Rostow's Stages of Economic Growth

The Rostow's Stages of Economic Growth model is one of the liner economic models
of historic economic growth. It was presented by American economist Walt Whitman
Rostow in 1960 as an alternative view of Marxist interpretation of history. Thus the
model was recognized as political theory as well as descriptive economic analysis of
growth and development (Thirwall, 2006). Rostow argued that economic take-off must
initially be led by a few individual sectors. This belief was based on the theory of
comparative advantage presented by David Ricardo. He criticized Marxist revolutionary
views on economic transition. This became one of the important concepts in the theory
of modernization in social evaluation (Wikipedia, 2016)

Rostow's model does not disagree with John Maynard Keynes regarding the importance
of government control over domestic development which is not generally accepted by
some ardent free trade advocates. The basic assumption given of Rostow’s theory is
that countries want to modernize and grow and that society will agree to the materialistic
norms of economic growth.

Thus Rostow’s thesis has identified five stages of economic development according to
the historic economic performance of developed countries.

1. Traditional society
2. Preconditions for self-sustaining growth
3. Take-off
4. Drive to maturity
5. The stage of High mass consumption

1. Traditional Society

 Traditional societies are characterized by nature and limitation of technology.

Thus more than 75 percent of labor force is occupied in agricultural activities.
Low Social mobility and great division of wealth and political power were
recognized as other main features.

 Wars, famines and epidemics like plague caused initially expanding populations
to halt or shrink, limiting the single greatest factor of production: human manual
labor. Volume fluctuations in trade due to political instability are frequent;
historically, trading was subject to great risk and transport of goods and raw
materials was expensive, difficult, slow and unreliable. The manufacturing sector
and other industries have a tendency to grow but are limited by inadequate
scientific knowledge and a "backward" or highly traditionalist frame of mind which
contributes to low labor productivity. In this stage, some regions are entirely self-
sufficient.

 In settled agricultural societies before the Industrial Revolution, a hierarchical

social structure relied on near-absolute reverence for tradition, and an insistence
 on obedience and submission. This resulted in concentration of political power in
the hands of landowners in most cases; everywhere, family and lineage, and
marriage ties, constituted the primary social organization, along with religious
customs, and the state only rarely interacted with local populations and in limited
spheres of life. This social structure was generally feudalistic in nature. Under
modern conditions, these characteristics have been modified by outside
influences, but the least developed regions and societies fit this description quite
accurately.

Thus it is characterized by

a) subsistence agriculture or hunting and gathering; almost wholly a "primary"

sector economy  Limited technology

b) A static or 'rigid' society: lack of class or individual economic mobility, with

stability prioritized and change seen negatively

2. Pre-Conditions for Self-Sustaining Growth

 According to Rostow, pre-condition of takeoff were characterized by change in

political and social transition from feudalism (Thirwall, 2006). Thus the stage
between feudalism and takeoff is called as transitional stage. The main
economic requirement in the transition phase is the level of investment should
be increased at least 5 to 10 percent of national income to ensure self-sustaining
growth. The main direction of investment is for developing physical and social
infrastructure i.e. transport.

 There are three important dimensions to this transition:

• Firstly, the shift from an agrarian to an industrial or manufacturing society

begins, albeit slowly.

• Secondly, trade and other commercial activities of the nation broaden the
market's reach not only to neighboring areas but also to far-flung regions,
creating international markets.

• Lastly, the surplus attained should not be wasted on the conspicuous

consumption of the land owners or the state, but should be spent on the
development of industries, infrastructure and thereby prepare for self-
sustained growth of the economy later on.

 Furthermore, agriculture becomes commercialized and mechanized via

technological advancement; shifts increasingly towards cash or export-oriented
crops; and there is a growth of agricultural entrepreneurship.
  The strategic factor is that investment level should be above 5% of the national
income. This rise in investment rate depends on many sectors of the economy.
According to Rostow capital formation depends on the productivity of agriculture
and the creation of social overhead capital. Agriculture plays a very important
role in this transition process as the surplus quantity of the produce is to be
utilized to support an increasing urban population of workers and also becomes
a major exporting sector, earning foreign exchange for continued development
and capital formation. Increases in agricultural productivity also lead to
expansion of the domestic markets for manufactured goods and processed
commodities, which adds to the growth of investment in the industrial sector.

