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ECON304: Economic Development

Unit 2: Traditional Theories of Economic Development   This unit will introduce you to the four periods of economic development that traditional schools of thought have identified:

1.    linear-stages-of-growth models,
2.    theories and patterns of structural change,
3.    international-dependence theories and structuralism, and neo-classical models.

This overview will be followed by in-depth explorations of each school. Linear-stage models see economic growth and development as proceeding in linear fashion with the economy moving from one stage to another and to another. The most famous of the linear-stage models is the one propounded by W.W. Rostow. Rostow saw five stages of growth:

1.    the traditional society,
2.    pre-conditions for take-off,
3.    take-off,
4.    drive to maturity, and
5.    the age of high mass consumption.

Rostow looked at how the Western world, in particular, went through the process of economic development and concluded more or less that all countries must go through the same stages. The beauty of the stages approach is that policy makers only need to ensure that the conditions exist in order to usher in the next stage of the development path. If there is one thing we have learned about economic development, it is that it is not easy to generalize the process. The processes appear to vary from region to region and sometimes from country to country. Harrod and Domar’s model is another linear-stage model. The model sees savings as essential to development and, in some sense, the only necessary input. The more a country saves, the more it grows. Savings of course is necessary but not sufficient.

The structural change models look at how the economy develops or grows by changing its structure. How does a predominantly agricultural economy become an industrial economy? Among the several theories trying to explain such structural change is one by Arthur Lewis. Structural changes can be sparked by population changes, resource changes, or government policies.

Dependency theories have their roots in colonialism and post colonialism. Proponents of these theories argue that developing or poor countries have their own structures that are different from those which modernists would like to see prevail. There is also the assertion that rich developed countries like to see the poor countries in a state of submission in order to provide the raw materials that developed countries need for their industries at low costs. The response from the developing countries, particularly in the early 1960s in Latin America was rapid industrialization.

Neo-classical growth models relate back to neo-classical economics. Neo-classical economists argue that growth is a function of the factors of production (capital, labor) productivity and technological change. They represent extensions of the Harrod-Domar model, and the most popular one now is the Solow Growth Model. You may have noticed that many of the models talk about growth not development. Economists like to talk and write about things they can measure.

Unit 2 Time Advisory
Completing this unit should take you approximately 21.25 hours.

☐    Subunit 2.1: 1.75 hours

☐    Subunit 2.2: 2.5 hours

☐    Subunit 2.3: 2.25 hours

☐    Subunit 2.4: 2.25 hours

☐    Subunit 2.5: 7 hours

☐    Subunit 2.5.1: 0.25 hours

☐    Subunit 2.5.2: 3 hours

☐    Subunit 2.5.3: 3.75 hours

☐    Subunit 2.6: 5.5 hours

☐    Activity: 5 hours

☐    Assessment: 0.5 hours

Unit2 Learning Outcomes
Upon successful completion of this unit, you should be able to: - describe the various economic development theories; - explain the similarities and differences among the various theories and between any two theories; - explain why any selected theory explains the development process better or worse than another theory; - identify the key variables in each theory; and - explain how policy can influence or not influence the key variables to improve economic performance.

2.1 Overview of Theories of Economic Development   Early traditional theories of economic development drew lessons from the experiences of the West (mostly Europe and North America) as well as the experience of re-building Europe after the World Wars. Other theories were conceptualized by intellectuals from developing countries; these adopt a view from the bottom. In the context of the Cold War, these theories are heavily influenced by the debate on economic structure taking place between the market-oriented West and the Communist countries.

  • Reading: University of Iowa, Center for International Finance and Development: E-Book on International Finance & Development: Ricardo Contreras’ “Competing Theories of Economic Development” Link: University of Iowa, Center for International Finance and Development: E-Book on International Finance & Development: Ricardo Contreras’ “Competing Theories of Economic Development” (HTML or PDF)
     
    Instructions: Read this chapter, which provides a concise overview of the major traditional theories of economic development. While reading this chapter, consider the influences mentioned in the information at the beginning of this subunit. You can access the PDF by choosing the “Download PDF” link next to the Adobe Icon at the top of the article.
     
    Reading this chapter should take approximately 45 minutes.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

  • Reading: University of Victoria: Professor Ramani Kumar’s Economic Development: “Lesson 4” Link: University of Victoria: Professor Ramani Kumar’s Economic Development: “Lesson 4” (PowerPoint)
     
    Instructions: When you click on the link above, you will be directed to a webpage with a list of contents. Click on Chapter 4 and read the PowerPoint version of these notes. This lecture outlines the “traditional theories” of economic development. 

