Topic Area 5: Development Economics Sub-Topic Area 5.1: Economic Growth and Development Unit 8: Economic Growth, Development and Underdevelopment
Unit 8: Economic Growth, Development and Underdevelopment
Key unit competence: Learners will be able to analyse the indicators and determinants of economic growth and development in an economy.
By the end of this unit, I will be able to:
⦿ Explain the meaning of economic growth, development and underdevelopment.
⦿ Examine the factors that determine economic growth and development.
⦿ Analyze the importance of growth to the economy.
⦿ Compare the balanced, unbalanced and big push strategies of growth.
⦿ Analyze the advantages, disadvantages, limitations and applicability of the theory to Rwanda .
⦿ Compare and contrast the stages, limitations and applicability of Rostow’s and Marxist’s theories of growth.
⦿ Examine the differences between economic growth, development and underdevelopment
. ⦿ Analyze the types of poverty and their causes.
⦿ Suggest policy measures that can be taken by the government of Rwanda to reduce the rates of poverty.
8.1 Economic Growth
Case study 1
Relating to the photos below in Figure 1, the economy of Rwanda has grown tremendously since 1994. This is evidenced in the development of many schools in each district, many hospitals, and many roads linking rural areas to urban centres. Food production also increased to fight the hunger that was cropping out. Environment is being protected, standardisation of goods is done and, women emancipation has been fostered. Many Rwandans now are able to access education, get treatment, move from one place to another and have meals throughout the day.
Basing on the photos A, and B below; the case study, discuss the following questions:
(i) The increase in the number of schools, hospitals, foods and roads is known as ….
(ii) What factors do you think have helped Rwanda to achieve the situation described in case study 1?
(iii) Examine the advantages the scenario described in case study 1 have on Rwanda.
(iv) Analyze the problems that the above scenario brings to Rwanda.
Figure 1: Economic growth
Rwanda is one of the fastest growing economies in Central Africa. Although still poor and mostly agricultural (90% of the population is engaged in subsistence agriculture) the nation has made a significant progress in recent years. The major source of foreign trade is coffee, tea, tin cassiterite, wolframite and pyrethrum. New industries such as tourism, cut flowers and fish farming have been gaining importance. All these have increased significantly to the national income of the country as shown by the increase in the gross domestic product.
Economic growth can be defined as the quantitative increase in the volume of goods and services, or the persistent increase in the volume of goods and services over a period of time. Some economists define economic growth as the persistent increase in the country’s Gross Domestic Product. (GDP).
Economic growth is a material concept. It concerns itself with the growth of physical output, and does not take into account non-material factors like stress, happiness, etc. It is generally considered that economic growth does cause an increase in the standard of living provided that the increase in production exceeds any increase in the population.
This concept of economic growth is usually illustrated by an outward shift of the production possibility curve or production possibility frontier. The production possibility curve is a locus of points showing combinations of two goods that a country can produce when all its resources are fully and efficiently utilized. The outward shift of the curve illustrates an increasing capacity to produce goods and services.
The curve K0Co shows all possible combinations of capital and consumer goods available to a nation when all resources are fully employed.
Point a represents unemployment of some resources, under-utilisation or excess capacity. Point b indicates full employment of all resources, while e represents economic growth. A movement from a to b or any other point on the curve represents an increase in real income. An outward shift of the Production Possibility Frontier (PPF) from K0Co to K1C1 illustrates economic growth.
8.1.1 Measuring of economic growth (Calculation of economic growth)
Economic growth can be measured by real national figures particularly by real GDP. When real GDP is growing over time, then the country is experiencing economic growth. The annual economic growth rate is measured by the percentage change in the real GDP of a country over a period of time usually a year. Countries in East African and the world at large, have varying rates of economic growth. This may not be consistent because one country may grow faster in one year but lags behind the following year. The following table shows the projection of the rates of economic growth of East African countries from 2003 to 2010.
Table 1: Real GDP growth of East African countries for selected years
According to table 1 above, Rwanda recorded the highest
rates of economic growth in 2010 while Burundi recorded the lowest.
Graph showing trends of economic growth The Gross Domestic Product (GDP) in Rwanda expanded 4.80 percent in the third quarter of 2016 over the previous quarter. GDP Growth Rate in Rwanda averaged 5.44 percent from 2000 until 2016, reaching an all-time high of 13.40 percent in the first quarter of 2007 and a record low of -5.10 percent in the first quarter of 2013.
Source: www.tradeconomics.com National Institute of Statistics of Rwanda
Figure 3 above shows Rwanda GDP growth rate from 2014 to 2016
8.1.2 Factors that determine economic growth
Economic growth is the increase in the capacity of an economy to produce goods and services within a specific period of time. It is actually a longterm expansion in the productive potential of the economy to satisfy the wants of individuals in a society. Economic growth is directly related to percentage increase in GNP of a country. In real sense, economic growth is related to increase in per capita national output or net national product of a country that remain constant or sustained for many years. Therefore, any factor that affects real GNP of a country affects economic growth. When these factors are favourable, they increase economic growth but when they are unfavourable, they affect economic growth adversely.
It should be noted that economic growth does not depend on a single factor but a proper balance and management of all the factors involved.
These factors are economic, political, social and cultural in nature. The following are some of the important factors that affect economic growth of a country:
• Human resource: The quality and quantity of available human resource can directly affect the growth of an economy. The quality of human resource is dependent on its skills, creative abilities, training and education. If the human resource of a country is well skilled and trained, then the output would also be of high quantity and quality. On the other hand, a shortage of skilled labour hampers the growth of an economy, whereas surplus of labor is of a lesser significance to economic growth. Therefore, the human resources of a country should be adequate in number with required skills and abilities, so that economic growth can be achieved.
• Natural resources: This involves resources that are produced by nature either on the land or beneath the land e.g. plants, water resources and landscape, oil, natural gas, metals, non-metals and minerals. These depend on climate and environmental conditions. Countries having plenty of natural resources enjoy good growth than countries with small amount of natural resources. Also, efficient utilisation or exploitation of natural resources depends on the skills and abilities of human resource, technology used and availability of funds. Therefore, a country having skilled and educated workforce with rich natural resources takes the country on the path of growth than the one with out.
