Analysis of the structural change &

Linear growth models of development

Introduction

Development should be the priority of any country. Its accomplishment rests on the
shoulders of the government and the citizens of the country. Development goes
beyond the financial stability of a country; whether its GDP is outstandingly
progressive over a period of time or not. So far, it is general knowledge that
development of any country encompasses both the wellbeing of its finances and its
citizenry. For development to be achieved a country has to undergo certain changes in
social and administrative institutions, political conditions, moral values, etc. The main
goals of development are as follows: improving the quality of life of citizens; growth
of gross national product (GNP); and promoting sustainable development.

Several theories have been formulated in order to explain these changes that occur in
underdeveloped countries in an attempt to achieve overall growth. The classic post-
World War II theory is one of such and it is dominated by four major schools of
thought:

 The Linear-Stages-of-Growth Model

 Structural-Change Model
 The International-Dependence Revolution
 The Neoclassical Counterrevolution

For the purpose of this essay, attention is devoted to the analyzing the Structural
Change Model -which is championed by both W. Arthur Lewis and Hollis B.
Chenery- and the Linear-Stages-of-Growth Model which is championed by Walt W.
Rostow and Sir Roy Harrod & Evsey Domar. Background information of these
models will be discussed which will help us construct a conclusion as to how
applicable or realistic they are in explaining the stages of development in Third World
Countries of the World. Furthermore, based on discussions, this paper identifies which
of the two growth models is superior.

1. Overview of the Linear-Stages-of-Growth Models

Development theory is a conglomeration of theories about how desirable change in

society is best achieved (Todaro & Smith, 2012). One of the key development models
is the linear stages of growth model. The Linear Stages of Growth model is an
economic model which is heavily inspired by the Marshall Plan of the US which was
used to rehabilitate Europe’s economy after the Post-World War II Crisis. The linear
stages of growth models are the oldest and most traditional of all development plans.
It was an attempt by economists to come up with a suitable concept as to how
underdeveloped countries of Asia, Africa and Latin America can transform their
agrarian economy into an industrialized one.

The most popular of the linear stage models are Rostow’s Stages of Growth Model
and the Harrod-Domar Growth Model. Rostow’s Stages of Growth Model: This
approach was formulated by American Economist Walt Whitman Rostow (1916-
2003). He argued in his model that the transition into development occurs in a series
of stages. Each stage can only be reached through the completion of the previous
stage. He asserts that all developed countries have gone through these stages and
developing countries are in one of these stages. These stages are as follows:

 The Traditional Society: this is mostly a backward society with no access to

science and technology where most of its resources are dedicated to agricultural
use. Agricultural productivity is mostly at the subsistence level and there is
limited market interaction.
 Preparatory Stage: here, there is an expansion in output which extends beyond
agricultural produce to manufactured goods. As a result of better savings and
investment in education there is more knowledge surrounding the use of
technology in various sectors of the economy. In this stage there are lower
levels of market specialization
 Take-off stage: at this stage revolutionary changes occur in both agriculture and
industry to attain a self-sustaining economic growth. There is greater
urbanization and rise in human capital accumulation.
 Drive to maturity: this stage takes place after a long period of time. The
population involved in agriculture declines while industry becomes more
diverse. Overall income per capita increases. The rate of savings and
investments is such that it can automatically sustain economic growth.
 Stage of Mass Consumption: at this stage a country’s demand shifts from food,
clothing and other basic necessities to demand for luxuries. To satisfy these
needs new industries involve their selves in mass production to match
consumption.

Harrod-Domar Growth Model: This model was developed independently by Roy F.

Harrod in 1939 and Evsey Domar in 1946.The Harrod-Domar model is an early post-
Keynesian model of economic growth. It is used in development economics to explain
an economy's growth rate in terms of the level of saving and productivity of capital
(Todaro & Smith, 2009). The Harrod-Domar Model is based on a linear function and
can also be referred to as the AK model where A is a constant and K is capital stock.
This model shows how sufficient investment through savings can accelerate growth.
Investments generate income and supplements productivity of the economy by
increasing the capital stock. The Harrod-Domar model is based on the following
assumptions:

 Laissez-faire; where there is no government intervention

 A closed economy; no participation in foreign trade
 Capital goods do not depreciate as they possess a boundless timeline
 Constant marginal propensity to save
 Interest rate remains unchanged, etc.

The Harrod-Domar model makes use of a Capital-output Ratio (COR). If the COR is
low a country can produce more with little capital but if it is high, more capital is
required for production and value of output is less. This can be denoted in a simple
formula of K/Y=COR; where K is the Capital stock and Y is Output because there is a
direct proportional relationship between both variables.

