THE FIVE STAGES OF ECONOMIC GROWTH

1. THE FIVE STAGES OF ECONOMIC GROWTH I.B. Economics Mr. Raffay

2. Walt Whitman Rostow

3. THE FIVE STAGES OF ECONOMIC GROWTH • In 1960 ‘The Stages of Economic Growth’ by W. W. Rostow was published. It was subtitled ‘A Non-Communist Manifesto’ because it offers a critique of Marxism in the later chapters, but this is beyond the remit of our syllabus. We shall therefore concentrate on the earlier chapters, which discuss the necessary conditions for economic development, or as Rostow calls them; the preconditions for take-off and the take-off. Rostow identifies and provides evidence for five stages of economic growth:

4. 1. The Traditional Society • A traditional society has a large proportion of the population devoted to agriculture. The level of technology is severely restricted or is ‘pre-Newtonian’. Examples include the Chinese dynasties, the medieval civilisations of Europe, the Middle East and the Mediterranean.

5. 2. The Preconditions for Take-Off • Preconditions for take-off exist when there is a more stable political nation. There is greater exploitation of science, and rising investment in transport and communication. Modern manufacturing appears.

6. 3. The Take-Off • Agriculture is commercialised, new industries appear. Unused natural resources are exploited, savings and investment rise and steady growth is achieved.

7. 4. The Drive to Maturity • After a long period of growth (say 40 years), 10 to 20% of national income is invested and output continually outstrips population growth. Goods that were previously imported are now produced at home. There is a shift away from heavy engineering towards more complex processes. The economy can choose to produce anything it wants even if the natural resources required are not actually present. Although 40 to 60 years is quoted, Rostow says that this length of time may vary.

8. 5. The Age of High Mass-Consumption • A large number of the population have moved beyond meeting their basic needs. Leading sectors of the economy are producing durable goods. For example, the production of the Model T Ford signalled the start of this process in the USA. Increased resources are allocated to social welfare and security.

9. Summation of the early chapters of Rostow’s work. • There are two main cases, says Rostow. The first case includes most of Europe, the greater part of Asia, the Middle East and Africa. In the second case are those countries that were ‘born free’. These include the United States, Australia, New Zealand and Canada. These countries were mostly born out of Britain which was already itself a fair way along the path of development. Thus their cultures and traditions were transplanted. The presence of abundant natural resources in these countries meant that the main task was that of constructing social capital.

10. However, anomalies exist. Louisiana in the American south, Quebec in Canada and the countries of Latin America did not fit into either of the two categories. In these cases economic development was hampered by the adoption or creation of unsuitable traditions. However our discussion is mainly concerned with the first case, i.e., Europe, Asia, the Middle East and Africa.

11. ‘The transition we are examining has, evidently, many dimensions. A society predominantly agricultural-with, in fact, usually 75% or more of its working force in agriculture- must shift to predominance for industry, communications, trade and services. • A society whose economic, social and political arrangements are built around the life of relatively small –mainly self-sufficient-regions must orient its commerce and its thought to the nation and to a still larger international setting.

12. The view towards the having of children-initially the residual blessing and affirmation of immortality in a hard life, of relatively fixed horizons-must change in ways which ultimately yield a decline in birth rate, as the possibility of progress and the decline in the need for unskilled farm labour creates a new calculus.

13. The income above minimum levels of consumption, largely concentrated in the hands of those who own land, must be shifted into the hands of those who will spend it on roads and railroads, schools and factories rather than on country houses and servants, personal ornaments and temples.

14. Men must come to be valued in the society not for their connexion with clan or class, or even, their guild; but for their individual ability to perform certain specific, increasingly specialized functions.’ • ‘The essence of the transition can be described…as a rise in the rate of investment to a level which regularly, substantially and perceptibly outstrips population growth;’

15. From the quote above we can see that Rostow identifies investment and the increase in capital as key issues for development. For Rostow these rates for investment are 10% of national income for a modern economy and below 5% for a traditional economy. He uses the term social overhead capital to refer to railways, canals and roads etc. Social overhead capital is different, he points out, to other forms of capital. Roads and railroads differ from factory machinery in that the pay-back period is much longer and the rewards are returned not to individuals but to society as a whole. The benefits from roads are not immediately apparent and often indirect, but these benefits are large. Rostow argues that because the nature of social overhead capital is different, government involvement is necessary.

16. One example of this is the construction of the Erie Canal which was built by the New York State legislature.

17. Rostow summarises the preconditions for take-off: • 1. Investment must rise to 10% of National Income • 2. The development of one or more substantial manufacturing sectors • 3. The existence of, or emergence of political, social and institutional framework, which favours the modern sector and growth.

18. Britain is identified as the country that was the first to ‘take-off’ in last 20 years of the 18th century. The reason, Rostow suggests for this, is that Britain was able to develop laterally – i.e. not in just one specific area. Banking, trade, shipping and manufacturing were all allowed to make progress. Crucially, Britain was also more religiously tolerant than other countries at similar stages of development such as France and Holland. Furthermore, Britain possessed the military power to defend its interests.

19. Characteristics of the take-off period are: • 1.Enlarged effective demand for the products of the new sectors that are capable of rapid growth. • 2.New methods of production and an expansion of capacity. • 3.The society must be capable of generating capital initially to detonate the take-off and a high rate of reinvestment of profits. • 4.The expansion of the leading sectors must induce a chain reaction leading to increased demand for the products of other sectors of the economy.

20. Criticism In attempting to offer a model of economic growth, Rostow himself offers so many non-typical cases that it is hard to conclude that there is in fact a typical case. However the theory does point us towards issues of investment and capital and the need for a shift towards urban living. A very large area of concern today is that of sustainable growth. That is growth that uses appropriate technology. Rostow’s work does not concern itself with this at all. Another question his work gives rise to is; can we speed up development? Foreign governments, multinational companies and aid agencies all provide investment capital to developing countries as a means of avoiding the need to save 10% of national income.

21. Finally we might conclude that rather than being one way to economic development, there are many. But in each path to development there are common characteristics and Rostow has successfully identified some of them.