• Capital formation: This involves land, building, machinery, power, transportation and medium of communication. Producing and acquiring all these man-made products is termed as capital formation. Capital formation increases the availability of capital per worker, which further increases capital/labour ratio. Consequently, the productivity of labour increases, which ultimately results in the increase in output and growth of the economy. On the other hand, a reduction in the rate of capital formation negatively affects the rate of economic growth.
• Technological development: This involves the application of scientific methods and production techniques. In other words, technology is the nature and type of technical instruments used by a certain amount of labor. Technological development helps in increasing productivity with the limited amount of resources. Countries that have worked in the field of technological development grow rapidly compared to countries that have less focus on technological development.
The selection of right technology also plays an important role for the growth of an economy. On the other hand, an inappropriate technology results in high cost of production thus affecting economic growth adversely.
• Social and political factors: social factors involve customs, traditions, values and beliefs which contribute to growth of an economy. For example, a society with conventional beliefs and superstitions resists the adoption of modern ways of living. In such a case, achieving growth becomes difficult. If a society is flexible towards modern ways of living, achieving growth is quicker and easier. Also, political factors, such as participation of government in formulating and implementing various policies, have a major part in promoting economic growth.
• Local and foreign Markets availability: The presence of market both local and foreign, makes suppliers find a way to increase production to satisfy the expanded market through increased demand. This will be witnessed through increased investments throughout the country in a bid to make more supplies and increase their profitability. On the other hand, the absence of market will discourage producers, lead to closure of some industries in the country etc. thus low production in general affecting economic growth negatively.
• Foreign capital (foreign aid and foreign investment): As domestic savings are not sufficient to make possible the necessary or desired accumulation of capital goods, borrowing from abroad may play an important role. This helps to supplement a country’s own small saving in its growth process. Foreign capital can be loans or through foreign direct investments by foreign companies which also help to accelerate economic growth in the receiving country through capital accumulation and higher productivity of labour. They, also, promote new advanced technologies and technical know-how which are required for industrial growth and building up of infrastructure, such as power, irrigation facilities, ports and telecommunications all necessary to aid productivity in an economy. However, if foreign assistance is not forthcoming in adequate quantity, then a country experiences serious difficulties in promoting economic growth as productive capacity of the economy will be rendered inappropriate and inefficient.
This means that, absence of sufficient borrowing and direct foreign investment and the economic growth of the country will be adversely affected.
• The growth of population: The growing population increases the level of output by increasing the number of working population or labour force provided all are absorbed in productive employment. Increase in population means increase in quantity of labour and also increase in demand for goods which encourages production in the economy due to an expanded market. This promotes large-scale production and thus reaping of economies of large scale production. However, it should also be noted that, a growing population will increase productivity only if there is availability of supplies of natural and capital resources and the prevailing technology. When the supplies of capital and other resources are meagre, the increase in population will merely add to unemployment and will not bring about an increase in national output this hinders economic growth instead of promoting it. In another view, population growth adds a number of mouths to be fed and this raises consumption and therefore lowers both saving and investment thus holding down the rate of economic growth in a country.
• Political situation: This is a crucial factor that affects economic growth in any given economy. When there is good political climate i.e. political stability and security of a country attracts both local and foreign investors. Thus increases the volume of goods and services produced. People are assured of security for themselves and their property and this motivates them to start up or expand their businesses in different parts of the country promoting more productive potentials and a positive change in economic growth of a country. In another view, political stability and security in a country reduces government expenditure on military hardware and other forms of financing wars which increases government expenditure on productive activities through development expenditure. Production capacity of the country increases leading to increase in economic growth. On the other hand, political instability and insecurity scares away potential investors, both local and foreign, and also increase government expenditure on financing wars, buying military hardware etc.
all which reduce the production potentials of a country leading to low production of goods and services and adverse effect on economic growth.
• Availability of entrepreneurs: Presence of large number of entrepreneurs will lead to invention of new methods of production which will increase output compared to where there are few entrepreneurs. Entrepreneurs are always willing to convert new ideas into successful innovations. This creates new products and new business models which increase the productive capacity of the people leading to increased productivity hence promoting economic growth of a country.
• Infrastructural development: Infrastructure involves transport network, communication facilities, power, banking institutions etc. Therefore, well-developed and evenly distributed socio-economic infrastructure in an economy will attract more investments by both local and foreign investors since it makes it easy for movement of producers from one place to another and exchange of goods and services to and from different parts of the world hence increasing productivity and output distribution. On the other hand, poorly developed and un fairly distributed socio-economic infrastructure will discourage both local and foreign investments therefore reducing the productive capacity of the nation hampering economic growth.
• Government policy of subsidisation and taxation: When the government adopts a conscious policy of promoting production like giving producers subsidies, tax holidays, reducing interest rate on borrowing etc., investments will be attracted leading to increase in the volume of goods and services produced in the country. Where as the government takes on policies that are not friendly to producers like over taxing these, unfair allocation of resources, high interest rate on borrowed funds etc. it will discourage investments and lower production potentials in the country thus hampering economic growth.
• Technological change: New knowledge and inventions can contribute markedly to growth of potential output, even without net capital accumulation. If the old capital is merely replaced in the same form, capital stock will be constant and there will be no increase in the capacity to produce.
However, if there is growth of knowledge so that as old equipment wears out, it is replaced by different and more productive equipment, productive capacity will be growing leading to economic growth.
8.1.3 Merits/benefits of economic growth
In order to maintain the current living standards, productive capacity must grow at a faster rate than the rate of increase in population. As the economy grows, industries expand, new ones get established, and employment opportunities also expand. This becomes easy for government to redistribute income, provide more services and more opportunities for the less fortunate. Therefore, a number of benefits can be derived from a high rate of economic growth as explained below:
• An increase in standard of living: Economic growth can maintain or improve the living standards. In the long-term, economic growth is the primary engine for raising general living standards. Growth means a higher material standard of living for the citizens of the country. It means more goods and services — cars, shoes, necklaces, foreign holidays, etc. It can help to tackle the poverty of the disadvantaged groups in society though there is no guarantee that this will automatically result from growth. It will probably require action by government to ensure that the benefits of growth are widely shared.
