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By Prof. Arturo  Boquiren                   May 2001

This handout intends to add a few points as well as contextualize some aspects of Todaro’s classification system on the leading theories of development. One can point out that Todaro’s classification system is only one of the several alternatives with which we can classify competing theories on development. Todaro’s classification system is not perfect but it is certainly the best classification system so far that can cover many if not all of the competing theories. In the future, however, Todaro’s write-ups have to be revised not only because of a defective classification system but also because of the way Todaro articulated some of the leading theories. In particular, Todaro was unfair in his elaboration and critique of Rostow’s and the new growth theories.

 

1.  ROSTOW’S THEORY OF STAGES OF ECONOMIC GROWTH

 

1.1.   Contrary to that implied in Todaro 5^th Ed. p. 73, Rostow recognizes the role of institutional factors in development.

1.2.   Rostow stresses that societies have five stages towards development: (1) traditional society; (2) pre-conditions for take-off; (3) take-off; (4) drive to maturity; and (5) age of high consumption.

1.3.   Rostow identifies the pre-conditions for take-off : (1) community surplus does not flow into hoarding, luxury consumption and low-productivity investment outlay; (2) institutions are developed for cheap and adequate working capital; (3) one or more sectors of the economy grow rapidly; and (4) foreign capital inflows. Although Rostow recognizes that take-offs occurred based almost wholly on domestic sources of finance,  Rostow nevertheless advocates the use of foreign capital inflows.

1.4.   Rostow defines a take-off as occurring within 2 to 3 decades and involve the following: (1) rise in productive investment to 5-10% of national income; (2) development of manufacturing sectors; and (3) emergence of a political and social framework “that will exploit the impulse to expansion.”

 

2.   ON THE SO-CALLED NEO-CLASSICAL COUNTERREVOLUTION

 

2.1. What occurred in the 1980s (cf. Todaro 5^th Ed. p. 85) was a classical counterrevolution led by the new classicals (also known as “rational expectations economics” or RATEX as described in Chapter 9 of Dornbusch and Fischer 6^th Ed.) and not a neo-classical counterrevolution. However, variants of the Keynesian school of thought (there are several interpretations of Keynes) tend to describe the phenomenon as a neo-classical revolution. In the first place, what must be clear is that since the Hicksian interpretation of Keynes through the IS-LM models (recall your Economics 101), mainstream Keynesian economic thought has been basically neo-classical[1] which is a synthesis of the debate between the classicals (i.e., the Marshallians who have opposed the views of Keynes and who are basically classicals but are labeled as neo-classicals by Keynes) and the original Keynesians (i.e., Keynes himself and his allies). In other words, in the debate between classicals and Keynesians, the classicals won and re-interpreted Keynesian views from the neoclassical perspective (note that the basic difference between classicals and neo-classicals is only marginal analysis). Thus, those influenced by Hicks through the IS-LM models argue that an economy always move towards equilibrium (basic classical argument: markets always clear or quantity demanded always equal quantity supplied in all markets) but the equilibrium is not necessarily at full employment and, thus, the need for government to intervene through fiscal and monetary policies. In contrast, New Keynesians argue the need for government intervention through fiscal and monetary policies on the premise that markets do not clear (e.g. prices are sticky because of “menu costs” in the goods market, “efficiency wage” in the labor market, and “credit rationing” rather than market clearing in the capital market).

2.2. While the points in 2.1. is the accurate version of what had occurred in the 1980s, those not very familiar with economic history may be confused. Thus, even as 2.1 faithfully reflects what has occurred,  for exam purposes we can oversimplify and use Todaro’s version (a source of confusion: Soc. Sci. 2 distinguish classicals from neo-classicals even as modern economic literature basically calls neo-classicals as classicals).

3.  “NEW” GROWTH THEORIES

3.1. Todaro 5^th Ed. was incorrect in criticizing endogenous growth theory for overlooking the role of infrastructure and institutional factors (cf. p. 90). On the contrary, endogenous growth theory, particularly the interpretation described as “supply side approach” in Dornbush 6^th Ed.  Box 10-1 p. 278-279 and p. 282, does recognize the role of such factors. In recognizing the role of these factors, however, the recent versions of endogenous growth theory (including that described as the supply side approach) emphasizes on the need for governments to withdraw from intervening in the market and for governments instead to strengthen and rely on market forces and institutions. Endogenous growth theory recognizes that market failures can occur. However, contrary to that prescribed in most Economics 151 books which justify government intervention in market failures, recent works on endogenous growth theory limits the role of government in market failures to that of creating markets or strengthening market mechanisms. For example, although many Economics 151 books would point out that government can spend on infrastructure or scientific research because they are public goods, recent works on endogenous growth theory would stress that investments on infrastructure and scientific research need not be done by government[2] because the private sector with appropriate incentives and tax breaks would invest on these. The private sector, for example, could be enticed to build roads if they would be given the right to charge toll fees on the roads they built.[3] Investments on public goods such as science and technology, on the other hand, can be encouraged if property rights on patents and the like are expanded and strengthened.

3.2. Basically, both the neo-classical and recent versions of endogenous growth theories (cf. Dornbusch and Fischer 6^th Ed. Ch. 10) belong to the classical economics (recall: markets clear). Although endogenous growth theory started out as Keynesian, recent versions of endogenous growth theory, particularly the supply-side approach, is basically new classical. In the supply-side approach version of endogenous growth theory, government is basically asked to limit its role to that of strengthening or creating markets when markets are either weak or missing in cases of market failures. Recent versions of endogenous growth theory are on a higher classical plane vis-à-vis neoclassical growth theory because many of the variables once exogenous are endogenized[4] (meaning, variables directly affecting growth are themselves determined within the model).

3.3. One example of an endogenous growth theory is to endogenize technology that is assumed exogenous in the neo-classical growth theory. However, this is only one route towards endogenizing variables.[5]

3.4. One recent development in endogenous growth theorizing is that savings are no longer analyzed within a closed economy framework but within an open economy framework. In an open economy framework, S I. Rather, S = I + CA where CA=X-M.

4.   RE-STATING SOME OF THE “LEADING THEORIES”

4.1. STRUCTURAL CHANGE AND PATTERNS OF DEVELOPMENT THEORIES. This set of thinking argues that for economic development to occur, changes in the following must take place: (1) structure of production must shift in emphasis from agricultural to industrial; (2) structure in consumer demand must change from one that is largely food into one that is largely industrial; (3) the structure of overall demand must change into in which the proportion of X+M increases;  (4) urbanization; and (5) there is accumulation of physical and human capital. Structural change and patterns of development theories point out that the following can serve as obstacles to development: (1) resource endowment, (2) government policies; (3) international trade situation; and (4) institutional constraints.

4.2. INTERNATIONAL DEPENDENCE MODELS. Neo-colonial dependence models attributes third world underdevelopment to  imperialism, colonialism, neo-colonialism, or dependency relations. False paradigm models attributes third world underdevelopment to faulty and inappropriate advise provided by well-meaning but often uninformed, biased and ethnocentric “experts” using models not suited to the third world. Dualistic development thesis is basically a description not a theory: (1) different set of conditions co-exist in a given space (i.e., the existence of superior and inferior); (2) difference between superior and inferior tends to increase; (3) co-existence of the two is chronic; and (4) superior does little or nothing to pull up the inferior and the superior may actually push down the inferior.