Theories of Economic Development
Linear Stages of Growth Model
In the 1950s and the early 1960s, the process of development was viewed as a series of successive stages through which all countries must pass.
With the right mix of savings, investment and foreign aid – these countries could be put on the path to development, thereby making development synonymous with aggregate economic growth.
- Walt Rostow became the most influential advocate of the stages of growth model of development- he argued that the advanced countries had all passed through a series of steps leading to development and growth.
The developing countries were still in either the traditional society or the preconditions stage and had to follow a set of rules to take-off into self-sustaining economic growth.
The principal strategy to help this takeoff was the mobilization of domestic and foreign savings in order to generate sufficient investment to accelerate economic growth.
- The economic mechanism through which more investment leads to more growth can be described by the Harrod- Domar Model.
In simple words the HD theory of economic growth states that the rate of growth of GNP is determined jointly by the national savings ratio and the national capital-output ratio.
Thus the most fundamental strategies to grow for economies is to save and invest a certain proportion of their GNP – but the actual rate at which they can grow for any level of saving and investment, depends on how much additional output can be had from an additional unit of investment.
According to this theory the major obstacle to growth is the capital constraint, which became the reason for transfer of capital and technical assistance to the developing countries.
Stages theory did not always work – because although savings and investment are a necessary condition for accelerated rates of growth- it is not a sufficient condition. Economies also need to possess the structural, institutional and attitudinal conditions like well integrated commodity and money markets, highly developed transport facilities, a well-trained and educated work-force and an efficient government etc.