    Studying these lecture notes should take approximately 1 hour.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.2 Linear-Stages-of-Growth Model: 1950s and 1960s   - Reading: Erik Krantz’s Development: “Theories of Economic Development” Link: Erik Krantz’s Development: “Theories of Economic Development” (HTML)

 Instructions: Read this brief webpage for an introduction to linear
stages of growth models.  

 Reading this article should take less than 15 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Reading: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” Link: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” (PDF)

    Instructions: This is a sample chapter of the textbook Economic Development, 8th edition by Todaro and Smith, published by Pearson Education. This textbook uses models and examples to discuss real-world development issues. Please click on the link above, and then select the “Chapter Four” hyperlink in order to download the PDF. Read pages 110–112 up until the section titled “Rostow’s Stages of Growth.”

    Reading this chapter should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

2.2.1 Fisher-Clark Theory of Structural Change   - Reading: biz/ed: “Fisher-Clark’s Theory of Structural Change” Link: biz/ed: “Fisher-Clark’s Theory of Structural Change” (HTML)

 Instructions: Read this brief overview of Fisher-Clark’s theory.
This article will introduce you to the main concepts behind Fisher
and Clark’s theory on economic development that centers on changes
in the sophistication of the products made in a country. For
clarification on terms used, please see the glossary at the bottom
of the page.  

 Reading this article should take approximately 15 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.

2.2.2 Rostow’s Linear-Stages Growth Model   - Reading: biz/ed: “Rostow’s Model: The Stages of Economic Development” Links: biz/ed: Rostow’s Model: The Stages of Economic Development” (HTML)

 Instructions: Read this article, which introduces the five stages
described in Rostow’s model of economic development. While you read,
consider how this theory differs from that of Fisher and Clark. For
clarification on terms used, please see the glossary at the bottom
of the page.  

 Reading this article should take approximately 15 minutes.  
    
 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.
  • Reading: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” Links: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” (PDF)

    Instructions: Click on the “Chapter Four” hyperlink on the webpage linked above. Read the section titled “Rostow’s Stages of Growth” on pages 112 and 113.

    Reading these articles should take approximately 15 minutes.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above

  • Reading: W.W. Rostow’s The Stages of Economic Growth: A Non-Communist Manifesto: “Chapter 2: The Five Stages of Growth – A Summary” Link: W.W. Rostow’s The Stages of Economic Growth: A Non-Communist Manifesto: “Chapter 2: The Five Stages of Growth – A Summary” (HTML)

    Instructions: Read this summary of Rostow’s five stages of growth, which were outlined in the introduction to Unit 2.

    Reading this chapter should take approximately 45 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.2.3 The Harrod-Domar Model   - Reading: biz/ed: “The Harrod-Domar Model” Link: biz/ed: “The Harrod-Domar Model” (HTML)
      
Instructions: Read this brief article on the Harrod-Domar Model, which links development, savings, and investment. For clarification on terms used, please see the glossary at the bottom of the page.

 Reading this article should take approximately 15 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.
  • Reading: Michael P. Todaro’s and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” Link: Michael P. Todaro’s and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” (PDF)
          
    Instructions: Click the “Chapter Four” hyperlink to download the PDF. Read the section titled “Harrod-Domar Model” on pages 113–116, stopping at the section titled “Structural Change Models.”

    Reading this article should take approximately 15 minutes.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above

2.3 Theories and Patterns of Structural Change: 1970s   - Reading: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” Link: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development“Classic Theories of Development: A Comparative Analysis” (PDF)

 Instructions: Click the “Chapter Four” hyperlink. Read the
introduction on p. 116 and the conclusion on pp. 122 and 123, up to
the section titled “The International-Dependence Revolution.”  

 Reading this chapter should take approximately 15 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.

2.3.1 The Lewis Model   - Reading: biz/ed: “Lewis’ Dual Sector Model of Development: The Theory of Trickle Down” Link: biz/ed: “Lewis’ Dual Sector Model of Development: The Theory of Trickle Down” (HTML)

 Instructions: Read this article for an introduction to the Lewis
Model, which tries to explain the co-existence of modern urban areas
and underdeveloped rural areas in developing countries. For
clarification on terms used, please see the glossary at the bottom
of the page.  
    
 Reading these articles should take approximately 15 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.
  • Reading: Erik Krantz’s Development: “Structural Changes Model” Link: Erik Krantz’s Development: “Structural Changes Model” (HTML)
     
    Instructions: Read this webpage for an introduction to Lewis’ structural change model.
     