• A higher level of public expenditure with no need for higher taxation: In most cases, increases in government expenditure exceed increases in the national income. This necessitates for a higher level of taxation to finance the increased expenditure. However, if there is a high rate of economic growth then government revenue would automatically increase without any increase in the rate of taxation. Economic growth is the best way to finance more government expenditure.
• Growth and redistribution of income: When there is economic growth and when the increment in income is redistributed through government intervention, it is possible to reduce income inequalities without actually having to lower anyone’s income. It is much easier for a rapidly growing economy to be generous toward its less fortunate citizens or neighbors, than it is for a static economy.
• Reduction in balance of payment problems: A faster rate of growth will make it easier to achieve a balance of payment equilibrium. An increase in output reduces pressure on prices, increases domestic demand and foreign demand for exports which improves the balance of payment position of a country.
• Creates and widens employment opportunities: An expanding economy will have a high level of capital investment spending that will help to sustain a high level of employment. New industries will be emerging and existing ones expanding thus increase in economic activities. This reduces the problem of unemployment and the rates of poverty and its related problems.
• Technological advancement: Economic growth involves advances in technology, innovation and a high degree of dynamism in the economy. This increase in efficiency is likely to be reflected in the quality of the country’s goods, and will make them more competitive in export markets. Besides, the volume of imports reduces, thereby improving the balance of payments position.
• Health related issues are reduced: There is increased production of goods and services which are vital to society and this helps to reduce malnutrition and other related diseases. This keeps the population healthy and more productive thus promoting more growth in the economy.
• Widens the tax base of the country: Once there is expansion of different economic activities in the economy, the country’s tax base increases through taxing those different economic activities hence increasing revenue to the government that can be used for development.
• Economic independence is attained: Since the country produces a lot of goods and services, it reduces reliance on other countries for assistance. Wide variety of commodities produced in the country enables its population to get most of their requirements at home and only gets what they cannot produce with their available resources.
• Infrastructure development: Infrastructures such as roads, hospitals and schools among others are developed to facilitate production directly or indirectly which leads to the development of the country.
• Promotes industrialisation and urbanisation: Economic growth encourages setting up of more industries and the expansion of the existing ones in order to increase productivity. This leads to growth of urban centres since so many facilities such as banking services, roads, power, water, telecommunication services, health centres, training centres etc. are set up in such areas to aid industrial production.
• Stabilizes prices in the economy: Wide variety of goods produced reduce price fluctuations as long as supply matches demand in and outside the country. And also as a result of much output, general price level of goods and services will reduce which increases real incomes of the citizens.
• Promotes political stability: With people being engaged in different economic activities and the desire to produce more and earn more, they have no reason to be chaotic and more so, have little or no time to waste as in rebelling against the ruling government. People who are well off and have a variety to consume, have no food conflicts which is a major cause of insecurities.
8.1.4 Costs of economic growth
The benefits of economic growth are truly impressive. This fact explains why economic growth is so ardently pursued by so many countries. The advantages of economic growth, however, should not obscure the reality that economic growth has costs as well as benefits. As the process of economic growth gets under way, and more goods and services are produced each year, there may arise certain undesirable side effects. If these are not incurred by the producers in the form of higher costs of production, then they are termed social costs. Social costs are those costs arising from economic activity that are borne by society and not by the producer.
Other things being equal, most people would probably regard a fast rate of growth as preferable to a slow one. In spite of the benefits associated with economic growth, there are also costs to material growth. These costs to society can be explained as follows:
• Pollution of air and water: The industries set up to produce and persistently increase output level produce fumes that pollute the environment and pour waste in the water bodies, there is also noise out of those machines. The present serious pollution problem according to the critics, results directly from rapid economic growth. As long as we pursue the goal of more economic growth, they conclude, we will continue to damage the environment.
• Environmental degradation: There is over exploitation of the natural resources which leads to their quick depletion. The ecosystem is normally tempered with, like, swamps being reclaimed, deforestation occurring so as to give room to industries that produce and persistently increase output level to attain economic growth. This reduces environmental sustainability.
• Congestion of traffic and houses leading to delays and easy disease spread: Traffic congestion occurs as vehicles are ever flowing in and out of the industrial place causing unnecessary delays. Workers in the industrial place tend to be accommodated near industries causing slum areas around and poor sanitation.
• Erosion of cultural values: In order to attain faster rates of economic growth, nationals tend to adopt foreign ways of consumption, behaviour and general living, this costs the nation discipline and order that had been maintained for long.
• Current consumption is normally foregone: People, in order to save enough, create capital assets that produce output to attain economic growth, always forego current consumption. They always feel that, to increase output and achieve greater economic growth, one should lower current consumption. This reduces health and living standards of the citizens that further worsens productive capacities and negatively affects economic growth.
• People forego leisure: Leisure is an important aspect of improved standard of living so as to always work, increase output and attain economic growth. However, economists also argue that a greater output of goods and services will not help us to achieve the good life. This is because, on the contrary, people feel that a greater real gross domestic product can be achieved only by sacrificing leisure.
• Increased indebtedness of developing countries: In order to attain economic growth, most developing countries borrow to set up production ventures that produce and persistently increase the level of economic growth. This increases a country’s indebtedness.
• Industrial/occupational hazards: Several upcoming industries set up to attain economic growth do not provide protective gadgets to the workers. Consequently, workers inhale poisonous fumes causing them chronic diseases. Also, they sometimes lose body parts to the machines they are not oriented to.
• The dangers of rural urban migration: As more industries are set up, people move to towns to get jobs and better living conditions in urban areas. As such, likely negative effects arise, such as slum development, open urban unemployment, and overcrowdings arise; this is mainly because people leave villages for urban settings where industries are set up fight for attainment of economic growth.
• Technological unemployment: Another aspect of social cost arises from new techniques of production. Machines and production methods will be subject to a fairly rapid rate of obsolescence. This is also true for labor. The changes which make economic growth possible also make labor redundant. This is especially the case with the capital-intensive techniques which rapidly increase the output level but make labor redundant. This causes technological unemployment.
8.1.5 Measures to promote economic growth
Measures that may be taken to promote long-term economic growth include among others:
• Human capital formation: The government can encourage investment in human capital by providing scholarships, educational grants, and loans to students on favourable terms. Financial support to colleges and universities will also help to improve the quality of human capital and thus promote economic growth.
