Stages of Economic Growth
Stages of Economic Growth
DEFINITIONS OF ROSTOW’S STAGES
UNIFIED THEORY OF GROWTH AND DEVELOPMENT
POLITICAL AND POLICY CONSEQUENCES
The attempt to search for a common set of general stages in the historical development of nations and their economies goes back to Adam Smith, who defined four stages of societal organization: the original stage of hunters, a second stage of “shepherds” or nomadic agriculture, a third stage of feudal “farming agriculture,” and a fourth and final stage of commercial society.
The most commonly accepted set of stages are those postulated by Walt Whitman Rostow, who in The Stages of Economic Growth (1960) proposed the stages as a general model of economic change. Rostow’s model assumes that it is possible that all societies during their development appear in one of five stages of economic development: the traditional society, the preconditions for takeoff, the takeoff, the drive to maturity, and the age of high mass-consumption. While this discussion will only consider the economic dimension of the stages, Rostow also outlined non-economic social, political, cultural, and psychological factors. However, in the classification of particular countries’ development, he emphasized the economic factors.
DEFINITIONS OF ROSTOW’S STAGES
The first stage, the traditional economy, is characterized only by basic industries: agriculture and mining. The economy is unproductive, society is based on pre-Newtonian science and technology, and the labor force is unskilled. The attainable level of output per capita is limited. The second stage of growth, the preconditions for takeoff, finds economies in the process of transition, as the traditional society starts to exploit the results of modern science. While the society can still mainly be characterized by traditional low-productivity, there are already productivity improvements in agriculture and extractive industries that create savings that can be invested in infrastructure. The supportive role of government is very important at this stage. During the third stage, the “takeoff” stage, the rates of productive investment and saving rise further and new industries grow rapidly, using new techniques of production. The process of industrialization is driven by the leading sectors of industry, such as railroads and steel, and stimulates the growth of other industries. The fast growth of productivity in agriculture is an important condition for successful takeoff. The economy and its social and political structure are transformed so that the growth can be sustained. After the takeoff stage, as new and more advanced industries develop and modern technology is applied to all industries, the economy enters the fourth stage, the drive to maturity. The fifth and final stage of growth is that of high mass-consumption, when all the leading sectors move toward durable consumer goods and services and the service sector experiences rapid growth. The most developed countries, like the United States, are now considered to be in this stage.
Rostow tried to establish a general “theory” of development, based on a dynamic neoclassical theory of production. He did not, however, provide a formal “model” of the stages, but only a set of narrative descriptions, so that the result was “less a theory than a language” (Supple 1984, p. 114). Rostow “linked theoretical constructs (like production functions, capital-output ratios, propensities to invest and to consume) to the dynamics and narrative of historical change, and acknowledged the vital significance of sociopolitical attitudes, groupings, and discontinuities” (Supple 1984, p. 108).
Rostow presented and described empirical and historical evidence for the most advanced countries, especially Great Britain, to support the view that the modern development of these countries had gone through the same stages. This work gave impetus to more careful, longerterm empirical research that ultimately failed to support Rostow’s conclusions—for example, it failed to “identify a takeoff in the economic history of countries such as France” (Crafts 2001, p. 308).
Aside from these theoretical criticisms, there were more general criticisms that may also be applied to current-day economic theories of growth and development. According to Edward S. Mason (1982), principal flaws include an overemphasis on discontinuity in historical processes, the teleological character of the conception of development, and problematic generalizations of political processes. R. de Oliveira Campos (1982) criticizes the presumption of the universality of economic motivations and of the inevitability of growth, without any space for economic decline and reversals. For W. Arthur Lewis (1982), what is missing is the crucial role of institutions; for Douglass C. North and Peter Temin (1982), it is the concept of transaction costs. Despite all these criticisms, Rostow’s stages of growth undoubtedly contributed to or at least were consonant with the early thinking about economic development as a process, and concepts such as the takeoff or leading sectors have been accepted by the profession. As Supple remarks, “even Rostow’s critics adopt his terminology” (1984, p. 108).