 Social overhead capital creation can only be undertaken by government, in

Rostow's view. Government plays the driving role in development of social
overhead capital as it is rarely profitable, it has a long gestation period, and the
pay-offs accrue to all economic sectors, not primarily to the investing entity; thus
the private sector is not interested in playing a major role in its development.

 On the social front, new elites must emerge to construct the industrial society
and it must be superseded authority of land based elites of the traditional
society. Surpluses must be channeled by new elites from agriculture to industry
(Thirwall, 2006).

In summary, the country would be able to achieve following requirements at this stage.

1) Develop social infrastructure such as transport, irrigation and communication

2) Increase food production sufficiently to feed population
3) Increase imports while increasing capital goods and expanding entrepreneurial
activities

 All these changes effectively prepare the way for "take-off" only if there is basic
change in attitude of society towards risk taking, changes in working
environment, and openness to change in social and political organizations and
structures. The pre-conditions of take-off closely track the historic stages of the
(initially) British Industrial Revolution.

3. Take Off

 The characteristics of takeoff are sometimes difficult to distinguish from the stage
of pre-condition to take off. However, since the pre condones for the takeoff have
been met in the transition stage, take off is a short stage of development that
takes nearly two decades. Development become self-sustaining and investment
must rise exceeding 10 percent of national income so as to increase per capita
income and level of investment. According to historical records, domestic finance
 for takeoff has fulfilled through two main sources i.e. agricultural taxes, rents
(Meiji reforms, Japan, and voluntary investment by land lords.

According to Rostow there are three main requirements for take-off:

1) "The rate of productive investment should rise from approximately 5% to over

10% of national income or net national product
2) The development of one or more substantial manufacturing sectors, with a high
rate of growth;
3) The existence or quick emergence of a political, social and institutional
framework which exploits the impulses to expansion in the modern sector and
the potential external economy effects of the take-off” i.e., the needed capital is
mobilized from domestic resources and is steered into the economy and not into
domestic or state consumption.

 Industrialization becomes a crucial phenomenon as it helps to prepare the basic

structure for structural changes on a massive scale. Rostow says that this
transition does not follow a set trend as there are a variety of different motivations
or stimulus which began this growth process. Take off requires a large and
sufficient amount of loanable funds for expansion of the industrial sector which
generally come from two sources which are:

1. Shifts in income flows by way of taxation, implementation of land reforms and

various other fiscal measures.

2. Re-investment of profits earned from foreign trade as has been observed in

many East Asian countries. While there are other examples of "Take-off" based
on rapidly increasing demand for domestically produced goods for sale in
domestic markets, more countries have followed the export-based model, overall
and in the recent past. The US, Canada, Russia and Sweden are examples of
domestically based "take-off"; all of them, however, were characterized by
massive capital imports and rapid adoption of their trading partners' technological
advances. This entire process of expansion of the industrial sector yields an
increase in rate of return to some individuals who save at high rates and invest
their savings in the industrial sector activities. The economy exploits their
underutilized natural resources to increase their production.

Tentative take-off dates.

 The take-off also needs a group of entrepreneurs in the society who pursue
innovation and accelerate the rate of growth in the economy. For such an
entrepreneurial class to develop, firstly, an ethos of "delayed gratification", a
preference for capital accumulation over expenditure, and high tolerance of risk
must be present. Secondly, entrepreneurial groups typically develop because
they cannot secure prestige and power in their society via marriage, via
participating in well-established industries, or through government or military
service (among other routes to prominence) because of some disqualifying social
or legal attribute; and lastly, their rapidly changing society must tolerate
unorthodox paths to economic and political power.

 Development of export industries has led to take off in some countries. Example
grains in USA, Canada and Russia, Timber in Sweden. Sector or the sectors that
led to take off were varied according to countries. However, Rostow has
concluded that any industry can play the role of leading sector in the take off
stage that to be met with (Thirwall, 2006):

 That the market for the product is expanding rapidly to provide a firm basis
for the growth of output.

