Rostow`s Stages of Growth Theory

W.W Rostow. The Stages of Economic Growth: A Non Communist Manifesto (Cambridge University Press, 1960), Chapter 2, “The Five stages of Growth –A summary,” pp 4-16

The Five Stages-Of-Growth- A summary

It is possible to identify all societies, in their economic dimensions, as lying within one of five categories: the traditional society, the preconditions for take-off, the take-off, the drive to maturity and the age of high consumption

The Traditional Society

Traditional society is one whose structure is developed within limited production functions, based on pre-Newtonian attitudes towards physical world. Newton is here used as a symbol for that watershed in history when man came widely to believe that the external world was subject to a few knowable laws, and was systematically capable of productive manipulation.

The conception of the traditional society is, however, in no sense static; and it would not exclude increases in output. Acreage could be expanded; some ad hoc technical innovations, often highly productive innovations, could be introduced in trade, industry and agriculture; productivity could rise with, for example, the improvement of irrigation works or the discovery and diffusion of a new crop. But the central fact about the traditional society was that a ceiling existed on the level of attainable output per head. This ceiling resulted from the fact that the potentialities which flow from modern science and technology were either not available or not regularly and systematically applied.

Both in the longer past and in recent times the story of traditional societies was thus a story of endless change. The area and volume of trade within them and between them fluctuated, for example, with the degree of political and social turbulence, the efficiency of central rule, the upkeep of the roads. Population--and, within limits, the level of life--rose and fell not only with the sequence of the harvests, but with the incidence of war and of plague. Varying degrees of manufacture developed; but, as in agriculture, the level of productivity was limited by the inaccessibility of modern science, its applications, and its frame of mind. 

Generally speaking, these societies, because of the limitation on productivity, had to devote a very high proportion of their resources to agriculture; and flowing from the agricultural system there was an hierarchical social structure, with relatively narrow scope--but some scope--for vertical mobility. Family and clan connexions played a large role in social organization. The value system of these societies was generally geared to what might be called a long-run fatalism; that is, the assumption that the range of possibilities open to one's grandchildren would be just about what it had been for one's grandparents. But this long-run fatalism by no means excluded the short-run 2 option that, within a considerable range, it was possible and legitimate for the individual to strive to improve his lot, within his lifetime. In Chinese villages, for example, there was an endless struggle to acquire or to avoid losing land, yielding a situation where land rarely remained within the same family for a century.

 Although central political rule--in one form or another--often existed in traditional societies, transcending the relatively self-sufficient regions, the centre of gravity of political power generally lay in the regions, in the hands of those who owned or controlled the land. The landowner maintained fluctuating but usually profound influence over such central political power as existed, backed by its entourage of civil servants and soldiers, imbued with attitudes and controlled by interests transcending the regions. In terms of history then, with the phrase 'traditional society' we are grouping the whole preNewtonian world : the dynasties in China; the civilization of the Middle East and the Mediterranean; the world of medieval Europe. And to them we add the post-Newtonian societies which, for a time, remained untouched or unmoved by man's new capability for regularly manipulating his environment to his economic advantage. 

To place these infinitely various, changing societies in a single category, on the ground that they all shared a ceiling on the productivity of their economic techniques, is to say very little indeed. But we are, after all, merely clearing the way in order to get at the subject of this book; that is, the post-traditional societies, in which each of the major characteristics of the traditional society was altered in such ways as to permit regular growth: its politics, social structure, and (to a degree) its value as well as its economy.