• Technological change: The government can promote technological change by encouraging Research and Development (R & D). A number of private firms undertake research and development.
The government can provide incentives to these and other firms to increase their research and development activities. It can also finance some research and development projects of its own.
• Encouraging investment: The government can foster economic growth by encouraging investment. This can be attained partly through interest rate policies (low interest rates tend to stimulate real investment), and partly through tax incentives for investment in plant and equipment.
• Transfer of surplus labor from agriculture: One step a less developed country can take to promote economic growth is to remove surplus labor from the agricultural sector to more productive use in other sectors.
• Use of modern technology in agriculture: Attempts should be made to introduce modern technology into agriculture. This could be in form of new types of seeds and improved farming methods. This would lead to dramatic increases in agricultural production.
• Population control: Almost all developing countries use population control methods as part of their attempt to break out of the underdevelopment trap. Population control programmers have two elements: the provision of low cost birth control facilities and the provision of incentives encouraging people to have a small number of children. These methods meet with some, but limited success. Their efforts have been greatly aided by the World Health Organization (WHO). Steps to increase the quality of their labor resources through education and training have also been taken. These measures have helped promote growth and development in less developed countries. Without these measures, the plight of these countries would have been worse.
• Foreign aid: The idea that foreign aid helps economic development arises from a simple consideration. If a poor country is poor because it has too little capital, then by obtaining aid, it can accumulate more capital and achieve a higher per capita output. Repeated applications of foreign aid year after year can enable a country to grow much more quickly than it could if it had to rely exclusively on its own domestic saving. By this line of reasoning, the greater the flow of foreign aid to a country, the faster it will grow.
• Removal of trade restrictions: By permitting unrestricted trade with underdeveloped countries, rich countries gain by being able to consume goods that are imported at lower prices than would be possible if only domestic supplies were available. Developing countries gain by being able to sell their output for a higher price than would prevail if they had only the domestic market available to them. Some of the most dramatic economic growth and development success stories have been based on reaping the gains from relatively unrestricted international trade. Countries such as Singapore and Hong Kong have opened their economies to free trade with the rest of the world and dramatically increased their living standards by specializing and producing goods and services at which they have a comparative advantage — which they can produce at a lower opportunity cost than other countries.
• Improve the general climate for growth: The government can attempt to improve the climate for growth in a number of ways as for instance; lower tax rates in the hope of increasing incentives for work and risk taking; reduce the extent of government interference and a greater role for the free market will create the environment for economic growth; keep down home market prices; market provision; improve the general infrastructure and create security.
8.1.6 Circumstances under which economic growth may take place without corresponding levels of economic development
Basing on the Case Study 1 of this unit, it is seen that there has been increase in the volumes of goods and services, schools and hospitals have been built among others. Still, the standard of living of the people has not moved hand in hand with growth meaning economic growth is not moving at the same speed with development.
As a whole class, discuss the reasons for this trend in most developing countries.
• Economic growth can give rise to a persistent increase in the volume of goods and services produced with little or no quality added at all, under such circumstances economic growth is attained minus economic development.
• Economic growth makes people overwork at the expense of leisure, for economic growth to be attained at hyper rates people must work without rest; this negatively affects their welfare since leisure is part of one’s standard of living.
• Economic growth may be achieved at high rates but when the country is producing ammunitions to support the ongoing war. Even then economic growth is attained minus a corresponding rate of economic development.
• Economic growth may be achieved but when people are still using traditional tools and under developed technology, there is no economic development in such a situation because people struggle much to raise such a level of output.
• Economic growth may be attained but when people’s mode of thinking and attitude towards work have not yet changed from that of a back ward primitive set up. Such a reasoning mode delays economic development.
• Economic growth may be achieved but with high rates of pollution from industries set up to attain it. The pollution denies the society development.
• Economic growth can be attained but when the country is producing capital goods that do not have a direct impact on the standard of living of the people. In such a situation, economic development delays.
• Economic growth may be attained but with benefits in the hands of a few capital owners. Due to the uneven distribution of resources, such a society does not achieve economic development.
• Economic growth may be achieved internally but when such output is exported and nationals do not experience its benefits, even then economic development is not achieved.
• There may be improper accountability. The government officials may embezzle benefits of the high rates of economic growth attained. Such corruption practices delay economic development.
Theories of Growth
The theories of growth attempt to show the causes, sources and stages of economic growth and they have been developed from the developed nations to show the stages they passed through and how far they have gone. Different economists have grouped these theories into two broad categories
1. Theories based on sector balancing. Here they devised three major theories as seen below;
(a) Balanced growth theory
(b) Unbalanced growth theory
(c) Big push theory.
2. Theories based on causes of growth. Here they devised three other theories as seen below;
(a) Rostow’s stages of growth
(b) Dependence theory
(c) Marxist theory of transformation.
Figure 4 above illustrates the theories of growth basing on
the causes of growth and sector balancing
8.2.1 Theories based on sector balancing
Like said earlier these theories have been developed basing on developed countries and they have been found to be a bit hard to apply in the East African countries like Rwanda, Kenya, Tanzania, Burundi, Uganda and South Sudan. These include the following;
1. Balanced growth theory
Use library textbooks or internet to carry out research and attempt the following questions:
(i) What is a balanced growth strategy?
(ii) Explain the advantages and disadvantages of balanced growth strategy?
(iii) Analyze the limitations of applying the balanced growth strategy in Rwanda?
Meaning of balanced growth
Balanced growth strategy was advocated for by Ragnar Nurkse in the article “The problem of capital formulation in developing countries”. It states that there should be a simultaneous and harmonious upbringing of all sectors in an economy so that they grow at a more or less the same pace. The theory advocates for a critical minimum effort which is the minimum level of investment or sacrifice required in all the sectors of the economy to ensure interdependence and self-sustaining growth.
Nurkse proposes that industries which complement each other through linkages should be established and developed at the same time and rate in terms of demand and supply of raw materials. This will provide market for each other either raw materials or in puts. For example, balance should be made in the following sectors;
(a) Capital goods industries and consumer goods industries,
(b) The industrial sector and agricultural sector,
(c) Social overhead capital (transport, power, water, education, health facilities) and productive activities. (agriculture, industry and services).
