1960, the American Economic Historian, W. W. Rostow, suggested that countries
passed through five stages of economic development.
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 labor intensive using only limited
quantities of capital. Resource allocation is determined very much by
traditional methods of production.
2 -- Transitional Stage (the preconditions for takeoff)
Increased specialization 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.
3 -- Take Off
Industrialization 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.
economic transitions are accompanied by the evolution of new political
and social institutions that support the industrialization. The growth
is self-sustaining as investment leads to increasing incomes in turn generating
more savings to finance further investment.
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
5 -- High Mass Consumption
The economy is geared towards mass consumption. The consumer durable industries
flourish. The service sector becomes increasingly dominant.
to Rostow, development requires substantial investment in capital. For
the economies of LDCs to grow, the right conditions for such investment
would have to be created. If aid is given or foreign direct investment
occurs at stage 3 the economy needs to have reached stage 2. If the stage
2 has been reached then injections of investment may lead to rapid growth.
Many development economists argue that Rostows's model was developed with
Western cultures in mind and not applicable to LDCs. It addition its generalized
nature makes it somewhat limited. It does not set down the detailed nature
of the pre-conditions for growth. In reality, policy makers are unable
to clearly identify stages as they merge together. Thus as a predictive
model it is not very helpful. Perhaps its main use is to highlight the
need for investment. 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.
Last updated on
April 22, 2004
© Kaya V. P. Ford, 2004