The Precondition for Take-off

The second stage of growth embraces societies in the process of transition; that is, the period when the preconditions for take-off are developed; for it takes time to transform a traditional society in the ways necessary for it to exploit the fruits of modern science, to fend off diminishing returns, and thus to enjoy the blessings and choices opened up by the march of compound interest. The preconditions for take-off were initially developed, in a clearly marked way, in Western Europe of the late seventeenth and early eighteenth centuries as the insights of modern science began to be translated into new production functions in both agriculture and industry, in a setting given dynamism by the lateral expansion of world markets and the international competition for them. But all that lies behind the break-up of the Middle Ages is relevant to the creation of the preconditions for take-off in Western Europe. Among the Western European states, Britain, favoured by geography, natural resources, trading possibilities, social and political structure, was the first to develop fully the preconditions for take-off

The more general case in modern history, however, saw the stage of preconditions arise not endogenously but from some external intrusion by more advanced societies. These invasionsliteral or figurative-shocked the traditional society and began or hastened its undoing; but they also set in motion ideas and sentiments which initiated the process by which a modern alternative to the traditional society was constructed out of the old culture. The idea spreads not merely that economic progress is possible, hut that economic progress is a necessary condition for some other purpose, judged to be good: be it national dignity, private profit, the general welfare, or a better life for the children. Education, for some at least, broadens and changes to suit the needs of modern economic activity. New types of enterprising men come forward--in the private economy, in government, or both--willing to mobilize savings and to take risks in pursuit of profit or modernization. Banks and other institutions for mobilizing capital appear. Investment increases, notably in transport, communications, and in raw materials in which other nations may have an economic interest. The scope of commerce, internal and external, widens. And, here and there, modern manufacturing enterprise appears, using the new methods. But all this activity proceeds at a limited pace within an economy and a society still mainly characterized by traditional low-productivity methods, by the old social structure and values, and by the regionally based political institutions that developed in conjunction with them.

In many recent cases, for example, the traditional society persisted side by side with modern economic activities, conducted for limited economic purposes by a colonial or quasi-colonial power. Although the period of transition--between the traditional society and the take-off--saw major changes in both the economy itself and in the balance of social values, a decisive feature was often political. Politically, the building of an effective centralized national state--on the basis of coalitions touched with a new nationalism, in opposition to the traditional landed regional interests, the colonial power, or both, was a decisive aspect of the preconditions period; and it was, almost universally, a necessary condition for take-off. There is a great deal more that needs to be said about the preconditions period, but we shall leave it for chapter 3, where the anatomy of the transition from a traditional to a modern society is examined.

The Take-Off

We come now to the great watershed in the life of modern societies: the third stage in this sequence, the take-off. The take-off is the interval when the old blocks and resistances to steady growth are finally overcome. The forces making for economic progress, which yielded limited bursts and enclaves of modern activity, expand and come to dominate the society. Growth 4 becomes its normal condition. Compound interest becomes built, as it were, into its habits and institutional structure.

In Britain and the well-endowed parts of the world populated substantially from Britain (the United States, Canada etc.) the proximate stimulus for take-off was mainly (but not wholly) technological. In the more general case, the take-off awaited not only the build-up of social overhead capital and a surge of technological development in industry and agriculture, but also the emergence to political power of a group prepared to regard the modernization of the economy as serious, high-order political business. During the take-off, the rate of effective investment and savings may rise from, say, 5 % of the national income to 10% or more; although where heavy social overhead capital investment was required to create the technical preconditions for take-off the investment rate in the preconditions period could be higher than 5%, as, for example, in Canada before the 1890's and Argentina before 1914. In such cases capital imports usually formed a high proportion of total investment in the preconditions period and sometimes even during the take-off itself, as in Russia and Canada during their pre-1914 railway booms.

During the take-off new industries expand rapidly, yielding profits a large proportion of which are reinvested in new plant; and these new industries, in turn, stimulate, through their rapidly expanding requirement for factory workers, the services to support them, and for other manufactured goods, a further expansion in urban areas and in other modern industrial plants. The whole process of expansion in the modern sector yields an increase of income in the hands of those who not only save at high rates but place their savings at the disposal of those engaged in modern sector activities. The new class of entrepreneurs expands; and it directs the enlarging flows of investment in the private sector. The economy exploits hitherto unused natural resources and methods of production. New techniques spread in agriculture as well as industry, as agriculture is commercialized, and increasing numbers of farmers are prepared to accept the new methods and the deep changes they bring to ways of life.