There are several criticisms to the assumptions of this model. Let’s start with the
assumption of laissez-faire. It is almost impossible for underdeveloped nations to
undertake certain large projects without the help of the government. As a growing
economy, the private sector has limitations to what they are able to contribute for the
growth of its country and this is where the government intervenes.

Also, as much as savings and investments are necessary for development, it is not
enough. The savings ratio might be constant but low and cannot support the amount of
productivity the country might want to undertake. There are other arrangements that
have to be put in place to complement the savings and investment.

1. Overview of the Structural Change Model

In economics, structural change is a shift in the basic way a market or economy

functions or operates (Todaro & Smith, 2012). The structural change model
demonstrates how a country’s economy transforms from the subsistence level which
is concerned with agricultural produce for personal consumption to a modern
industrial economy with greater output for worldwide consumption.

In order to illustrate the structural change model, we’ll consider two approaches, they
are:

 Two-sector surplus labor theoretical model which was developed by Nobel

Laureate W. Arthur Lewis.
 Patterns of demand analysis formulated by Hollis B. Chenery
The Lewis model was presented in the mid 1950’s and gained popularity amongst
other development theories between 1960’s and 1970’s. This model is applicable in
surplus labor developing countries of the world like China. Two- sector surplus labor
model as the name implies considers two sectors in an underdeveloped economy, they
are an overpopulated rural agricultural sector with marginal labor productivity equal
to zero- this is because agriculture generally under employs workers and a withdrawal
of the excess supply of labor will not result in a loss of output (Lewis, 1954). The
other is a highly urbanized and industrial manufacturing and service economy where
the excess labor migrates to. In this model, Lewis (1954) assumes that there is
employment creation in the urbanized sector that can accommodate the excess labor
being transferred from the rural subsistence economy.

Furthermore, Lewis (1954) added that since this industrialized economy is run by
capitalists, wages paid for labor is fixed instead of it being paid according to the value
imparted on the goods during production. After which the excess of profit over wages
is then re-invested to acquire capital goods and equipment for the purpose of capital
accumulation which results in an expansion of output.

Several contrary arguments have been raised concerning Lewis’ model. There have
been disagreements that his assumptions merely explain the realities of what goes on
in most developing countries. The first questionable fact is that job creation will be
able to match capital accumulation in the work force because if profits are re-invested
in laborsaving capital equipment then the excess labor might get laid off leading to
unemployment of the masses. Although output might increase as well as GDP, the
welfare of the people might remain unchanged.

This is one of many arguments. Moreover, in recent times, Lewis’ theory has been
modified and extended by economists such as John C.H. Fei and Gustav Ranis.
Another Structural Change Model approach is that of Hollis Burnley Chenery (1918-
1944) which is called the Patterns of Demand theory. Chenery’s model defines
economic development as a set of interrelated changes in the structure of an
underdeveloped economy that are required for its transformation from an agricultural
economy into an industrial economy for continued growth in addition to accumulation
of capital both human and physical (Chenery, 1960).

Chenery’s model requires an altering of the existing structures within an

underdeveloped economy to pave way for the penetration of new industries and
modern structures to attain the status of an industrial nation (Chenery, 1960). It is
quite similar to Lewis’ model but in its opinion investment and savings although
necessary are not enough to drive the degree of growth that is required. Chenery’s
model adopts four main strategies to achieve economic growth:
  Transformation of production from agricultural to industrial production
 Changing composition of the consumer demand from emphasis on food
commodities and other consumables to desire for multiple manufactured goods
and services
 International trade; creating a market for its exports
 Using resources as well as changes in socio-economic factors as the
distribution of the country’s population.

Although, Chenery’s approach better explains the structural change model, it also has
its limitations. One of the criticisms against the Chenery’s structural change model is
that it shortchanges critical valuables judgement. Again, in his analysis of Chenery’s
theory, Krueger identified areas of market failure emanating from exploitation of
static comparative advantage inferior for less developed countries to a more protective
or interventionist approach which merely focuses on producing dynamic comparative
advantages. This observation bears some relevance to the protection mechanism
established under the ‘Common Exchange Tariff (CET)’ mechanism for ECOWAS
member countries. Here, there is clause in the CET that allows Nigeria to use tariffs to
protect some local industries (Echenin, 2015). In spite of these limitations, Chenery’s
model is useful for economic growth where different countries with varying economic
systems are able to support each other in terms of economic relations. On this note,
this model suits the economic development efforts of developing countries against the
backdrop of globalization (Greider, 1997).