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 patterns of 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)

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 of development 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