The revolutionary changes in agricultural productivity are an essential condition for successful take-off; for modernization of a society increases radically its bill for agricultural products. In a decade or two both the basic structure of the economy and the social and political structure of the society are transformed in such a way that a steady rate of growth can be, thereafter, regularly sustained. As indicated in chapter 4, one can approximately allocate the take-off of Britain to the two decades after 1783; France and the United States to the several decades preceding 1860; Germany, the third quarter of the nineteenth century; Japan, the fourth quarter of the nineteenth century; Russia and Canada the quarter-century or so preceding 1914; while during the 1950's India and China have, in quite different ways, launched their respective take-offs.

THE DRIVE TO MATURITY

After take-off there follows a long interval of sustained if fluctuating progress, as the 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, 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 society makes such terms as it will with the requirements of modern efficient production, balancing off the new against the older values and institutions, or revising the latter in such ways as to support rather than to retard the growth process.

Some sixty years after take-off begins (say, forty years after the end of take-off) what may be called maturity is generally attained. The economy, focused during the take-off around a relatively narrow complex of industry and technology, has extended its range into more refined and technologically often more complex processes; for example, there may be a shift in focus from the coal, iron, and heavy engineering industries of the railway phase to machine-tools, chemicals, and electrical equipment. This, for example, was the transition through which Germany, Britain, France, and the United States had passed by the end of the nineteenth century or shortly thereafter. But there are other sectoral patterns which have been followed in the sequence from take-off to maturity, which are considered in chapter 5.

Formally, we can define maturity as the stage in which an economy demonstrates the capacity to move beyond the original industries which powered its take-off and to absorb and to apply efficiently over a very wide range of its resources--if not the whole range--the most advanced fruits of (then) modern technology. This is the stage in which an economy demonstrates that it has the technological and entrepreneurial skills to produce not everything, but anything that it chooses to produce. It may lack (like contemporary Sweden and Switzerland, for example) the raw materials or other supply conditions required to produce a given type of output economically; but its dependence is a matter of economic choice or political priority rather than a technological or institutional necessity.

Historically, it would appear that something like sixty years was required to move a society from the beginning of take-off to maturity. Analytically the explanation for some such interval may lie in the powerful arithmetic of compound interest applied to the capital stock, combined with the broader consequences for a society's ability to absorb modern technology of three successive generations living under a regime where growth is the normal condition. But, clearly, no dogmatism is justified about the exact length of the interval from take-off to maturity.

THE AGE OF HIGH MASS-CONSUMPTION

We come now to the age of high mass-consumption, where, in time, the leading sectors shift towards durable consumers' goods and services: a phase from which Americans are beginning to emerge; whose not unequivocal joys Western Europe and Japan are beginning energetically to probe; and with which Soviet society is engaged in an uneasy flirtation.

As societies achieved maturity in the twentieth century two things happened: real income per head rose to a point where a large number of persons gained a command over consumption which transcended basic food, shelter, and clothing; and the structure of the working force changed in ways which increased not only the proportion of urban to total population, but also the proportion of the population working in offices or in skilled factory jobs-aware of and anxious to acquire the consumption fruits of a mature economy.

 In addition to these economic changes, the society ceased to accept the further extension of modern technology as an overriding objective. It is in this post-maturity stage, for example, that, through the political process, Western societies have chosen to allocate increased resources to social welfare and security. The emergence of the welfare state is one manifestation of a society's moving beyond technical maturity; but it is also at this stage that resources tend increasingly to be directed to the production of consumers' durables and to the diffusion of services on a mass basis, if consumers' sovereignty reigns. The sewing-machine, the bicycle, and then the various electricpowered household gadgets were gradually diffused. Historically, however, the decisive element has been the cheap mass automobile with its quite revolutionary effects--social as well as economic--on the life and expectations of society.