(d) The rural sector and the urban sector,
(e) Production for market and production for export,
(f) Labor intensive techniques and capital intensive techniques etc.
Arguments in favour of the balanced growth theory
Below are the arguments supporting the balanced growth theory:
• It encourages resource exploitation and utilisation because it creates high demand for these resources by the many sectors in operation.
• The theory widens the tax base of the country because all the developed sectors are taxed by the government.
• It encourages forward and backward linkages in the economy since some sectors provide raw materials while others provide market for those raw materials.
• Employment is created because of the increased demand for labor to work in the different developed sectors.
• Balance of payment position may be improved especially when production is for export.
• Development in technology is undertaken because of the need to produce good quality goods and services.
• Self-reliance is created since all sectors are developed at the same time and there are a variety of goods and services needed in the society.
• It reduces income inequality because most of the people are engaged in the production of goods and services.
• Brain drain is reduced because the people are able to find employment in the country.
• Foreign exchange is saved because there is little to import since the economy is self-sustaining.
Disadvantages of the balanced growth theory
The following are the disadvantages of the balanced growth theory:
• It may lead to sectors being developed without quality since it calls for a critical minimum effort.
• It requires a lot of capital which may be lacking in developing countries. This is because developing all sectors requires a lot of capital.
• It may lead to over exploitation of resources. This is because all sectors have to be developed.
• It may lead to uncoordinated plans and sectors which may not lead to the development of the economy. The sectors may turn out to be without linkages.
• Over ambitiousness may at times lead to shoddy work since the expected results cannot be achieved.
Limitations of the balanced growth theory
Below are the limitations supporting the balanced growth theory:
• A balanced growth strategy requires a lot of capital funds which are not yet available in LDCs.
• Developing countries do not have adequate skilled manpower to scatter in all sectors being developed at the same time.
• A balanced growth strategy requires proper planning and implementation of plans so as to coordinate the different projects running at the same time, developing countries are not blessed with such planning skills.
• A balanced growth strategy requires developed infrastructure in terms of transport and telecommunication network, hydroelectric power, among others, such developed infrastructure is still inadequate in LDCs, and so they cannot sustain a balanced growth strategy.
• Developing countries have underdeveloped technology; it is still traditional and sometimes just intermediate that cannot support the growth of a balanced growth strategy.
• LDCs have inadequate local and foreign market, such a market cannot support the much output from all sectors of the economy, it goes to wastage hence losses.
Application in Rwanda
Most development and growth theories are based on the experience of the people who develop them. The balanced growth strategy has been found inapplicable to Rwanda basing on the arguments below:
• The theory is based on the assumption that all sectors in the economy are underdeveloped at the same level. This is not the case because in Rwanda some sectors are far more developed than others and the developed sectors are having linkages and pulling the rest that are lagging behind.
• Rwanda does not have the ‘‘critical minimum effort’’ that is minimum level of investment required to develop all the sectors at once. It can only afford a few sectors at a time. Developing agriculture, industry and all other sectors will require large sums of money that is lacking.
• Rwanda does not have the necessary resources both in terms of capital and human resources and related to that is the technology. With these lapses, the theory cannot be applicable due to the deficiencies.
• The theory does not consider the enormous planning that is required to ensure that the development process does not harm the economy. There has to be planning to ensure that there is equilibrium in the economy where demand and supply are equal because if one is greater than the other, they might develop imbalances and this may create inflation and surpluses. Planning is still a major problem in all developing countries at large.
• The theory assumes that industries and other sectors complement each other but this is not true, because in real terms, the sectors compete with each other for resources like labor, raw materials, market etc.
• The size of the market in Rwanda is still small meaning that when all sectors are developed at the same time, the massive production may cause surpluses and wastage. Still the foreign market maybe small due to the quality of the goods that are produced.
• Attempts to develop all the sectors in the economy may cause inflation. This is because it will call for increased expenditure in the economy which will cause increased money supply leading to demand pull and monetary inflation among others.
• The theory ignores the principle of comparative advantage. Rwanda may not be able to develop all the sectors at the same time but it may look at that sector that it can incur the least opportunity cost and then import other goods from other countries.
2. Unbalanced growth theory
Use the library or internet to contact a research about the following;
(i) Meaning of an unbalanced growth strategy.
(ii) The advantages and disadvantages of the unbalanced growth strategy.
(iii) The limitations of applying the unbalanced growth strategy in Rwanda.
Meaning of unbalanced growth theory
The Unbalanced Growth theory was popularised by Albert. O. Hirschman. According to this growth strategy, investment should be made in strategically selected sectors rather than simultaneously in all sectors of the economy. Investment should be made in a few selected sectors or industries for rapid development. This will lead to disequilibrium, creating scope for new investment opportunities, and thus, this would create inducement to invest. One disequilibrium calls for development which leads to another disequilibrium and then to the next one and so on. This is the path of development, an under developed country has to follow which according to the proponents of the unbalanced growth theory. The economies accruing from these few industries can be utilised for the development of other sectors. According to this strategy, unbalanced growth is the best way to achieve economic growth in an underdeveloped economy since these countries lack enough resources. Development can take place by unbalancing the economy such that the developed sectors will expand and others are developed at a later stage.
Hirschman emphasises the importance of international trade as a means of helping LDCs out of a vicious cycle of poverty. He proposed heavy investment in social overhead capital which reduces the costs of production thus encouraging productive activities at a later stage.
Advantages of the unbalanced growth theory
The following are the advantages of the unbalanced growth theory:
• It needs little capital and resources which makes it possible in LDCs to deal with deficit budgets.
• It requires less expenditure because a few sectors are looked at first then others come in later.
• It is easy to control and manage because a few leading sectors can easily be coordinated compared to the balanced growth theory.
• Production can be controlled basing on demand forces because the country will be producing according to available markets.
• The theory reserves some resources for the future use since some sectors are developed at a later stage.
• Specialization is possible since the country concentrates on some sectors fast and others are developed later. This creates efficiency in production.
• The theory requires micro-planning since it involves a small number of sectors which makes planning and implementation easy.
• There will be less reliance on foreign loans and donations leading to limited balance of payment problems.
Demerits of the unbalanced growth theory
Below are the demerits of the unbalanced growth theory
• It slows the rate of economic growth since the output from the few sectors is low and may not serve the whole nation at large. This may lead to constant importation.
