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The Rostow's Stages of Growth model is one of the major historical models of economic growth. It was published by American economist Walt Whitman Rostow in 1960. The model postulates that economic growth occurs in five basic stages, of varying length:
Rostow's model is one of the more structuralist models of economic growth, particularly in comparison with the 'backwardness' model developed by Alexander Gerschenkron, although the two models are not mutually exclusive.
Rostow argued that economic take-off must initially be led by a few individual sectors. This belief echoes David Ricardo's comparative advantage thesis and criticizes Marxist revolutionaries' push for economic self-reliance in that it pushes for the 'initial' development of only one or two sectors over the development of all sectors equally. This became one of the important concepts in the theory of modernization in social evolutionism.
Below is a detailed outline of Rostow's 5 Stages:
Rostow claimed that these stages of growth were designed to tackle a number of issues, some of which he identified himself; and wrote, "Under what impulses did traditional, agricultural societies begin the process of their modernization? When and how did regular growth become a built-in feature of each society? What forces drove the process of sustained growth along and determined its contours? What common social and political features of the growth process may be discerned at each stage? What forces have determined relations between the more developed and less developed areas; and what relation if any did the relative sequence of growth bear to outbreak of war? And finally where is compound interest taking us? Is it taking us to communism; or to the affluent suburbs , nicely rounded out with social overhead capital; to destruction; to the moon; or where?"
Rostow asserts that countries go through each of these stages fairly linearly, and set out a number of conditions that were likely to occur in investment, consumption and social trends at each state. Not all of the conditions were certain to occur at each stage, however, and the stages and transition periods may occur at varying lengths from country to country, and even from region to region.
Rostow's model is a part of the liberal school of economics, laying emphasis on the efficacy of modern concepts of free trade and the ideas of Adam Smith. It disagrees with Friedrich List's argument which states that economies which rely on exports of raw materials may get "locked in", and would not be able to diversify, regarding this Rostow's model states that economies may need to depend on raw material exports to finance the development of industrial sector which has not yet of achieved superior level of competitiveness in the early stages of take-off. 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 by Rostow is that countries want to modernize and grow and that society will agree to the materialistic norms of economic growth.
An economy in this stage has a limited production function which barely attains the minimum level of potential output. This does not entirely mean that the economy's production level is static. The output level can still be increased, as there was often a surplus of uncultivated land which can be used for increasing agricultural production. States and individuals utilize irrigation systems in many instances, but most farming is still purely for subsistence. There have been technological innovations, but only on ad hoc basis. All this can result in increases in output, but never beyond an upper limit which cannot be crossed. Lacking modern science and technology, such innovation as occurs spreads slowly and inconsistently and is sometimes reversed or lost. Trade is predominantly regional and local, largely done through barter, and the monetary system is not well developed. Investment's share never exceeds 5% of total economic production.
Wars, famines and epidemics like plague cause 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 labour 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 & submission. This resulted in concentration of political power in the hands of landowners in most cases; everywhere, family & 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.
In the second stage of economic growth the economy undergoes a process of change for building up of conditions for growth and take off. Rostow said that these changes in society and the economy had to be of fundamental nature in the socio-political structure and production techniques. This pattern was followed in Europe, parts of Asia, the Middle East and Africa. There is also a second pattern in which he said that there was no need for change in socio-political structure because these economies were not deeply caught up in older, traditional social and political structures. The only changes required were in economic and technical dimensions. The nations which followed this pattern were in North America and Oceania (New Zealand & Australia).
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.
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 organisations and structures. The pre-conditions of take-off closely track the historic stages of the (initially) British Industrial Revolution.
Referring to the graph of savings and investment, notably, there is a steep increase in the rate of savings and investment from the stage of "Pre Take-off" till "Drive to Maturity:" then, following that stage, the growing rate of savings and investment moderates. This initial & accelerating steep increase in savings and investment is a pre-condition for the economy to reach the "Take-off" stage and far beyond.
This stage is characterized by dynamic economic growth. As Rostow suggests, all is premised on a sharp stimulus (or multiple stimuli) that is/are any or all of economic, political and technological change. The main feature of this stage is rapid, self-sustained growth. Take-off occurs when sector led growth becomes common and society is driven more by economic processes than traditions. At this point, the norms of economic growth are well established and growth becomes a nation's "second nature" and a shared goal. In discussing the take-off, Rostow is noted to have adopted the term "transition", which describes the process of a traditional economy becoming a modern one. After take-off, a country will generally take as long as fifty to one hundred years to reach the mature stage according to the model, as occurred in countries that participated in the Industrial Revolution and were established as such when Rostow developed his ideas in the 1950s.
Per Rostow there are three main requirements for take-off:
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:
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 can not 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.
A country's making it through this stage depends on the following major factors:
In the table note that Take-off periods of different countries are the same as the industrial revolution in those countries.
After take-off there follows a long interval of sustained growth known as the stage of drive to maturity. Rostow defines it "as the period when 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, 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.
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:
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 toto.
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.
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 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.
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 has taken 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 political change and environment and also Cold War.
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. (See Dependency theory)