STAGES OF ENDOGENOUS GROWTH
Rostow’s stages of growth have stimulated recent attempts in the field of growth theory to construct more general formal models able to capture the behavior of developed and less-developed economies. One of the first such models was developed by Costas Azariadis and Allan Drazen (1990), who used the endogenous growth model with human capital as an engine of growth, an approach first suggested by Robert Lucas (1988), but amended it by adding “threshold” externalities in the human capital sector. Such a model exhibited two steady states: the regime of the zero-growth, underdevelopment trap, and the regime of sustained growth. When the underdeveloped economy manages to accumulate a critical amount of human capital, it reaches an area of increasing returns stimulating even more investment in human capital, and the economy takes off into sustained growth. By explicitly modeling knowledge-diffusion, Fabrizio Zilibotti (2005) in the AK model and Michal Kejak (2003) in Lucas’s model construct a model able to exhibit different stages of growth. (Mentioned here are only a handful of the numerous growth models with multiple steady states, as many of the others are not linked to Rostow’s stages of growth.)
UNIFIED THEORY OF GROWTH AND DEVELOPMENT
Growth-theory literature on models with multiple steady states laid the grounds for the establishment of a “unified” theory of growth and development that aims to capture in a single unified framework the era of Malthusian stagnation, the modern stage of sustained growth, and the transition between these two regimes—industrial revolution. Lucas (2002) offers such a model of the industrial revolution, in which human capital serves as an engine of sustained growth. An important part of this model’s mechanics is a Beckerian trade-off between the quantity and quality of the children responsible for demographic transition. A similar model with non-homothetic preferences is presented by Oded Galor and David N. Weil (2000). An alternative model of the industrial revolution in which new ideas are seen as an engine of growth can be found in the work of Charles I. Jones (2001). An even simpler model with exogenous growth in technology improvements is presented in works by Gary D. Hansen and Edward C. Prescott (2002) and Stephen L. Parente and Prescott (2004).
POLITICAL AND POLICY CONSEQUENCES
Rostow wrote The Stages of Economic Growth as an “Anticommunist Manifesto” (to quote the book’s subtitle)—that is, as a liberal’s reply to Marxist analysis (Solivetti 2005). He considered those societies in the transition from a traditional to a modern state especially vulnerable to communist development, which he calls “a disease of transition.” Rostow’s aim was to offer an attractive and achievable means of development for less-developed countries, as an alternative to dependency theory and development toward communism.
The ideological and political consequences of Rostow’s stages of growth can best be guessed from his own political and policy-making activities. After publishing The Stages, he became an adviser to the American presidents John F. Kennedy and Lyndon B. Johnson and later the chairman of the policy Planning Council at the State Department. Rostow’s theory “became a cornerstone in American international policy towards the Third World” (Solivetti 2005, p. 722).
The only policy recommendation derived from Rostow’s stages of growth has been the principle that takeoff into “self-sustained growth” requires a large increase in investment. Unfortunately, aside from the Marshall Plan for the reconstruction of Western Europe after World War II, this policy has not been successful in dealing with underdeveloped economies. As William Easterly (2001) points out—according to Solow’s original insight—“capital fundamentalism” has failed to advance growth in poor countries. The foreign aid based on “financing the gap” has not delivered any results, and it has created wrong economic incentives.
Recent achievements in the unified theory of growth and development, besides contributing to a better explanation of past economic development, have also created strong claims for the effects of government policies on economic development. Despite the fact that empirical work on policies and growth, embodied mainly in cross-country growth regressions, has tended to confirm these claims, real-world experience has not satisfied expectations. In recent debates over this failure several shortcomings have been identified. In empirical studies on growth, it has been claimed, the conventional approach suffers from several statistical problems (Durlauf 2002), results are often driven by extreme observations (Easterly 2005), and there are nonlinear interactions between policy and growth once institutions are controlled for (Aghion and Howitt 2006). Furthermore, most existing theoretical development models ignore the informal sector (Easterly 2005) and/or do not properly model technological change (Aghion and Howitt 2006).
SEE ALSO Capitalism; Communism; Development Economics; Economic Growth; Investment; Stagflation; Stagnation
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Michal Kejak