• Regional inequalities come up because some areas will develop at the expense of others hence creating dualism with its associated problems.
• Unemployment may come up since few sectors are developed and worse still the sectors may resort to capital intensive technology to produce good quality.
• The theory encourages dependence because the country cannot satisfy the needs of its people thus it keeps on importing what it cannot produce hence worsening the balance of payment position.
• Leading sectors may not be able to pull others hence they will develop at the expense of others since they may not be compatible.
• Less tax revenue will be collected from the few sectors leading to constant borrowing with its associated problems.
• Some resources will remain idle since the developed sectors cannot use them as resources hence under utilization.
• A decline in one or two sectors will affect the economy drastically since it has no alternative sectors to run to. • There will be brain drain since few people will be employed creating a vacuum in the country since the would be skilled people have fled in search for greener pastures.
Limitations of the unbalanced growth theory
The following are the limitations of unbalanced growth theory:
• The strategy emphasizes specialization which has several weaknesses like limited varieties. This limits choice and development, total loss in case of failure among others.
• The strategy limits employment opportunities, one or a few sectors promoted can employ only a few people, with special skills. This will limit employment opportunities.
• The strategy denies the economy a chance to diversify which is a great input to development.
• Developing countries have a limited size of the market which cannot consume all the output from the sector being emphasized all over the country, so it leads to wastage of resources.
• The strategy encourages dependency on other nations, the output missed from the neglected sectors is to be imported. This worsens dependency and the balance of payment problems in the country.
• The emphasized sector may fail to have a serious impact on the country. Worse still it may just make it underdeveloped the more.
• The strategy may make the neglected sectors to lag so behind that uplifting them later may be so expensive or even hard, and this further widens the gap between the sectors of the country.
Application in Rwanda
Since the theory calls for development of a few sectors first so that others follow, the Rwandan government has put this to its advantage due to the little resources it has. The government has embarked on massive investment in sectors that link areas. A case in point is the massive construction of roads to connect places. Secondly, sectors like education and agriculture among others have been developed. Below are the instances that show applicability of the theory:
• Rwanda has limited resources and therefore it has been able to develop a few leading sectors like transport education and agriculture while the rest are also following and having linkages.
• In Rwanda, planning is being carried out to develop a few sectors first as seen in the current budget that calls for increased infrastructure development so as to encourage linkages.
• In Rwanda, the theory has encouraged specialization which in turn is helping to create employment opportunities and skill development.
• The difference in resource endowment has made the theory more applicable in Rwanda. It is unwise to develop the all the sectors like agriculture, fishing, mining among others. Due to resource inadequacy, Rwanda has embarked on developing more agriculture compared to fishing.
• The unbalanced growth strategy has helped Rwanda to participate in foreign trade more so as to get what it cannot produce. Rwanda is actively participating in the East African community and other trade organizations. This has created international relations.
3. Big push theory
Use library materials or internet and research about the following:
(i) The meaning of the big push theory.
(ii) The advantages and disadvantages of the big push theory.
(iii) The limitations of applying the big push theory in Rwanda.
Meaning of big push theory
The Big push theory was advanced by an economist called Paul Rodenstein Rodan and this explains why some economists prefer calling it the Rodanian theory. The theory states that; “for developing countries to take off into self sustaining and dynamic economic growth, they need a massive investment programmer in industrialization and building up economic infrastructure”.
This is a theory that assigns to capital the central role in the process of economic growth and development. Big-Push or a large comprehensive programmer is needed in the form of a high minimum amount of investment to overcome the obstacles to development in LDCs. There should be a high minimum level of resources that must be devoted to a development programmer if LDCs are to come on the path of economic progress.
The theory opposes proceeding “bit by bit”, as proposed by professor W.W. Rostow, because it will not launch the economy on the development path. The Big-Push calls for a sudden sharp increase in the rate of investment so as to put LDCs on the path of economic progress. This could be done by mobilising savings. The sudden increase in the rate of investment would require government action and direction since the majority of people in LDCs are unable to establish industrial firms. Big-Push necessitates obtaining external economies that arise from simultaneous establishment of technically interdependent industries. It also requires investment in social overhead capital at a large scale. Besides, the Big-Push theory requires a sizeable market to ensure favourable returns.
Arguments in favor of the big push strategy
Below are the arguments in favor of the big push theory:
• The theory advocates for setting up complementary industries. This rises the volume and variety of goods and services provided to the nationals.
• The massive investment programmer emphasized by the theory accelerates a stagnant economy into high rates of economic growth.
• The theory advocates for industrial growth that provides several employment opportunities to nationals, this develops the nation further.
• The industrial progress that Walt Rodan advocated for provides forward and backward linkages to the agricultural sector all of which are necessary for the rapid development of developing countries. • The theory calls for maximum exploitation of resources of developing countries and this reduces under utilization of resources.
• There is a high likelihood of having a balanced development of the economy if the different varieties of industries are scattered in different parts of the developing countries.
• The theory encourages self-sufficiency, that is the major symptom of development. The different varieties of industries produce different varieties of output. This reduces the need to import from other countries.
Disadvantages of big push theory
The disadvantages of the big push theory can be seen discussed below:
• The theory calls for massive expenditure, such funds are not readily available in LDCs, it calls for borrowing from other nations and this increases the indebtedness of LDCs.
• The big push theory ignores the role of agriculture in development. Agriculture is the major supplier of foodstuffs and raw materials to agro-based industries that developing countries can sustain.
• The massive industrialization that Rodan advocates for increases pollution that reduces the quality of life of the people.
• The theory calls for over exploitation of the natural resources due to the massive industrialization, this leads to their quick depletion.
• The heavy industrialization and economic infrastructural growth brings about the use of machines in production, these replace laborers, causing technological unemployment.
• The massive industrialization required by the theory calls for the rich foreign investors to developing countries, these repatriate all profits to their home countries leaving LDCs in a worse state than they found them.
Limitations of the big push theory
The big push theory has numerous challenges some of which are shown below:
• There is inadequate funds and man power in LDCs to invest in the theory.
• LDCs have inadequate resources to act as raw materials. This may be a hindrance to the development of industries.
• Developing countries do not have adequate skilled manpower to scatter in all sectors being developed at the same time.
