MODULE 3: DEVELOPMENT THEORIES savings ratio and the national capital-

output ratio
https://plannerspace.blogspot.com/2017/11/
 In order to grow, economies must
development-theories-and-their.html
save and invest a certain proportion of
https://www.academia.edu/38802989/ their GNP
Evolution_of_Development_Theories_in_the_
Philippines 2. Structural Change Theory
 Used modern economic theory and
Classic Theories of Development
statistical analysis to portray the
1. Linear Stages of Growth Model internal process of structural change
 Viewed development as a series of that a “typical” developing country
successive stages of economic growth must undergo if it is to succeed in
through which all countries must pass. generating and sustaining a process of
 An economic theory of development rapid economic growth
in which the right quantity and  Focuses on the mechanism by which
mixture of saving, investment, and underdeveloped economies transform
foreign aid were all that was necessary their domestic economic structures
to enable developing nations to from a heavy emphasis on traditional
proceed along an economic growth subsistence agriculture to a more
path that historically had been modern, more urbanized, and more
followed by the more developed industrially diverse manufacturing and
countries. service economy

Lewis Two-Sector Model

Rostow’s Stages of Growth
 Walt W. Rostow  W. Arthur Lewis
 Transition from underdevelopment to  The underdeveloped economy
development can be described in consists of two sectors: a traditional,
terms of a series of steps or stages overpopulated rural subsistence
through which all countries must sector characterized by zero marginal
proceed: labor productivity (surplus labor) and
o Traditional society a high-productivity modern urban
o Pre-conditions for take-off into industrial sector into which labor from
self-sustaining growth the subsistence sector is gradually
o Take-off transferred
o Drive to maturity  Level of wages in the urban industrial
o Age of high mass consumption sector is assumed to be constant and
determined as a given premium over a
Harrod-Domar Growth Model fixed average subsistence level of
 Describes the economic mechanism by wages in the traditional agricultural
which more investment leads to more sector
growth Patterns of Development Analysis
 The rate of growth of GNP is
determined jointly by the national  Focuses on the sequential process
through which the economic,
industrial, and institutional structure dependence and dominance
of an underdeveloped economy is relationship with rich countries.
transformed over time to permit new
Neocolonial Dependence Model
industries to replace traditional
agriculture as the engine of economic  Attributes the existence and
growth. continuance of underdevelopment
 Increased savings and investment are primarily to the historical
perceived by patterns of-development evolution of a highly unequal
analysts as necessary but not sufficient international capitalist system of
conditions for economic growth rich country–poor country
 A set of interrelated changes in the relationships.
economic structure of a country are  Coexistence of rich and poor
required for the transition from a nations in an international system
traditional economic system to a dominated by such unequal power
modern one relationships between the center
 Domestic constraints to development: (the developed countries) and the
country’s resource endowment and its periphery (the LDCs) renders
physical and population size as well as attempts by poor nations to be
institutional constraints such as self-reliant and independent
government policies and objective difficult and sometimes even
 International constraints to impossible
development: access to external  Underdevelopment is thus seen as
capital, technology, and international an externally induced
trade phenomenon, in contrast to the
 The structural-change model linear-stages and structural-
recognizes the fact that developing change theories’ stress on internal
countries are part of a highly constraints such as insufficient
integrated international system that savings and investment or lack of
can promote (as well as hinder) their education and skills
development.
False Paradigm Model
3. International Dependence Revolution
 Viewed underdevelopment in terms of  Attributes underdevelopment to
international and domestic power faulty and inappropriate advice
relationships, institutional and provided by well-meaning but
structural economic rigidities, and the often uninformed, biased, and
resulting proliferation of dual ethnocentric international
economies and dual societies both “expert” advisers from developed-
within and among the nations of the country assistance agencies and
world. multinational donor organizations
 International-dependence models  Leading university intellectuals,
view developing countries as beset by trade unionists, high-level
institutional, political, and economic government economists, and
rigidities, both domestic and other civil servants all get their
international, and caught up in a training in developed-country
institutions where they are to produce and how to produce it
unwittingly served an unhealthy efficiently; and product and factor
dose of alien concepts and elegant prices reflect accurate
but inapplicable theoretical scarcity values of goods and
models. resources now and in the future.
o Public Choice Theory - assumes
4. Neoclassical Counterrevolution that politicians, bureaucrats,
 Emphasized the beneficial role of free citizens, and states act solely
markets, open economies, and the from a self-interested
