DISCLAIMER: Every reasonable effort is made to ensure the accuracy of the information used in the creation of this reference

material, without prejudice to the existing copyrights of the authors. As an off-shoot of the innumerable difficulties encountered
during these trying times, the authors endeavored to ensure proper attribution of the esteemed original works, by way of footnotes or
bibliography, to their best abilities and based on available resources, despite the limited access and mobility due to quarantine
restrictions imposed by the duly constituted authorities.
We make no warranties, guarantees or representations concerning the accuracy or suitability of the information contained in this
material or any references and links provided here. Links to other materials in our CPOD and CAM was made in good faith, for non-
commercial teaching purposes only to the extent justified for the purpose, and consistent with fair use under Sec. 185 of Republic Act
No. 8293, otherwise known as the Intellectual Property Code of the Philippines .

Midterm
#12 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson and William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by tereso Tulao Jr., Gerardo Largosa, Christina Castill
D. Economics (volume 3)
Philippine Economic and Development Issues
Copyright Gerardo Sicat, 1983, 2003
E. Economic Development in the third World
@Michael P. Todar

Development should be perceived as a multidimensional process involving the reorganization and reorientation of entire
economic and social system that means beside improvements in incomes and output it must include changes in
institutional, social, administrative structures and also popular attitudes, customs, and beliefs.

It is helpful to explore historical and intellectual evolution about how and why development does and does not take place.
Classic Theories of Economic Development
The four major and often competing theories of economic development:
a. The linear-stages-of-growth model
b. Tehories and patterns of structural change
c. The Interbational-dependent revolution
d. Neo-calssical, free market counter-revolution

In 1950’s and 1960’s, theorists viewed the developement process as a series of successive stages of economic growth
through whihch all countries must pass. It was an economic theory of development which proposed that the right quantity
and mixture of savings, investment and foreign aid are necessary ingredients to proceed along the path of economic
growth that had been historically applied by more developed countries.
1. The linear-stages-of-growth model – this theory of economic development says that a countrypasses through
sequential stages in achieving development.
American economic historian Walt W. Rostow advocated the linear-stages-of-growth and according to W. W.
Rostow, the transition from underdevelopment to development can be described in terms of a series of steps or
stages through which all countries must proceed.

W. W. Rostow stages of economic growth:

a. The traditional society
b. The pre-conditions for takeoff into self-sustaining growth
c. The take-off
d. The drive to maturity
e. the age of high mass consumption
One of the development staregies to effect take-off is the use of domestic and foreign savings to generate sufficient
investment to accelerate economic growth and the economic mechanism by which more investment leads to more
growth is described in the Harrod-Domar growth model which is the functional economic realtionship in which the growth
rate of gross domestic product (g) depends directly on the national net savings rate or national net saving ratio (s) (
savings expressed as a proportion of disposable income over some period of time) and inversely on the national capital-
output ratio (c) (a ratio that shows the units of capital required to produce a unit of output over a given period of time).

Change in Y / Y = s / c

Example: capital output ratio is 3, aggregate net saving ratio is 6 percent, then GDP growth rate is 2 percent per year,
(.06/3=.02). If net saving ratio increases to 15 percent then (.15/3= 5) percent GDP growth rate increases to 5 percent
An increase in the proportion of national income saved will increase GDP.

FOOTNOTES: Materials contained in the learning packets have been copied and conveyed to you by or on behalf of Pamantasan ng
Cabuyao pursuant to Section IV- The Copyright Act (RA) 8293 of the Philippines Intellectual Property Code. You are not allowed by
the Pamantasan ng Cabuyao to reproduce or convey these materials. The content may contain works which are protected by
copyright under RA 8293. You may be liable to copyright infringement for any copying and/or distribution of the content and the
copyright owners have the right to take legal action against such infringement. Do not remove this notice.

