Patterns of Development and Obstacles to Growth

 Among
the economists who further developed the theoretical inheritance from Lewis,
Rostov, and others, but in the context of more structuralist approaches, Hollis
Chenery and Moshe Syrquin require special attention. In addition, two Danish economists may be mentioned: Karsten
Laursen and Martin Paldam. 

We shall look a little close at
selected aspects of their analyses to introduce the contemporary debate on the
basic structure of the development process and on the most important sources of
and obstacles to growth within developing economies. In the present section,
the focus is on the internal conditions in developing countries. This is
followed by a discussion of the international perspective on the growth process in
the next section.

In
a conventional Keynesian approach, the most important source of economic growth
is an increase of aggregate demand for consumer goods and investment goods.
From this will follow a corresponding growth in supply and, hence a new balance
(or equilibrium point) at a higher level will be achieved. Growth in aggregate
demand can be increased through public investments, but will otherwise come
from increased incomes.

Other
approaches within development economics emphasize, as was noted in earlier
sections, the addition of more factors of production – particularly capital and
technological innovation as the critical sources of growth. Better education of
the workforce may, in this context, function as a special source of growth.
These approaches essentially assume that increased demand will result from the expanded supply. The more structuralist approaches accept these sources of
growth but add reallocation of labour and resources from sectors with low
productivity to high productivity sectors. 

They also emphasize the
interrelations between the different sources of growth, instead of treating
each one in isolation. Furthermore, they distinguish between industrialised
countries and developing countries regarding the typical composition of growth
sources. 

They view the adding of more factors of production in the economy as a
whole – capital, technology and educated labour – as the most important source
in the highly industrialised countries, while in the developing countries a
significant proportion to the growth depends on the previously mentioned
transfer of labour and resources to high-productivity sectors. Laursen has
characterised this transfer as a process of diffusion.

Industrialised
Countries Developing Countries

Increased
aggregate demand     =                         Increased production and supply
(private and public)

 

Injection of more capital             =   Technological innovation            = Education

Injection of more capital in modern industry and other high-productivity sectors Transfer of labour and other resources from sectors with low productivity to sectors with high productivity

The
basis for the reasoning concerning the diffusion process is a two-sector model
similar to Lewis’s with a large rural subsistence sector with disguised
unemployment and underdevelopment. Hence, labour can be transferred to the
urban industrial sector without any, or with a very limited, decline in
agricultural production. In any case, the utilization of more labour in
industry, due to higher productivity in this sector, will lead to the net growth in
total production.

In
a more elaborate version of the model, the assumption about only two separate
and homogeneous sectors is replaced by assumptions about a multitude of sectors
with diverse characteristics and different levels of productivity. Urban
industry, in particular, is divided into relatively modern, large-scale
industry and traditional, small scale manufacturing and crafts. In the latter
sectors, as in agriculture, the existence of disguised unemployment and underemployment
along with low labour productivity allows for a replication of the diffusion
argument here.

Laursen
has observed that there is a tendency for the expansion of the modern large
scale sector to break down the traditional sector too fast, which further
implies that the industry’s job-creating ability is less than the growth in
unemployment following from the breakdown. Neither this nor other complicating
factors, however, weaken the basic point that it is the modern large-scale industry
that is the main engine of growth and economic transformation.

A
pertinent question then is: What are the factors limiting the haulage capacity
of this engine? Here, the more recent theoretical debates do not only emphasise
low savings rates and lack of capital for investment but add to these the lack
of foreign exchange. The classical development economists were, as their
successors, aware of the need for foreign exchange to finance the necessary
imports, but they did not regard this limitation as particularly important,
while contemporary development economics tend to give it a very high priority as
an obstacle to growth, especially in low-income, oil-importing countries. 

Two
further barriers to industrial growth have been identified, namely low growth
in agriculture and limited human resources, chiefly with respect to highly
qualified labour, business managers and political decision-makers, but also
regarding human development in a wider sense. We will
come back to these growth impeding conditions later and continue here with
other aspects of the theories proposed by Chenery, Syrquin and Laursen.

Prompted
by an interest in achieving an overview of basic changes in the developing
countries’ economic structures over a longer period, Chenery and Syrquin, in
the early 1970s, abandoned the construction of models. Instead as some of the
pioneers in this respect, they started to carry out a very comprehensive
empirical survey of the changing economic structures. Laursen later carried out similar surveys and investigations,
adding new data.

The
result of these surveys and investigations was documentation of tendencies as
foreseen in the diffusion model A clear correlation could be observed between, on
the one hand, rising per capita income and on the other, increasing migration
from agriculture and other primary economic sectors into the modern industrial
sector. 

It was also noteworthy that the changes in the pattern of employment
were not as marked as the changes in the distribution of investments and in the
various sectors’ contribution to gross domestic product. The relative growth of the modern industry was much more pronounced in these latter respects than when
measured in terms of employment. The problems of absorbing the fast-growing workforce in the modern industry were reflected in this. Parallel to the changes
mentioned, a further shift towards services, the tertiary sector, could be
observed.

It
was not the documentation of these patterns that was the most interesting
result emerging from the surveys; these patterns were well known from earlier
studies. The new and really interesting insight coming from the surveys was
that the patterns in most of the developing countries were closely correlated with
rising per capita income. 

The higher the income, the greater the shift away
from the primary sector and towards the secondary and tertiary sectors, these
were deviating cases, and the statistical significance was not in all cases
particularly high, but overall there was a clear correlation. A second
interesting result was that distinct stages in the changes of the economic
structures could not be identified. Rather, the picture revealed was one of the gradual changes without leaps.

The
unit will now conclude with a brief review of a special economic theory that is
not really part of the growth and modernization theories, but which may be
interpreted as a supplement to them. It concerns some more recent
considerations on the interdependence between developing countries and
industrial countries considerations which to a large degree came to play a role in the Brandt
Commission’s recommendations.

The theory of
interdependence has its roots in conventional economic theory. It began to play
a role in the development debate during the 1970s when it became evident how
closely the world’s economies are interconnected and, in their performance,
increasingly dependent upon each other. It provided an occasion for refining three forms of interdependence between the developing countries and the
industrial countries