Modern Theories of Economic Development and the Third World

Abstract

The main feature of underdevelopment is an inadequate supply of factors of production, which does not allow to develop economic activities on a scale large enough to satisfy demand of society. The basic factor, which, when scarce, creates especially unfavourable barriers for the developing countries, is capital. But even if a supply of capital in underdeveloped economy is very limited, proper allocation of this factor can soften the, effects of its shortage. Thus, when an underdeveloped country is going to reach a higher level of development its economic policy should aim not only at looking for the , external sources of capital inflows but, above all, at such an allocation of possessed capital due to which the greatest possible social benefits could be achieved .This attempt to find an optimal allocation of scarce capital supply is stressed in modern theories of economic development. In this respect we can divide these theories into two groups : theories of balanced development and those of unbalanced development. The most essential difference between the two groups of the theories lies in different ways of allocating the factors of production among particular parts and branches of national economy. In the case of the balanced growth models (models, because both in the groups of balanced and unbalanced growth theories the terms „balance” and „unbalance” are defined in different ways by various authors) uniform allocation of factors and relatively harmonized dynamics of growth of particular parts of national economy are justified by the functioning of market mechanisms, especially those shown in the Say’s law. In the models of unbalanced growth the main goal is to find „points of growth” , i.e., key branches, from which the process of growth will be transmitted to the other parts of national economy by means of intersectoral flows.

Apparently, the groups of theories of development presented in this paper do not seem to propose alternative solutions. In practice, they can be complementary to one another. It seems that changes of economic structures, characteristic of underdevelopment and leading to lack of balance in an economic system, may be a result of introducing a new system of disequilibria to this economy. Thus, the application of an unbalanced growth model may be a way of balancing an economy but on a higher level of development. On the other hand, the application of a balanced growth model in initial stages of development could only strengthen existing unfavourable economic structures. The functioning of the two groups of growth models — balanced and unbalanced one does not impose the necessity of choice between them since the sequence of the models could be more advisable. However, an unbalanced growth model, particularly a model of extreme unbalance, should not function in an economy for too long a period because in such a case it could bring about a new set of disequilibria (maybe even worse than those in the starting point). In this paper the author gives a detailed analysis of both groups of the theories. He tries to show the positive features of the theories and their shortcomings which are revealed when those theories be applied to solve the problem of underdevelopment