For the United States, the turning point was, perhaps, Henry Ford's moving assembly line of 1913- 14; but it was in the 1920's, and again in the post-war decade, 1946-56, that this stage of growth was pressed to, virtually, its logical conclusion. In the 1950's Western Europe and Japan appear to have fully entered this phase, accounting substantially for a momentum in their economies quite unexpected in the immediate post-war years. The Soviet Union is technically ready for this stage, and, by every sign, its citizens hunger for it; but Communist leaders face difficult political and social problems of adjustment if this stage is launched.

BEYOND CONSUMPTION

 Beyond, it is impossible to predict, except perhaps to observe that Americans, at least, have behaved in the past decade as if diminishing relative marginal utility sets in, after a point, for durable consumers' goods; and they have chosen, at the margin, larger families- behaviour in the pattern of Buddenbrooks dynamics.*

 * In Thomas Mann's novel of three generations, the first sought money; the second, born to money, sought social and civic position; the third, born to comfort and family prestige, looked to the life of music. The phrase is designed to suggest, then, the changing aspirations of generations, as they place a low value on what they take for granted and seek new forms of satisfaction.

Americans have behaved as if, having been born into a system that provided economic security and high mass-consumption, they placed a lower valuation on acquiring additional increments of real income in the conventional form as opposed to the advantages and values of an enlarged family. But even in this adventure in generalization it is a shade too soon to create--on the basis of one case--a new stage-of-growth, based on babies, in succession to the age of consumers' durables: as economists might say, the income-elasticity of demand for babies may well vary from society to society. But it is true that the implications of the baby boom along with the not wholly unrelated deficit in social overhead capital are likely to dominate the American economy over the next decade rather than the further diffusion of consumers' durables.

Here then, in an impressionistic rather than an analytic way, are the stages-of-growth which can be distinguished once a traditional society begins its modernization: the transitional period when the preconditions for take-off are created generally in response to the intrusion of a foreign power, converging with certain domestic forces making for modernization; the take-off itself; the sweep into maturity generally taking up the life of about two further generations; and then, finally, if the rise of income has matched the spread of technological virtuosity (which, as we shall see, it need not immediately do) the diversion of the fully mature economy to the provision of durable consumers' goods and services (as well as the welfare state) for its increasingly urban-and then suburban-population. Beyond lies the question of whether or not secular spiritual stagnation will arise, and, if it does, how man might fend it off: a matter considered in chapter 6.

In the four chapters that follow we shall take a harder, and more rigorous look at the preconditions, the take-off the drive to maturity, and the processes which have led to the age of high mass consumption. But even in this introductory chapter one characteristic of this system should be made clear.

Theory of Economic development with Unlimited Supplies of Labor

Theory of economic development with unlimited supplies of labor

It is a classical model of a dual economy. It is a long run structural change theory which explains the mechanism of changing structure of under developed economies from subsistence agriculture sector to capitalistic modern industrial sector.

The economic development depends upon capital accumulation due to unlimited supply of labor. He tries to revive the classical model and had firmly stressed that classical assumption of unlimited supply of labor is more relevant conditions prevailing in majority of UDCs. The model that excess labor in agriculture sector is an engine of development.

1.      Economy is dualistic in nature

Professor Lewis has divided an economy into two sectors, capitalistic sector or modern sector and the subsistence sector.

a)      Capitalist sector is defined as the part of economy which uses reproducible capital and pays capital for the use of thereof and employs wage labor for making process. The distinguishing feature of capitalist sector is the hiring of labor and sale of its output for a profit, which can be undertaken by public enterprises as well as private. This sector is characterized by high productivity modern urban industries into which labor from subsistence is gradually transferred. People are literate advance and skilled in the capitalist sector. He assumes that supply of unskilled labor in this sector is unlimited.

b)      The agricultural sector/subsistence sector: The subsistence sector is that part of the economy which does not use reproducible capital. It is the typical indigenous traditional sector or the self-employment sector characterized by low average productivity of labor and lower output per head than that in capitalist sector. As variable land being fixed the marginal product of labor diminishes is zero or negligible at subsistence sector, with the increase in population over time. People   are generally backward illiterate, unskilled and simple at subsistence sector.

