The purpose of this essay is to critically compare and contrast the linear-stages of growth theory against the structural change models. Structural change theory focuses on mechanisms by which underdeveloped economies transform their domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanized and more industrially diverse manufacturing and service economy. Two of the most well-known examples, that will be discussed in this essay, are the ‘Two-sector surplus labour’ model by Lewis, and the ‘Patterns of Development’ empirical analysis by Chenery. The linear stages of growth theories are best described as a set of steps/stages from rural to modern society that every developing country must proceed. The two well-known theories that will be discussed in this essay are the ‘Rostow Stages of Growth Model’ by Rostow, and the Harrod-Domar growth model. The essay will explain the origins and contexts of the theories as well as the main concepts and ideas whilst analysing the pros and cons and similarities and differences between the models.
The first generation of economic development models was formulated post World War II. The early models produced focused on the utility of massive injections of capital to achieve rapid GDP growth rates (Todaro & Smith 2009). Theorists from the 1950s and early 1960s interpreted the process of development as sequence of historical stages; this view was popularized and highlighted by Rostow (Ingham, 1995). The Harrod-Domar and Rostow models essentially predicted that development is a matter of increased national savings and investment, the models assume that the existence of the necessary structural, institutional and attitudinal condition in developing countries; in reality however, many countries were in fact lacking these attitudes and arrangements. Further to this, they were lacking many complementary factors such as managerial competence and skilled labour.
However, the linear-stages came under scrutiny in later years with many economists finding critiques in the methodology and thus during most of the 1960s and early 1970s, economists described the development process as structural change where the reallocation of labour from the agricultural sector was deemed as the main reason for economic growth (Dang & Low, 2015)
The Lewis Theory of Development formulated by W. Arthur Lewis in the 1950s became a general theory of development process in surplus-labour developing nations during the 1960s – 1970s. The model assumed that the economy consisted of two sectors: agriculture and industry of which the agriculture was overpopulated, with zero marginal product of labour (MPL) and industry was highly productive. In addition to this, Harvard economist Hollis B. Chenery and co-workers collected international data from over one hundred countries between 1950 and 1970 and carried out regression simulations to calculate the standard structure of various economic phases for different countries. The model consists of estimations of general standard values for population urbanization at certain levels of economic development, which unfold in three stages (Chenery et al., 1988)
Rostow (1960) claimed that in order to move from an underdeveloped nation to a developed nation, a country would need to pass through 5 stages: the traditional society, the preconditions for take-off, the take-off, the drive to maturity and the age of high mass consumption. The most important and of highest relevance stage for a country is the take-off phase, whereby developing countries are expected to move from an underdeveloped to a developed state. However, Rostow did argue that the most difficult phase and biggest problem for poor countries to achieve was in fact the take-off; whereby poor countries have a problem with the interruption of the ‘vicious circle’ established over the years (Pietak 2014). In 1971, Rostow added a sixth stage of economic development, named ‘quality’ – of which was characterized by continuous improvement in the quality of goods and services (Rostow, 1971). As well as this, Rostow argued that the reconstruction of the economy from agricultural to industrial would allow for economic growth across a whole country (Pietak 2014).