    Reading this webpage should take approximately 15 minutes.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

  • Reading: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” Link: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” (PDF)
          
    Instructions: Click the “Chapter Four” link to download the PDF; read the section on the Lewis model on pages 117–121.

    Reading this article should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

2.3.2 Chenery’s Patterns of Development Model   - Reading: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” Link: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” (PDF)

 Instructions: Click the “Chapter Four” link to download the PDF.
Read the section on the Structural Change model on pages 121 and
122.  

 Reading this article should take approximately 45 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Reading: The World Bank: William Branson, Isabel Guerrero, and Bernhard Gunter’s “Patterns of Development 1970–1994” Link: The World Bank: William Branson, Isabel Guerrero, and Bernhard Gunter’s “Patterns of Development 1970–1994” (PDF)

    Instructions: Read pages 1–9 and 31–33 for an overview of the patterns of economic growth school as well as the conclusions of an empirical test of the major tenets supported by this school. If you have a background in econometrics, feel free to read the rest of the document. 

    Reading this article should take approximately 15 minutes.

    Terms of Use: This article has been reposted by the kind permission of World Bank, and the original version can be found here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

2.4 International-Dependence Revolution & Structuralism: 1970s   - Reading: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” Link: Pearson Education: Michael P. Todaro and Stephen C. Smith’s Economic Development: “Classic Theories of Development: A Comparative Analysis” (PDF)

 Instructions: Click on the “Chapter Four” hyperlink. Read “The
International-Dependence Revolution” on pages 123–127.  

 Reading this chapter should take approximately 30 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.

2.4.1 Neo-Marxist   - Reading: PBS: David N. Balaam and Michael Veseth’s Introduction to International Political Economy: “Lenin’s Critique of Global Capitalism” Link: PBS: David N. Balaam and Michael Veseth’s Introduction to International Political Economy“Lenin’s Critique of Global Capitalism” (HTML)

 Instructions: Read this excerpt. If you have any question on the
terms used, please consult the
[glossary](http://www.pbs.org/wgbh/commandingheights/shared/glossary/index.html).  

 Reading this chapter should take approximately 15 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.

2.4.2 Dependency Theory   - Reading: PBS: Daniel Yergin and Joseph Stanislaw’s Commanding Heights: “Up for Debate: Dependencia and Protectionism in Hindsight” Link: PBS: Daniel Yergin and Joseph Stanislaw’s Commanding Heights: “Up for Debate: Dependencia and Protectionism in Hindsight” (HTML)
 
Instructions: Read the introductory paragraph, and then select the links to the names of each participant to learn about their perspectives on the Dependencia theory of economic development. What are your thoughts on the theory? Were South American countries right to adopt import substitution industrialization?

 Reading this article and answering the questions above should take
approximately 30 minutes.  
    
 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Reading: PBS: David Yergin and Joseph Stanislaw’s Commanding Heights: “Raul Prebisch and Dependencia Theory” Link: PBS: David Yergin and Joseph Stanislaw’s Commanding Heights“Raul Prebisch and Dependencia Theory” (HTML)
     
    Instructions: Read this except. If you have any question on the terms used, please consult the glossary.
     
    Reading this article should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

  • Reading: biz/ed: “Dependency Theory” Link: biz/ed: “Dependency Theory” (HTML)

    Instructions: Read this article, which introduces the dependency theory. As you read, consider how this theory differs from those of Rostow and Lewis.

    Reading these articles should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

2.5 Neo-Classical, Free-Market Counterrevolution: 1980s and 1990s   2.5.1 Neo-Classical Approach   - Reading: biz/ed: “Neo-Classical Theory of Growth” Link: biz/ed: “Neo-Classical Theory of Growth” (HTML)
 
Instructions: Read this brief overview of Neo-Classical economic growth theory. This article will introduce the main concepts behind neo-classical theories of economic development. This section is followed by details on the Solow Growth Model and extensions of this model. For clarification on terms used, please see the glossary at the bottom of the page.

 Reading this chapter should take approximately 15 minutes.  
    
 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.

2.5.2 Solow Growth Model   - Reading: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 5: The Solow Growth Model Chapter Summary” Link: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 5: The Solow Growth Model Chapter Summary” (HTML)
 
Instructions: When you click on the link above, you will be directed to the study space for the W. Norton and Company’s Macroeconomics textbook by Charles I. Jones. Please skim the outline presented on this webpage. Do not worry if you do not fully understand all of the key concepts after reading the chapter outline; the tutorial that follows will help flesh these key concepts out.

 Skimming this outline should take approximately 1 hour.  
    