• The strategy requires proper planning and implementation of plans so as to coordinate the different projects running at the same time, developing countries are not blessed with such planning skills.
• Strategy requires developed infrastructure in terms of transport and telecommunication network, hydroelectric power, among others. Such developed infrastructure is still inadequate in LDCs, and they cannot as such sustain a balanced growth strategy.
• Developing countries have underdeveloped technology; it is still traditional and sometimes just intermediate that cannot support the growth strategy.
• LDCs have inadequate local and foreign market, such a market cannot support the much output from all the industries of the economy, it goes to wastage hence losses.
Application in Rwanda
Like in other developing countries, the theory is not applicable to Rwanda based on the following arguments:
• The theory assumes that financial resources are available to massively invest in all sectors at once, and this isn’t the case in Rwanda.
• Excess spending may lead to inflation in the short run when the there is more demand of goods than supply.
• Output resulting from the high investments may lack market both domestic and foreign thus creating unwanted surpluses and wastage.
• Resources in Rwanda may not be readily available to be exploited at the same time since Rwanda has a problem of resource inadequacy.
• Some industries can only develop after others have grown, so it may be hard to develop all of them at the same time. e.g. the leather industry can only develop after the livestock industry has developed; Sugar industries can develop after the sugar cane firms have developed, etc.
• In Rwanda, there is still inadequacy in the labor force to coordinate and manage the various productive activities initiated.
8.2.2 Theories based on causes of growth
The theories based on the causes of growth tend to show the stages that the countries passed through to where they are now. They tend to concentrate more on how the developed nations reached where they are. Further, some theories such as the dependence theory, tend to explain more, why some countries have continuously lagged behind in terms of growth and development. There are basically three theories under the causes of growth and these are discussed below.
1. Rostow’s stages of growth
Use the library or internet and research about the following:
Figure 5: Rostow’s stages of growth
(i) The stages of development according to Rostow.
(ii) The different characteristics under each stage
(iii) The extent to which the theory is applicable in Rwanda.
Professor Walt Whitman Rostow is one of the pronounced development economists. After studying the trend of economic development in various countries, he came up with the conclusion that, development follows specific stages. He postulated that the transition from underdevelopment to development can be described through 5 gradual stages or steps. He described these stages together with the features through which all countries pass to attain hyper rates of economic growth and development. i.e. from primitive stage to the last stage he called it the mass high consumption stage. These stages depict the way of life, way of doing work, level of capital accumulation, method of production, level of saving and investment among others.
Professor W.W. Rostow emphasizes capital accumulation as a driving force of the economy through these gradual stages.
Rostow’s stages of economic growth
• Traditional stage • Transitional stage
• Take off stage • Drive to maturity stage
• Stage of high mass consumption
This is the first stage in the development process where the economy is still in infancy and there is little progress taking place. It has the following features:
• Subsistence production where output is for home consumption.
• No use of money as a medium of exchange.
• There is a high degree of communal organization where people work together as a community.
• Traditional beliefs in culture lead to a lot of conservatism.
• There are cases of disease and the nearest hospital is the bush.
• Production is highly labor intensive.
• There is almost no formal employment and organised income.
• There is nothing like investment and savings in the economy and the economy is closed from external world.
• High levels of resource wastage through unproductive activities like funeral rites, birth cerebration, marriage, etc.
Transitional stage/pre-condition to take off
The societies are in the process of transition. It is the period when the society lays the foundation for take-off and never to revert to the traditional era. The society is first influenced by the external forces from MDCs.The idea of economic progress spreads. The society then starts to imitate the advanced society. In this stage, the following features exist:
• Dualism arises at this stage. Dualism is the co-existence of two contradicting sectors in an economy, one developed and the other under developed. e.g. commercial agriculture versus subsistence agriculture, agriculture versus industry.
• The society starts moving away from dominant subsistence sector and traditional methods of production are reduced.
• A market economy starts emerging where people exchange their output for money.
• Industrialization starts more so the processing industry, these are normally agro-based industries processing agricultural output.
• Entrepreneurs start to emerge.
• Saving and investment start and rise up to 5% of the Gross Domestic product.
• Development of a national identity and shared economic interests.
• Mobility of labor begins.
• Education starts spreading.
• Banks and other institutions for mobilizing capital appear.
• Investments in communications and manufacturing take place.
• Entrepreneurs start to emerge. i.e. new enterprising people come forward to mobilize savings.
Take off stage to self-sustained growth stage
Self-sustained growth means a reduction on foreign dependence. This is the stage when the obstacles to steady growth are finally overcome. The forces of economic progress from the modern economic activities expand and dominate the society. The economy becomes self-propelling. This stage involves rapid transformation in the country’s social, cultural, political and economic spheres. It has the following characteristics:
• Barriers to development are eliminated. Strong economic infrastructure like banks, hospitals, schools are set up.
• Savings and investment grow to between 5% and over 10% of the Gross Domestic Product, new industries are introduced and industrial growth takes faster rates.
• More employment opportunities are created; people’s incomes rise because wages are higher.
• Idle resources are put to more efficient use through exploitation by the industries.
• Modern and advanced technology is introduced in all sectors of the economy.
• Skilled and qualified labor and entrepreneurs start coming up.
• Education and literacy rates increase at faster rates.
• Rate of urbanization increases faster.
• Both industrialization and markets expand.
• One or more leading sectors of the economy develop.
• The increase in per capital output should outstrip the growth of population.
Prematurity stage/Drive to maturity stage (self-sustained growth)
The growing economy drives to extend modern technology over all the economic activities. It is a period of long sustained economic growth. New production techniques replace the old ones and new sectors are created. This stage has the following features:
• The rate of saving and investment is between 10% and 20% of GDP.
• The economy undergoes fundamental political, social and economic advancements, technology progresses rapidly.
• Production for export grows further and there is limited importation of manufactured goods.
• The industrial sector is transformed from small scale to heavy industrialization.
• Agricultural mechanization emerges and such heavy agricultural machines like tractors, combine harvesters, multi crop thresher are used to increase agricultural productivity.
• There is maximum utilization of the country’s resources.
• Modernization of the economy is very high and traditional norms, beliefs and customs are kicked away.
• There are high levels of employment opportunities and white collar jobs increase in availability.
