Unit 4

Structural-Change and Dual

Economy Models
Instructor : Tadele Melaku, PhD
 The Four Models (Theories)

I. Linear stages of growth model

II. Structural change theories
1. Lewis two-sector surplus labor theory
2. Patterns of development theory (Chenery
model)
III. International – dependence revolution
IV.Neoclassical theory (Free market
counterrevolution)
 I. Linear Stages of Growth Models

 Rostow’s Stages of Growth Theory

 Five Stages of Development :
1. Traditional society: slow economic and population
growth
2. Pre-condition to take-off: development of
institutions,
organizations, and infrastructure
3. Take-off: large investment in selected industry (10 to
15% of GDP)
4. Drive to maturity: sustained growth of the industry
and economy
5. Age of high mass consumption: production of
consumer goods and services to serve an affluent
society
 I. Linear Stages of Growth Models

 Rostow Argued:
1. All advanced countries already through the take-off
stage.
2. LDCs still in the traditional or "pre-conditions"
stage.
3. LDCs only need to follow certain set of rules to
move
into take-off stage.
4. Principal strategy for development: Generate high
levels of domestic and foreign saving to generate
sufficient investment to accelerate economic growth.
II. Structural Change Theories

 Two Major Theories

1. Lewis two-sector surplus labor theory
2. Patterns of development theory (Chenery model)
 Lewis Two-Sector Surplus Labor Theory

 Focus on the structural transformation of a

primarily subsistence economy with two sectors:
1. Traditional sector:
- Overpopulated, rural subsistence sector with
MPLA = 0
2. High-productivity, modern, urban,
industrial sector to which surplus rural labor is
transferred
Lewis Two-Sector Surplus Labor Theory

 Focus on the process of labor transfer and growth of

output and employment in the modern sector
- labor transfer and employment growth from output
growth
- speed of output growth determined by rate of
industrial investment and capital accumulation in
urban sector
- investments made possible by excess of urban sector
profits over wages, assuming all such profits are re-
invested
- level of wage in urban sector fixed and set at some
premium over wage level in traditional sector
The Lewis Development Model

 Rural agricultural sector

 Low or even zero Marginal Product of Labor so that
labor is a redundant factor and wage rate is at the
subsistence level
 Urban industrial sector
 Rising demand for unskilled labor to be trained for
industrial growth results in greater employment and
more profits and higher wages
 Rural-Urban migration
 To find jobs and earn higher wages

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Criticisms of Lewis Model

 Industrial technology is generally capital intensive/labor-

saving. Hence, the demand for unskilled rural labor
would not increase employment
 Assumes labor is transferred and employment created as
capital accumulates in modern sector. But what if profits
NOT reinvested due to:
- capital flight
- re-investment in "labor-saving" rather than "labor-
intensive" technology ("anti developmental“ economic
growth
 Industrialization must be supported by agricultural
development to supply an ever-increasing supply of food
items and raw materials
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Patterns Development Theory (Chenery Model)

 Focus on the sequential process of economic, industrial,

institutional change
 Assumes that S and I necessary but not sufficient
conditions for growth
 Also necessary are changes in the economic structure
which face constraints in LDCs
 Differences in constraints (domestic and international)
account for differences in development levels among
countries
 International constraints most important since transition
can occur faster with access to international sources of
capital, technology, manufactured imports, etc.
Patterns Development Theory (Chenery Model)

 Chenery used time series and cross country models to

identify characteristic features of the development
process.
 Identified five characteristic features (not necessarily
stages) of the development process for countries
that have developed:
1. Shift from agricultural to industrial production
2. Steady accumulation of physical and human K
3. Change in composition of consumer demand
4. Growth of cities and urban areas
5. Decline in family size and overall population growth
III. International-Dependence Revolution

Three Types of Models in This Area

1. Neoclassical dependence models
2. The false paradigm model
3. Dualistic-development thesis
 Neoclassical Dependence Models

- Outgrowth of Marxist thinking

- Underdevelopment is the result of dominance by and
dependence on industrialized countries,
international special interest groups (MNCs, foreign
aid agencies, World Bank, and IMF)
- Small, elite ruling class in LDCs perpetuates the
dependence
- A large part of underdeveloped world’s continuing
poverty due to the existence and policies of industrial
countries
Neoclassical Dependence Models

- LDCs can only grow and develop as large countries

grow
- Thus, underdevelopment is an EXTERNALLY induced
phenomenon
- Solution : Revolutionary struggles or major
restructuring of world capitalist system needed to free
LDCs from economic control of DCs and elite
oppressors.
False-Paradigm Model

 Underdevelopment the result of faulty or

inappropriate advice and well-uniformed biased
recommendations by meaning but often uniformed,
biased, and ethno-centric international “expert”
advisers from DCs
 Advisers base their models and analysis on faulty
assumptions more appropriate for DCs
 Problem perpetuated by DC educational
institutions
 Domestic planners and policymakers trained in
“irrelevant” Western concepts
 What is the solution?
 Dualistic-development Thesis

 Views the world as composed of divergences between

rich and poor nations
 Four Key Arguments:
1. Different sets of conditions can coexist
2. Such coexistence is chronic
3. The discrepancies in “superior” and “inferior”
conditions will increase over time
4. There is no “trickle down” from the rich to
poor
 Dualistic-development Thesis

 Structural transformation models create a “dualistic”

pattern of development, resulting in an ever-increasing
degree of economic inequality both nationally and
internationally:
 urban vs. rural
 industrial vs. agricultural
 modern vs. traditional
 rich vs. poor

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Weaknesses of international-dependence
theories

 These theories call for fundamental, economic,

political, and institutional reforms but several
weaknesses:
1. They offer little explanation of how countries initiate
and sustain development
2. Actual experiences of LDCs pursuing revolutionary
change to achieve development mostly negative (e.g.,
Mexico, China, India, Cuba)
3. The logical conclusion of this theory is that LDCs
should have as little to do with DCs as possible (self-
sufficiency, import substitution)
Weaknesses of international-dependence
theories

 What do countries experience tell us?

 East Asian countries such as South Korea, Taiwan,
Singapore,…, pursued export led development
strategies
 They interacted with industrial economies
 They followed outward looking development
policy
 Latin American countries followed import substitution
(self reliance or inward looking policy)
 Now: East Asian countries are by far richer that Latin
American countries
 What can we conclude?