 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Web Media: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 5: The Solow Growth Model Tutorial” Link: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 5: The Solow Growth Model Tutorial” (Flash)
     
    Instructions: When you click on the link above, you will be directed to the study space for the W. Norton and Company’s Macroeconomics textbook by Charles I. Jones. From this page, click on the link for “Launch Solow Growth Model Tutorial” and a narrated, illustrated lecture will automatically launch.
     
    Studying this resource should take approximately 1 hour.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Assessment: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 5: The Solow Growth Model Quiz” Link: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 5: The Solow Growth Model Quiz” (HTML)
     
    Instructions: When you click on the link above, you will be directed to a quiz within the study space for the W. Norton and Company’s Macroeconomics textbook by Charles I. Jones. You will have the choice between a 5, 10, or 15 question multiple choice quizzes to test your understanding of the material in the Chapter. Please take the 15 question quiz. Note that the software will immediately give you a response to each question after your answer is submitted and will provide an explanation of the correct answer.
     
    This assessment should take approximately 1 hour.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

2.5.3 Endogenous Growth Theory and the Romer Model   - Reading: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 6: Growth and Ideas Summary” Link: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 6: Growth and Ideas Summary” (HTML)
 
Instructions: When you click on the link above, you will be directed to the study space for the W. Norton and Company’s Macroeconomics textbook by Charles I. Jones. Review this chapter outline. Do not worry if you do not understand all of the key concepts after reading the chapter outline; the tutorial that follows will further define these concepts.
 
Reading this chapter should take approximately 1 hour.
 
Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Web Media: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 6: Growth and Ideas Tutorial” Link: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 6: Growth and Ideas Tutorial” (Flash)
     
    Instructions: When you click on the link above, you will be directed to the study space for the W. Norton and Company’s Macroeconomics textbook by Charles I Jones. From this page, click on the link for “Launch Romer Model Tutorial” and a narrated, illustrated lecture will automatically launch.
     
    Watching this tutorial should take approximately 1 hour.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Assessment: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 6: Growth and Ideas Quiz” Link: W.W. Norton and Company: Charles I. Jones’ Macroeconomics: “Chapter 6: Growth and Ideas Quiz” (HTML)
     
    Instructions: When you click on the link above, you will be directed to a quiz within the study space for the W. Norton and Company’s Macroeconomics textbook by Charles I Jones. You will have the choice between a 5, 10, or 15 question multiple choice quizzes to test your understanding of the material in the Chapter. Please take the 15 question quiz. Note that the software will immediately give you a response to each question after your answer is submitted and will provide an explanation of the correct answer.
     
    Completing this assessment should take approximately 1 hour.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Guest Lecture: YouTube: TED Talks’ “Paul Romer’s Radical Idea: Charter Cities” Link: YouTube: TED Talks’ “Paul Romer’s Radical Idea: Charter Cities” (YouTube)

    Instructions: Watch this lecture. In this subunit, you studied the Romer model. The model presented ideas as an engine of economic growth. In this guest lecture, Stanford economist Paul Romer presents an example of how ideas can potentially lead to higher growth and better governance of economies. 
     
    Watching this lecture and pausing to take notes should take approximately 45 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. It is attributed to TED, and the original version can be found here.

2.6 Recap of Unit 2   - Assessment: Pearson Education: Michael P. Todaro’s and Stephen C. Smith’s Economic Development: “Student Resources for Chapter 4” Link: Pearson Education: Michael P. Todaro’s and Stephen C. Smith’s Economic Development: “Student Resources for Chapter 4” (HTML)
 
Instructions: To access the Todaro and Smith quiz, click on “Quiz,” on the left hand side of the page. Please complete the entire quiz for Chapter 4. To grade your quiz, click on the link titled “Submit answers for grading” at the bottom of the page. For more practice, see the graphing and quantitative exercise.
 
Completing this assessment should take approximately 30 minutes.
 
Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

  • Activity: The Saylor Foundation’s “ECON304 Course Discussion Board” Link: The Saylor Foundation’s “ECON304 Course Discussion Board”
     
    Instructions: After reviewing the course materials for this unit, please respond to the following questions by posting to the course discussion board. Please feel free to start your own discussions as well as review and respond to other students’ postings.

    1.    How does the Solow model differ from the Harrod-Domar model?

    2.    Which model do you think is the most realistic, and why?

    3.    In recent years, many developing countries have been liberalizing their economies. Compare North Korea’s development progress with one such recently liberalized economy.

    4.    In A. Lewis’ economic development with unlimited supply of labor, what are the main factors that could drive economic development and what might be some of the constraints?

    Completing this activity should take approximately 5 hours.