• Goods formerly imported are produced at home with import substitution industrial strategy.
• New import requirements develop and new export commodities to match the imports develop.
• The character of entrepreneurship changes to a better one.
• Real wages start rising.
• It is at this stage that the economy demonstrates its technological and entrepreneurial skills to produce anything it may choose.
Stage of high mass consumption
This is the last stage in growth where the economy has reached its climax. It is the stage when the leading sectors of the economy shift from producing mainly capital goods to producing consumer goods. The incomes of the majority rise beyond what is necessary for subsistence. The structure of the population changes from being predominantly rural to predominantly urban. It has the following characteristics:
• All resources in the country are fully exploited and utilized.
• Consumer durables like washing machines, cookers etc become necessities in every household.
• Incomes of the people are extremely high due to full employment conditions.
• Industrial growth is at its peak and they start producing luxuries like cosmetics, necklaces among others.
• The rates of saving and investments are over 20% of gross domestic product.
• There are high rates of exportation and the country’s balance of payment position improves.
• Urbanization increases thus increase in the urban population.
• A country starts lending and donating to other nations.
• People reduce working hours and start enjoying leisure, they even start going abroad to tour and rest.
• There is more allocation of funds to social welfare and social security than to industry which leads to the emergence of a welfare state.
• The proportion of the population working in offices or skilled factory jobs dominates the working class.
It is important to note that some stages over lap into others, so it may be difficult to identify the exact stage at which a society lies according to the features stated by Professor Walt Whitman Rostow.
Applicability of the theory in low developing countries
As talked about by Rostow, developing countries have tended to go through the same path though there is still a long way to go. The following features can be seen in the developing countries:
• Subsistence production where output is for home consumption is very common in developing countries as a means for survival.
• No use of money as a medium of exchange. In some areas, exchange is through barter system while generally money is used as a medium of exchange in all societies.
• There is a high degree of communal organization where people work together as a community through cooperatives.
• Traditional beliefs in culture lead to a lot of conservatism. This is very common in developing countries and it has led to low quality output.
• Production is highly labour intensive and this is because of the inadequacy in capital in developing countries.
• High levels of resource wastage through unproductive activities like funeral rites, birth cerebration, marriage etc. are common practices in developing countries.
• Dualism is common. Dualism is the co-existence of two contradicting sectors in an economy one developed and the other under developed. e.g. commercial agriculture versus subsistence agriculture, agriculture versus industry.
• Industrialization is common especially the processing industry. These are normally agro-based industries processing agricultural output, as mentioned in the pre-conditions to take off stage.
• Entrepreneurs are emerging and this has increased saving and investment leading to increase of the gross domestic product.
• There are high cases of labor mobility in the developing countries both internal and external.
Criticisms of Rostow’s theory
Rostow’s theory of growth is criticised as shown below:
• Rostow talks about progressing from stage to stage but does not show the mechanism of how it is done.
• Some countries have already entered into the last stage of the age of High Mass consumption before going through the fourth stage of maturity, e.g. Canada, Australia.
• Rostow bases his theory on American and European history and defines the American norm of high mass consumption as an integral to the economic development process to all industrial societies, so his model has no impact on other nations especially the developing agricultural nations.
• Rostow fails to demarcate one stage from the other as the features especially stage one and stage two; and stage four and five tend to overlap into each other. So it is difficult to demarcate one stage of growth from the other.
• Some countries have achieved high savings – 5 to 15% — but they have never taken off.
• Rostow does not appreciate that some countries were born free of some stages. Rostow does not consider nations like U.S.A and Canada, which were born free of the traditional stage.
• Rostow bases his theory on savings, showing that growth occurs as the rate of savings increase with advancing stages but savings do not show a picture of economic growth because they are autonomous.
• Whitman Rostow gives rates of savings and investment at different stages but does not show how the rates are determined, so they become unrealistic.
2. Marxist theory of growth
Using the library or internet, research and attempt the following:
(i) Give stages of development according to Marxist Theory.
(ii) Show the different characteristics under each stage.
Figure 6: Marxist stages of growth
According to Karl Marx, development grows through stages that are determined by class struggle. He also developed five stages like Rostow and although the stages were different he also agreed that development started from nowhere, where everything was primitive, what he called the traditional stage.
The difference between him and Rostow was that while Rostow emphasised the role of saving and capital accumulation, Karl Marx advocated for the importance of labour as an engine to growth:
Karl Max’s stages of growth
• Traditional stage
• Slave economy
• Feudal economy
• Socialism and Communism
This is the first stage and has got the following characteristics:
• A generally peasant economy where simple activities for home consumption are carried out.
• Communal ownership of land i.e. land is owned by the whole community.
• No use of money as a medium of exchange.
• Traditional beliefs in culture lead to a lot of conservatism.
• Production is direct for home consumption.
• Family labor is used in the production process.
• The output produced is little.
This is the second stage and has the following characteristics:
• Private ownership of resources like land emerge.
• There is ownership of people as property.
• Slaves are used as free labor to increase output.
This has the following features:
• Under this land is owned by the kings and other cultural leaders.
• Cultural leaders have a task of collecting tax revenue which may be in form of produce within their respective areas and present it to the kings.
• People pay for use of land through the output produced.
The capitalist economy has the following characteristics:
• There is increased competition in the markets.
• Emergence of monopolies in form of big multinational corporations.
• Forces of demand and supply determine what is to be produced.
• Profit motivation is the major determinant of production.
• Government role is to regulate the production activities but participates less in the production process.
• Increased use of machinery causing technological unemployment.
Socialism and communism
This economy is characterized by the following:
• Increased mechanized worsening the unemployment problem.
• Creation of an army of the employed emerges due to high rates of unemployed.
• The workers tend to take over the states and their main aim is to distribute wealth.
• There are riots and strikes against the government.
• Ultimately socialism leads to communism where by the state withers away and there will be no shortage of products.
3. Dependence theory
Basing on the photos A, B and C in figure 7 below, answer the following questions:
(i) What forms of dependence are shown by the photos A, B and C?
(ii) Apart from those activities, how else does your country rely on others?
(iii) The process of relying on another country for resources or economic decisions is known as……..?
(iv) Analyze the effects of such a process mentioned in (iii) above to Rwanda as a country and how can they be reduced?