Roy Harrod and Eysey Domar constructed and developed a model that sought for the possibility for sustainable growth. In order to do this, they extended the short-term Keynesian model of which assumes the instability of the capitalist economy (Harrod, 1939; Domar, 1946). Similar to Rostow’s stages growth model, the Harrod-Domar model put emphasis on the fact that the prime mover is the economy is investments (Ghatak, 2003). In the model, growth is sustainable if three growth rates are equal: the actual growth rate, guaranteed growth rate, and natural growth rate- Harrod called this situation as ‘the golden age’ where the achieved macroeconomic balance ensured the full use of capital and labour (Pietak, 2014). The model argues that if investment ever strays from a critical growth rate, full employment is doomed to regress into either hyperinflation or depression.(Hochstein 2017)
In contrast, the structural change models focused on the pattern of development and hypothesized that the pattern was similar in all countries and was identifiable. (Dang &Low, 2015). The model proposed by Lewis assumes that maintaining a low level of life in the short term creating larger amounts of savings will increase the stock of capital, which longer term will lead to the appearance of income growth. (Pietak, 2014). In Lewis’s work, he dealt with the problem of poor countries, but with a rich labour force (Lewis, 1954, p.3). In fact, labour increasingly moves away from the agricultural sector to the industrial sector (Lewis, 1954). Lewis argues that output in the industrial sector is expanding due to the rate of industrial investment and capital accumulation in the sector, which, in turn, attracts additional labour from agricultural industry this leads to industrial sector profits being positive due to the low wages. The process of the modern sector self-sustaining growth and employment expansion will continue until all surplus rural labour is absorbed in the industrial sector. Afterwards additional workers can be withdrawn from the rural sector only in case of a salary rise.
Hollis B. Chenery, a Harvard economist implemented an empirical analysis of the development patterns of numerous developing countries post war. His study led to several findings and characteristics about countries and their development processes. Chenery found that there had been shifts from agricultural to industrial production as well as the steady accumulation of physical and human capital. It was also found that there was a change in consumer needs whereby basic needs had turned into diverse manufactured products together with the growth of cities and urban industries as people had begun to migrate from rural areas. There was also a finding that there had been a decline in the family size and overall population as people preferred child quality to quantity.
However, empirical works on the process of structural change such as Chenery (1960), Chenery and Taylor (1968), and Chenery and Syrquin (1975), do recognize that development does differ across countries which can be for a range of reasons including “a country’s resource endowment and size, its governments policies and objectives, the availability of external capital and technology, and the international trade environment” (Todaro & Smith, 2009, p.120).
There has been a dramatic growth in developments in the manufacturing sector since the 1950 in the countries that were then seen as poor or ‘developing’, albeit with a large uneven distribution of growth between countries. Wang and Peng (2004, 2005) make the point that the Chenery model has had a substantial impact on urban policy in China whereby it is now easy to recognize the predictions of an unrealistic level of urbanization and urban size in urban planning in China. In fact, starting from the late 1970s, China has become the fastest growing economy in the world; the rapid economic growth has promoted the growth of modern industries and changed the entire structure of the economy. Consequently, over 150 millions of populations have moved location from the agricultural-based rural areas to industry and service dominated urban locations (State Statistical Bureau of China, 2005)
The linear-stage theory has come under critique from many scholars, where Adelman (2000) argues that the key weakness of both Rostow and Harrod-Domar theorems is that they are too simplistic in their assumptions. It is assumed that a single production function is used universally for all countries. Each and every economy is expected to have the same necessary conditions and would pass through the same phasing, stage by stage. In actual fact however, that economic growth path, which historically had been followed by the higher developed countries, is not the only pathway and the development process actually turns out to be highly non-linear. (Chenery, 1960; Chenery & Syrquin, 1975). Todaro and Smith (2009) also raised the issue that it is possible for economies to miss stages or even become stuck in one particular stage, potentially even regressing depending on a range of factors such as managerial capacities or the availability of skilled labour for a range of development projects.
Furthermore, the model of Harrod-Domar reveals two problems due to the fact that there is no mechanism to balance the three growth rate as proposed: firstly, it is impossible for the growth of a capitalist economy at the guaranteed rate of growth with full employment; the process of economic growth is always accompanied by involuntary unemployment. Further to this there is no convergence towards equilibrium in a capitalist economy (Pietak 2014).