 That the leading sector generates secondary expansion

 That the sector has an adequate and continual supply of capital from
surplus profit

 That the new production function can be continually introduced in to the

sector by increased productivity.

At the take off stage, the economy will transform as follows;

o Urbanization increases, Industrialization proceeds, Technological

breakthrough occurs

o the "secondary" (goods-producing) sector expands and ratio of secondary

vs. primary sectors in the economy shifts quickly towards secondary

o Increase growth rates in industrial sector.

o Changes in social and political institutions

o Decrease the capital output Ratio

Fig. 1 Economic Growth and Decrease Capital Output Ratio

S/K/l

K2

K1

K0

I1 T1

Io T0

0
Y0 Yi Y2
National output

 K and Y represent Capital and National output respectively T0 Y0/Y0Y1

represents marginal capital output ratio

 S represents savings

 According Rostow, savings rate and capital output ratio is inelastic (slope of
saving curve is high) during the pre-condition of take off period. It happens due to
low savings during precondition of take off period. However savings ratio is
increased during takeoff period and consequently investment ratio also
increased. Thus during pre-condition period, at I0 investment, national output
increase by 0Yo -0Yi and at 0I1 investment, national output increase by Ti y1/Y1-
Y2. Thus capital output ratio is decreased during takeoff period.

4. Drive to Maturity

 Rostow defines it as the period when a society has effectively applied the range
of modern technology to the bulk of its resources." Now regularly growing
economy drives to extend modern technology over the whole front of its
economic activity.

 Some 10-20% of the national income is steadily invested, permitting output

regularly to outstrip the increase in population. The make-up of the economy
changes unceasingly as technique improves, new industries accelerate, and
older industries level off. The economy finds its place in the international
economy: goods formerly imported are produced at home; new import
 requirements develop, and new export commodities to match them. The leading
sectors will in an economy be determined by the nature of resource endowments
and not only by technology.

Tentative drive to maturity dates.

 On comparing the dates of take-off and drive to maturity these countries reached
the stage of maturity in approximately 60 years.

The structural changes in the society during this stage are in three ways:

 Work force composition in agriculture shifts from 75% of the working

population to 20%. The workers acquire greater skill and their wages
increase in real terms.

 The character of leadership changes significantly in the industries and a

high degree of professionalism is introduced

 Environmental and health cost of industrialization is recognized and policy

changes are thus made.

 During this stage a country has to decide whether the industrial power and
technology it has generated is to be used for the welfare of its people or to gain
supremacy over others, or the world in total.

 A prime example of a country in the Drive to Maturity stage is South Africa. It is

developing a world-class infrastructure- including a modern transport network,
widely available energy, and sophisticated telecommunications facilities.
Additionally, the commercial farm sector shed 140,000 jobs, a decline of roughly
20%, in the eleven-year period from 1988 to 1998.

This diversity leads to reduction in poverty rate and increasing standards of living, as
the society no longer needs to sacrifice its comfort in order to build up certain
sectors

o diversification of the industrial base; multiple industries expand and new

ones take root quickly
 o manufacturing shifts from investment-driven (capital goods) towards
consumer durables and domestic consumption
o rapid development of transportation infrastructure
o Large-scale investment in social infrastructure (schools, universities,
hospitals, etc.)

5. Age of High Mass Consumption

 The age of high mass consumption refers to the period of contemporary comfort
afforded many western nations, wherein consumers concentrate on durable
goods, and hardly remember the subsistence concerns of previous stages.
Rostow uses the Buddenbrooks dynamics metaphor to describe this change in
attitude. In Thomas Mann's 1901 novel, Buddenbrooks, a family is chronicled for
three generations.

 The first generation is interested in economic development, the second in its

position in society. The third, already having money and prestige, concerns itself
with the arts and music, worrying little about those previous, earthly concerns. So
too, in the age of high mass consumption, a society is able to choose between
concentrating on military and security issues, on equality and welfare issues, or
on developing great luxuries for its upper class.