This sector is overpopulated characterized by infinitely elastic supply of labor at the given wage rate. Thus it is possible to withdraw labor from this sector without any loss of output. He classifies this sector as surplus labor sector

2.      Lewis assumes that urban wages are at least 30%higher than the average rural income to induce workers to migrate from their home areas. He adds reason for the existence of the wage gap. One of the reason is the cost of living in the urban sector is almost invariably empirically true that, even in real terms urban wages are above the rural wages. This happens due to psychological cost of transferring from the easy going life at subsistence sector to more regimented or urbanized environment.

3.      Lewis has assumed perfect competition in modern sector- labor market giving fixed wage rate and horizontal supply curve of labor. On the other wage rate in the traditional sector is given by average productivity of labor while wage rate at urban sector is given accordance with marginal product of labor. 

1.      The cost of importing training and skill to the unskilled labor assumed to be remaining constant through constant through time. Lewis observes that skill can only be a quasi bottle neck for the process because it is very temporary bottleneck and if capital is available for development, the capitalist will provide facilities for training more skilled people.

2.      The production in the expanding capitalist sector takes place according to the principle of profit maximization. The capitalists sector operates by employing the reproducible capital and wage labor.

The magnitude of investment in capitalist sector is not absolutely larger in relation to population growth .i.e

Theories and Strategies of Development

Classical growth theory

The synchronization of the ideas of classical economists regarding economic development and growth is termed to classical theory development. The theory is developed by integrating the views classical economists in their writing.

Classical economists considered economic development race between technological progress and capital accumulation on the one hand and growing population and diminishing return from land on the other.

In broad outline the classical theory of economic development may be stated as suppose on expected increase in profits brings of capital and to the steady flow of improvement techniques. This increase capital accumulation raises the wage funds. As a result, wages rise. Higher wages induce accelerated population growth which causes demand for food to rise. Food production can be raised by employing additional cost i.e. diminishing returns holds in land. Consequently the price of food goes up and in turn returns increase, wages rise, thereby reducing profits. Reduction in profits implies reduction in investment, retarded technological progress, diminution of wages fund slowing down the population growth rate and capital accumulation and the economic activities come to halt. In the classical model end result of capitalist development is stagnation.

The views of classical school on economic development have put in the form of few important propositions in terms of mathematical equations by Benjamin Higgins as it makes the model brief, simple and easy to understand.

Proposition I

The total output of an economy depends up on (a) size of labor (L) (b) the stock of capital (K), (c) the amount of available natural resources (N) and (d) available technology(T).

i.e. Q=f(K,L,N,T)……….(1)

where Q= total output

N is constant because it cannot be increased quantitatively but quality can be improved by advanced technology the total output ultimately depends upon the labor force (L), stock of capital (K), and technology (T). They did not make entrepreneurship a strategic part of their system.

Proposition II

The technological progress depends upon investment that is why classical economists stressed on capital accumulation and saving rather than technological progress as an independent factor. So, to them, level of technique depends on the level of investment.

            i.e. T=f(I)…………..2

where, I is investment(net)

Proposition III

Investment depends on the level of profits: I =f(R). The argument is based on their premises that the capital make investment only if it is profitable, i.e. investors make investment only if they  expect to earn profits on them. And investment the net addition to the existing stock of capital, i.e. I=ΛK,

R is the return on fixed factors of production (land and capital), or profit. And by definition, net investment, I equal the increase in stock of capital, i.e. ΛK .

So,  I= ΛK=f(R)………..(3)

Proposition IV

Profits further depend on the labor supply and the level of technique, i.e.

R=f(L,T)………….4

Profits are partly determined by the level of technology and labor force. The application of improved technology in agriculture raises productivity and hence profit. Similar to the Marxian interpretations, classical economists too argue that level of profits depend upon labor. Both factors have positive relationship with profit.

