Transcript Sources of Growth - West Morris Mendham High School

THE FIVE STAGES OF
ECONOMIC GROWTH
I.B. Economics
Mr. Raffay
Walt Whitman Rostow
THE FIVE STAGES OF ECONOMIC GROWTH
• In 1960 ‘The Stages of Economic Growth’ by W. W.
Rostow was published. It was subtitled ‘A NonCommunist 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:
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.
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.
3. The Take-Off
• Agriculture is commercialised, new
industries appear. Unused natural
resources are exploited, savings and
investment rise and steady growth is
achieved.
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.
5. The Age of High MassConsumption
• 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.
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.
• 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.
• ‘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.
• 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.
• 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.
• 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;’
• 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.
One example of this is the construction of the Erie Canal
which was built by the New York State legislature.
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.
• 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.
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.
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.
• 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.