In terms of the structural change theories, although many of the aspects of world economy has substantially since the early 1950’s, a lot of Lewis’ policy recommendations still sit very well with the current thinking on ‘new industrial policy’. This being said, many of his assessment dating from the 1950’s have withstood the test of time very well (Weiss, 2017). Nonetheless, Lewis’ theory does contain some assumptions that are difficult to accept; for example, the problem of poverty cannot just be postponed until an unspecified future, on balance the increased accumulation of capital would be achieved by reducing consumption, thus affecting the poorest people. (Pietak, 2014). As well as this, several of Lewis’ assumptions are no longer valid, such as those relating to rural surplus labour, and the proportional rate of expansion in the modern sector (Todaro and Smith, 2009). As well as this, four of the key model assumptions do not fit the realities of developing countries: the rate of labour transfer and employment creation in the modern sector is proportional to the modern sector capital accumulation; assumption of the surplus labour in rural areas; competitive modern sector labour market that guarantees the continued existence of constant real urban wages up to the point where the supply of surplus rural labour is exhausted as well as diminishing returns in the modern industrial sector.
Furthermore Meier (2000) argues that criticisms of these models were hardened by the fact that poverty was prevalent in many developing countries; following the pattern that was recommended by structural change economists, the attention of policy makers began to move to put more emphasis on human capital such education and health. However, to contrast this view, investments just in health and education do not guarantee development, for example, in Sub-Saharan Africa life expectancy and school enrolments increased dramatically in recent decades, but as a group the economies in the group had slow, even negative growth since the early 1970’s (World Bank, 2000, p.16). Likewise, since the reallocation of labour from the agricultural sector towards the industrial sector was considered to be the main driver towards economic growth, many developing countries chose to implement policies that promoted industry and neglected agriculture, yet the negative effects of these policies that chose to disregard that vital sector have since become widely recognized (World Bank, 2000).
Although the standard development pattern of the Chenery model is considered to be important, it comes alongside a number of drawbacks that mean that it cant’t compare, explain and interpret the relationship between urbanization and development in some countries (Mingxing et al.) In particular the Chenery and Syrquin patterns of development are rooted in the facts from the 1964 priced per capita of 90 countries when in reality the world has progressed and moved on greatly since then in terms of technology, commerce and political geography(Zhao & Zhang, 2009). The per capita of GDP in 2018 is different from that in 1964, and thus it would be wise to set a standard rule in studying the relationship between urbanization and economic development (Mingxing et al. 2015). Additionally, Jones and Kone (1996) argue that there has been little work done to determine whether or not the findings are still the same and whether or not they would be valid.
The two models of growth do however come with elements of similarities and differences, for example, both the Harrod-Domar model and Lewis Model both put high emphasis and considered savings and investments to be the driving forces of economic development but in the context of less developed countries. Further to this, the Harrod-Domar model emphasized that the prime mover of the economy was investments, much like Rostow’s stages growth model.
Chenery and Syrquin (1975, p.53) argue that in an economy that is continuously in equilibrium, urbanization may appear as the result of a causative chain of events, starting with changes in demand and trade and eventually leading to industrialization which consequently results in a steady movement from the labour force from rural to urban occupations. On the contrary however, Lewis (1954) states that the growth of national output in less developed economies has very rarely been good enough at being quick to keep up with rapidly accelerating population growth and prevents a rise in rural underemployment.
To summarize, this essay has looked to compare and contrast the linear-stage growth model against the structural change by introducing the theories of Harrod-Domar, Lewis, Chenery and Rostow. Both models were developed and were revolutionary at their time of introduction, with much academic credit and changed the idea about development and were the basis of much understanding, however as time has progressed many of the models have come under critique and weaknesses have been discovered as ideas and the time progresses. The Lewis and Chenery models developed on the previous findings of Rostow and Harrod-Domar, highlighting the key weaknesses and working to provide a more thorough and realistic interpretation and view of development. The models are similar in a sense that investment is the main driver in development but the structural change model is a more recent model, where ideas from Chenery have helped to predict the development and growth of countries such as China but some of the main critiques are the over simplified views with lack of recognition of things that could change or in Lewis’ case, the overlooking of poverty and rather the over emphasis on urbanization.