To the classist the level of technique depends on the level of investment, investments depends on profits and profits depend partly on the level of technique as illustrated in previous propositions. We can express this circularity by substituting equation 3 and 4 in equation 2 which gives us

T=f(I)=F[f(R)]

=F[f{φ(L,T)}]…………..(4a)

Proposition V

The size of labor force depends on the size of wage bill.

L=f(W)…………(5)

This proposition explains the classical iron law of wages that there is constant tendency for real wage rate of return to the subsistence level. If the wage fund is raised the size of labor force will be large and vice versa. They visualized that population growth depends upon the availability of working capital- if total wage fund increases, this contributes to the growth of population and thus labor force, .i.e. labor supply increases again decreasing wage rate. This all eventually has tendency for real wage rate [W/P] to return to subsistence level.

Proposition VI

The wage bill depends on the level of investment.

W=f(I)

Wage fund depends on the saving of the capitalists and these saving find their way in investments automatically. So, wage fund is the function of investment or net investment determines the size of wage fund. Except for Malthus, who showed a high degree of sophistication in this respect, the classical tended to think that savings found their way into investment more or less automatically. Thus the wage bill could be increased only by net  investment.

Similarities and Differences between Perfect Competition and Monopolistic competiton

The main similarities between perfect competition and monopolistic competition are: 

    

11)   There are large numbers of buyers and sellers.

  2)     There is freedom of entry and exit in the long run.

33)     Marginal Return (MR) =Marginal Cost (MC) principle of equilibrium.

44)   Normal profit in the long run in both markets.

55) Firms compete with each other in both markets.

t       The  main differences are:

Perfect Competiton                                                    Monopolistic Competition Products is homogenous                                           Products are differentiated yet  they are close                                                                                      substitutes of each other. Demand curve is perfectly elastic and thus             Demand curve is negatively sloped and thus firm is a price taker only.                                        firms have some power over price. Selling activities has no place in its                          Selling activities is an important policy vari- analysis.                                                                      able. There is no excess capacity because long                There is excess capacity as long run equilibr run equilibrium is always at minimum                   iuim is always at the falling part of LAC. LAC. The price is lower and output is larger than             Price is higher and output is lower than in per- In monopolistic competition.                                   fect competition. Optimum allocation of resources and thus               No optimum allocation of resources and thus   Welfare is maximized.                                               Welfare is not maximized.

MONOPOLY MARKET

Monopoly is a market structure un which there is a single seller and there are no close substitutes for the commodity it produces and there are strong barriers to entry. Thus in a monopoly market a single seller sup[plies the total output demanded and this has power to determine the price of the product. further, no substitutes are available and no firms are allowed to enter the industry.

Reasons for a monopoly:

·        *    Ownership of key raw materials or exclusive knowledge of production techniques so that no other       firms keep courage to produce the output.

·        *   Patent right for product or production method will not allow any firm to produce the output produce     by the firm.

·         *   Government licensing creates barriers to entry of foreign firms which would not encourage                   competition.

·         *   Natural monopoly i.e. the size of the market allows only one firm of optimal size to operate.

·       *    Firms limit pricing policy which creates barriers to entry usually combined with other limiting             policies such heavy advertising or continuous product differentiation.

MONOPOLISTIC COMPETITION

 Monopolistic competition is a market structure where the elements of both perfect competition and monopoly are combined. It is a market structure in which a large number of sellers sell differentiated products which are close substitutes of each other. The main features of monopolistic competition are:

·        *    Product Differentiation: Firms sell the products that are different in physical qualitites, taste, selling      services etc.

·       *    Large number of sellers: The number of sellers is large but not as large as in perfect competition.         That is why monopolistic firms have some control over the price.

·      *   Free entry and exit: The firms are free to enter the group if there is scope of earning excess profits        and they are also free to leave the group if they incur losses in the long run.

·   * Selling cost: Chamberlin has introduced selling cost as one of the strategic variables in the            monopolistic competition.

·       *  Downward slopping demand curve: Since the monopolistic firms have some control in price level,         the firms demand curve is downward slopping but it is highly elastic.