The Stages of Economic Development Rostow's Model of The Stages of Economic Development

The economy: The means by which a society applies its (limited) resources to satisfy its (unlimited) needs and wants The system of production and distribution and consumption The combined business and work done by a community. The human processes by which Nature’s resources are converted into goods and services. A country's industry, trade and finance.

What is Economic Development? Economic development occurs with the reduction and elimination of poverty, inequality and unemployment within a growing economy. Theories of economic growth try to explain how and why the economy expands. The Rostow Linear Stages Model: A linear theory of development. It argues that to achieve modernity all countries pass through the same stages of development. Economies divided into primary, secondary, and tertiary sectors. The history of developed countries suggests a common pattern of structural change.

In 1960, the American Economic Historian, Walt Whitman Rostow suggested that countries passed through five stages of economic development. 1916–2003

Stage 1 Traditional Society The economy is dominated by subsistence activity where output is consumed by producers rather than traded. Any trade is carried out by barter where goods are exchanged directly for other goods. Agriculture is the most important industry and production is labour intensive using only limited quantities of capital.

Stage 2 Transitional Stage (the preconditions for takeoff) Increased specialisation generates surpluses for trading. There is an emergence of a transport infrastructure to support trade. As incomes, savings and investment grow entrepreneurs emerge. External trade also occurs concentrating on primary products.

Stage 3: Take Off Industrialisation increases, with workers switching from the agricultural sector to the manufacturing sector. Growth is concentrated in a few regions of the country and in one or two manufacturing industries. The level of investment reaches over 10% of GNP.

The economic transitions are accompanied by the evolution of new political, economic and social institutions that support the industrialisation. Ex: Bank of Canada - 1935 The growth is self-sustaining as investment leads to increasing incomes in turn generating more savings to finance further investment. It’s the old upward economic spiral – Canada in the 1920s.

Stage 4 Drive to Maturity The economy is diversifying into new areas. Technological innovation is providing a diverse range of investment opportunities. The economy is producing a wide range of goods and services and there is less reliance on imports.

Stage 5 High Mass Consumption The economy is geared towards mass consumption. The service sector becomes increasingly dominant. Increasing emphasis on “knowledge-based” industries Increased awareness of environmental issues

Rostow’s Model -1 http://www2.hmc.edu/~olson/7

According to Rostow development requires substantial investment in capital (the tools of production). For economies to grow the right conditions for such investment would have to be created. Such conditions may include the stable provision of financial services – savings, credit, a stable internationally traded currency.

Limitations Many development economists argue that Rostow's model was developed with Western cultures in mind and not applicable to countries in the periphery today. In addition, its generalised nature makes it somewhat limited. It does not set down the detailed nature of the pre-conditions for growth.

Who cares? In reality, policy makers are unable to clearly identify stages as they merge together. Thus as a predictive model it is not very helpful.

Like many of the other models of economic developments it is essentially a growth model and does not address the issue of development in the wider context.

There may be (the horror) priorities other than “growth”, the simple increase in per capita income over and above the rate of population growth.

Let’s Apply!!! What Stage are the Following Countries in? Country GNI % Agric. % Manufac. A 600 91 3 B 750 70 14 C 10600 18 27 D 8000 13 34 E 950 57 10 F 30200 3 19 G 3500 29 16