 Each country in this position chooses its own balance between these three goals.
There is a desire to develop an egalitarian society and measures are taken to
reach this goal. According to Rostow, a country tries to determine its uniqueness
and factors affecting it are its political, geographical and cultural structure and
also values present in its society.

 Historically, the United States is said to have reached this stage first, followed by
other western European nations, and then Japan in the 1950s.

Fig. 2 Rostow’s Growth Stages

National Output

I II III IV V

Time
Criticism of the Model

1. Rostow is historical in the sense that the end result is known at the outset and is
derived from the historical geography of a developed, bureaucratic society.

2. Rostow is mechanical in the sense that the underlying motor of change is not
disclosed and therefore the stages become little more than a classificatory
system based on data from developed countries.

3. His model is based on American and European history and defines the American
norm of high mass consumption as integral to the economic development
process of all industrialized societies.

4. His model assumes the inevitable adoption of Neoliberal trade policies which
allow the manufacturing base of a given advanced polity to be relocated to lower-
wage regions.

5. Rostow's model does not apply to the Asian and the African countries as events
in these countries are not justified in any stage of his model. The stages are not
identifiable properly as the conditions of the take-off and pre take-off stage are
very similar and also overlap.

6. According to Rostow growth becomes automatic by the time it reaches the

maturity stage but Kuznets asserts that no growth can be automatic there is need
for push always.

7. There are two unrelated theories of take off one is that take is a sectoral and a
non-linear notion and other is that it is highly aggregative.

Rostow's thesis is biased towards a western model of modernization, but at the time of
Rostow the world's only mature economies were in the west, and no controlled
economies were in the "era of high mass consumption." The model de-emphasizes
differences between sectors in capitalistic vs. communistic societies, but seems to
innately recognize that modernization can be achieved in different ways in different
types of economies.

The most disabling assumption that Rostow took is of trying to fit economic progress
into a linear system. This assumption is false as due to empirical evidence of many
countries making false starts then reaching a degree of progress and change and then
slipping back. E.g.: In the case of contemporary Russia slipping back from high mass
consumption to a country in transition, the main cause being the end of the Cold War
and geopolitical struggles.

Another problem that Rostow's work has is that it considered large countries with a
large population (Japan), with natural resources available at just the right time in its
history (Coal in Northern European countries), or with a large land mass (Argentina).
He has little to say and indeed offers little hope for small countries, such as Rwanda,
which do not have such advantages. Neo-liberal economic theory to Rostow, and
many others, does offer hope to much of the world that economic maturity is coming
and the age of high mass consumption is nigh. But that does leave a sort of 'grim
meathook future' for the outliers, which do not have the resources, political will, or
external backing to become competitive.

 Simon Kuznets threw doubts upon Rostow's theory. He argued that many
countries which have now reached developed status did so without seeing a
significant increase in their savings rate.

 The theory does not account for exceptions, e.g. falling output in the USSR
under a communist regime; the corrupt and failing government in Zimbabwe has
reversed development advances; increased globalization means that a country's
growth rate does not lie solely in its own hands and international competition and
protectionism may prevent an economy from moving through the latter stages

Relevant to Developing Countries

 The model was developed by considering development performance of
developed countries. But applying model for developing countries is not easy as
anticipated because the situations in developing countries are not similar as the
western countries. Globalization has changed the world through the economic
inter dependency across the world.

Recommended Reading
 Rostow, W. W. (1960). The Stages of Economic Growth: A Non-Communist
Manifesto. Cambridge University Press.
 Baran, P.; Hobsbawm, E. J. (1961). "The Stages of Economic Growth". Kyklos 14
(2): 234–242.
 Hunt, Diana (1989). "Rostow of the Stages of Growth" . Economic Theories of
Development: An Analysis of Competing Paradigms. New York: Harvester
Wheatsheaf. pp. 95–101. ISBN 0-74500237-4.
 Meier, Gerald M. (1989). "Sequence of Stages". Leading Issues in Economic
Development (Fifth Ed.). New York: Oxford University Press. pp. 69–72. ISBN 0-
19-505572-1.