The theory of development, which influenced the world from the mid-1940s
to the 1970s, viewed the problem of less developed countries stemming from low
capital and resource misallocation. Economists during this period believed that
development was equivalent to a growth process that required high capital and
resource reallocation from low-productivity agricultural sectors to high-productivity
manufacturing sectors. Rostow (1960) argued that countries had to go through
successive stages of growth, from the taking-off stage to the sustaining growth
stage. Also, savings-led growth was considered essential (Harrod 1939; Domar
1957). However, there was a problem of capital accumulation in less developed
countries—people were too poor to save. It was thought that foreign aid, together
with the right combination of savings and investment, would solve the capital