Rostow's Stages of Economic Growth | Criticisms on Rostow

Rostow's Stages of Economic Growth

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 the Marxist interpretation of history. Thus the model was recognized as a political theory as well as a descriptive economic analysis of growth and development.

Rostow’s thesis has identified five stages of economic development according to him countries passed through those five stages of economic development.

Stage 1: The Traditional Society

The economy is dominated by subsistence activity. Output is consumed by producers; it is not traded. Trade is barter where goods are exchanged directly for other goods. Agriculture is the most important industry. Production is labor intensive using only limited quantities of capital. Technology is limited, and resource allocation is determined very much by traditional methods of production.

Stage 2: The Transitional Stage (The Pre-Conditions for Take Off)

In the second stage of growth, societies are in the process of transition, building up conditions that in course of time enable them to take off. According to Rostow:

• Agrarian society should attempt to transform itself into an industrial society.
• Trade and commerce should not remain localized.
• Society should attempt to enlarge the area of its commercial activity.
• Surplus of income to be used to create more industries and develop infrastructure.
• Rise in rate of savings and investment.
• Broadened outlook of people.
• More emphasis on trade.
• Development of transport and communication.
• A strong central government encourages private enterprise.

Rostow noted history provides two different patterns for the transition from the traditional society.

First: changes of a fundamental nature in the socio-political structure and the production techniques. This pattern was observed in Europe, Some Parts of Asia, the Middle East, and Africa.

Second: change in economic and technical dimensions. This pattern is observed in America, Australia, and New Zealand.

Stage 3: The Take-off Stage

It is the period in which growth becomes a normal condition of society. Industrialization increases, with workers switching from land to manufacturing. Growth is concentrated in a few regions of the country and one or two industries.

New political and social institutions are evolving to support industrialization. The growth is self-sustaining as investment leads to increasing incomes in turn generating more savings to finance further investment.

According to Rostow, the requirements of take-off are:

• The rise in the rate of investment and savings (>10%).
• Development of one or more substantial manufacturing sectors, with a high rate of growth.

Rostow groups the sectors of the economy into the following three categories:

Primary growth sectors, where possibilities of high growth rate exist and activity in them set in motion expansionary forces elsewhere.

Supplementary growth sectors, where rapid growth takes place in direct response to progress in primary growth sectors.

Derived growth sectors, where growth materializes in some steady response to increases in real income, population, etc.

Stage 4: The Drive to Maturity

Maturity can be defined as the stage in which an economy demonstrates the capacity to move beyond the original industries which powered or triggered the take-off and to absorb and apply efficiently over a wide range of its resources the most advanced fruits of its technology.

• Change in the character of the labor force, they are more organized now and the wages are increased.
• Change in the character of entrepreneurship. Increase in the investment from 10% to 20% of the Net National Product (NNP) or National Income.
• The old methods are replaced by new technology.
• Increase in exports.
• Less dependence on other countries.
• Increase in standard of living.
• Increase in per capita income.
• The economy is producing a wide range of goods and services and there is less reliance on imports.
• Development of new sectors, because of linkage effects, which can be forward or backward.
• Urbanization increases. Technology is used more widely.

Stage 5: The age of High Mass Consumption

As society approaches maturity, its attention shifts from the problems of production to the problems of consumption. (The economy is geared towards mass consumption, and the level of economic activity is very high. Technology is extensively used but its expansion slows. The service sector becomes increasingly dominant. Urbanization is complete. Now, multinationals emerge. Income for large numbers of persons transcends basic food, shelter, and clothing. Increased interest in social welfare).

According to him, there are three important ways to allocate resources to achieve welfare:

1. Allocation of resources for military and foreign policy requirements.
2. Redistribution of income through progressive taxes.
3. Expansion of consumption levels beyond the necessities of life (food, shelter, clothing) ex. Education, health, infrastructure, etc.

• Consumption of comforts and luxuries increases.
• The rate of investment rises above 20% of NI.
• Society assumes the role of a welfare state.
• Migration of population from villages to cities.
• Increase in financial security.
• More employment opportunities.
• Extensive use of durable consumer goods like automobiles and household instruments.
• A kind of prosperous and progressive society in which, “hunger is something one reads about and Poverty a memory”.

Criticisms:

• Inadequate empirical base. (Cairncross).
• Stages are not identifiable precisely: no distinction between the stages of pre-condition to take-off and the take-off. (Simon Kuznets).
• At no stage economic growth is automatic. Kuznets disagrees that growth becomes an automatic process during the drive to maturity.
• It considers mostly large countries. 
• The historical experience of UDCs contradicts Rostow’s theory.