privatization of inefficient public perspective, using their power
enterprises. and the authority of government
 Failure to develop is a primarily a for their own selfish ends
result of result of too much o Market-Friendly Approach -
government intervention and recognizes that there are many
regulation of the economy imperfections in LDC product and
 Called for freer markets and the factor markets and that
dismantling of public ownership, governments do have a key role
statist planning, and government to play in facilitating the
regulation of economic activities operation of markets through
 Underdevelopment results from poor “nonselective” (market friendly)
resource allocation due to incorrect interventions
pricing policies and too much state
Solow Neoclassical Growth Model
intervention by overly active
developing-nation governments  Expanded on the Harrod-Domar
 The neoliberals argue that by formulation by adding a second
permitting competitive free markets factor, labor, and introducing a
to flourish, privatizing state-owned third independent variable,
enterprises, promoting free trade and technology, to the growth
export expansion, welcoming equation.
investors from developed countries,  Technological progress became
and eliminating the plethora of the residual factor explaining
government regulations and price long-term growth, and its level
distortions in factor, product, and was assumed by Solow and
financial markets, both economic other growth theorists to be
efficiency and economic growth will determined exogenously, that
be stimulated. is, independently of all other
 Component Approaches factors.
o Free-Market Analysis - markets
Traditional Neoclassical Growth Theory
alone are efficient—product
markets provide the best signals  Output growth results from one
for investments in new activities; or more of three factors:
labor markets respond to these increases in labor quantity and
new industries in appropriate quality (through population
ways; producers know best what growth and education),
increases in capital (through o Equality of savings and
saving and investment), and investments
improvements in technology o Calculating real GDP
 Closed economies (those with o Real and nominal
no external activities) with variables
lower savings rates (other 2. Marxian Economics
things being equal) grow more  Karl Marx and Friedrich Engels
slowly in the short run than  Focuses on the labor theory of
those with high savings’ rates value and what Marx considers
and tend to con verge to lower to be the exploitation of labor
per capita income levels by capital
 Open economies (those with  labor theory of value is a
trade, foreign investment, etc.), method for measuring the
however, experience income degree to which labor is
convergence at higher levels as exploited in a capitalist society,
capital flows from rich countries rather than simply a method for
to poor countries where capital- calculating price.
labor ratios are lower and thus 3. Keynesian Economics
returns on investments are  John Maynard Keynes
higher  school of thought that is
Four Schools of Economic Thought characterized by a belief in
active government intervention
1. Classical Economics/Classical Political in an economy and the use of
Economy monetary policy to promote
 Anders Chydenius growth and stability.
 focuses on both the tendency  why high labor-market
of markets to move towards unemployment might not be
equilibrium and on objective self-correcting due to low
theories of value "effective demand," and why
 Classical theory reoriented neither price flexibility nor
economics away from individual monetary policy could be
interests to national interests counted on to remedy the
 focuses on the growth in the situation
wealth of nations and promotes  Aggregate demand is influenced
policies that create national by a series of factors and
expansion. responds unexpectedly. Shifts in
 It analyzed and explained the aggregate demand impact
price of goods and services in production, employment, and
addition to the exchange value. inflation in the economy.
 Assumptions: 
o Self-regulating markets 4. Chicago School of Economics
o Flexible prices  Milton Friedman
o Supply creates its own  Market economies are
demand inherently stable so long as the
money supply does not greatly  According to Hume, in the long-run, an
expand or contract. increase in the money supply will do
nothing.
Urban Planning in a Neoliberal Era
 Aggregate supply is the total amount of
 Neoliberalism = Classic liberalism + goods and services that firms are willing
(Theory of growth + Keynesianism) to sell at a given price in an economy
 Urban planning in a neo-liberal era  Aggregate demand is the total amounts
o Roll back government of goods and services that will be
intervention purchased at all possible price levels
o Roll out market mechanisms 
and competitiveness

 Neoliberalism subsumes planning as a

minimalist form of spatial regulation to
provide market certainty and facilitate
economic growth
 Neoliberalism is a process of
restructuring the public, private and
third sectors to promote a growth first
approach to urban change

Aggregate Demand and Aggregate Supply

 In the short run, output is determined

by both the aggregate supply and
aggregate demand within an economy.
Anything that causes labor, capital, or
efficiency to go up or down results in
fluctuations in economic output.
 Aggregate supply and aggregate
demand are graphed together to
determine equilibrium. The equilibrium
is the point where supply and demand
meet.
 According to Hume, in the short-run,
and increase in the money supply will
lead to an increase in production.