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DISCLAIMER: Every reasonable effort is made to ensure the accuracy of the information used in the creation of this reference
material, without prejudice to the existing copyrights of the authors. As an off-shoot of the innumerable difficulties encountered
during these trying times, the authors endeavored to ensure proper attribution of the esteemed original works, by way of footnotes or
bibliography, to their best abilities and based on available resources, despite the limited access and mobility due to quarantine
restrictions imposed by the duly constituted authorities.
We make no warranties, guarantees or representations concerning the accuracy or suitability of the information contained in this
material or any references and links provided here. Links to other materials in our CPOD and CAM was made in good faith, for non-
commercial teaching purposes only to the extent justified for the purpose, and consistent with fair use under Sec. GD185 of Republic
Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines.
Midterm continuation….
#13 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson and William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by tereso Tulao Jr., Gerardo Largosa, Christina Castill
D. Economics (volume 3)
Philippine Economic and Development Issues
Copyright Gerardo Sicat, 1983, 2003

Criticism of the theory of linear stages of growth

The theory of linear stages of growth’s development mechanism does not work always because more savings and
investments are not sufficient condition ( a condition that when present causes or guarantees that an even will or can
occur) for accelerated rates of economic growth though it is necessary condition (a condition that must be present,
although it need not be, although it need not be in itself sufficient, for an event to occur).

In 1970s, the linear-stages of growth model was replaced by two competing schools of thought:
1. Theories and Patterns of Structural Change- It used modern economic theory and statistical analysis to portray
internal process of structural change that a developong country must undergo if it is to succeed in generating
and sustaining economic growth. Theory of Structural Change (The hypothesis that underdevelopemnt is due to
underutilization of resources arising from structural and institutional factros that have their origins in both
domestic and international dualism. Development thus requireas more than just accelerated capital formation,
Theory of Pattern-of-Development Analysis of Structural Change (an attempt to identify characteristics features
of the internal processes of structural transformation that a typical developing economy undergoes as it
generates and sustains modern economic growth and development).
2. The International Dependence Revolution -It viewed underdevelopment in terms of international and domestic
power relationships, institutional and structural economic rigidities, and the resulting proliferation of dual
economies and dual societies both within anfd among the nations of the world.

One of the theories that deals on Theory of Structural Change is the structural transformation (The process of
transforming an economy in such a way that the contribution to national income of manufacturing sector will surpasses
the agricultural sector contribution) of primarily subsistence economy which was formulated by Nobel Laureate W. Arthur
Lewis known as Lewis two-sector model (A theory of development in which surplus labor from the traditional agricultural
sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes
industrialization, and stimulates sustained development).
In Lewis two-sector model, underdeveloped consist of two sectors, 1) a traditional, overpopulated rural subsistence
sector chracterized by zero marginal labor (surplus labor) productivity 2) and a high-productivity modern, urban industrial
sector into which surplus labor from susisstence labor is gradually transferred. A surplus labor means the excess of labor
over and above the quantity demanded at the going free-market wage, however in Lewis two-sector model, surplus labor
means the portion of the rural labor force whose marginally productivity is zero. The focus of the two-sector model is both
on the surplus labor transfer from subsistence sector and the growth of output and employment in the modern sector.

Criticisms of the Lewis two-sector Model

a. It assumes that the rate of labor transfer and employment creation in the modern sector is proportional to the
rate of the modern sector capital accumulatuion. The faster the rate of capital accumulation, the higher the
growth rate of modern sector and the faster the rate of new job creation. However, what if capital accumulated is
used in other undertaking beside using it to create new job.
b. The notion that surplus labor exist in rural arwas while there is full employment in the urban areas. Suppose
there is no or little surplus labor from rural area which is what research indicated.
c. The notion of competitive modern sector labor market that guarantees the continued existence of constant real
urbanwages up to the point where supply of rural surplus labor is exhausted.However, the tendecy of urban
wages is to rise substantially.
d. Its assumption of diminishing return in the modern industrial sector. Yet there is a much evidence of increasing
returns prevailing in this sector.

FOOTNOTES: Materials contained in the learning packets have been copied and conveyed to you by or on behalf of Pamantasan ng
Cabuyao pursuant to Section IV- The Copyright Act (RA) 8293 of the Philippines Intellectual Property Code. You are not allowed by
the Pamantasan ng Cabuyao to reproduce or convey these materials. The content may contain works which are protected by
copyright under RA 8293. You may be liable to copyright infringement for any copying and/or distribution of the content and the
copyright owners have the right to take legal action against such infringement. Do not remove this notice.

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