Study notes

Rostow's Five Stages of Economic Growth Model

  • Levels: A Level
  • Exam boards: Edexcel, OCR, IB

Walt Rostow took a historical approach in suggesting that developed countries have tended to pass through 5 stages to reach their current degree of economic development.

These are:

  1. Traditional society. This is an agricultural economy of mainly subsistence farming, little of which is traded. The size of the capital stock is limited and of low quality resulting in very low labour productivity and little surplus output left to sell in domestic and overseas markets
  2. Pre-conditions for take-off. Agriculture becomes more mechanised and more output is traded. Savings and investment grow although they are still a small percentage of national income (GDP). Some external funding is required - for example in the form of overseas aid or perhaps remittance incomes from migrant workers living overseas
  3. Take-off. Manufacturing industry assumes greater importance, although the number of industries remains small. Political and social institutions start to develop - external finance may still be required. Savings and investment grow, perhaps to 15% of GDP. Agriculture assumes lesser importance in relative terms although the majority of people may remain employed in the farming sector. There is often a dual economy apparent with rising productivity and wealth in manufacturing and other industries contrasted with stubbornly low productivity and real incomes in rural agriculture.
  4. Drive to maturity. Industry becomes more diverse. Growth should spread to different parts of the country as the state of technology improves - the economy moves from being dependent on factor inputs for growth towards making better use of innovation to bring about increases in real per capita incomes
  5. Age of mass consumption. Output levels grow, enabling increased consumer expenditure. There is a shift towards tertiary sector activity and the growth is sustained by the expansion of a middle class of consumers.

These countries are ranked lowest in terms of the 2015 Human Development Index - many of these low-income countries remain heavily dependent on primary commodities.

These countries in 2015 had the highest share of employment in the farming industry

Revision Presentation on the Economics of Transition Economies

Evaluation of Rostow's Five Stages of Economic Growth Model

  • There is overlap with the Harrod-Domar model i.e. stages 2 and 3 require increased saving and investment; Stage 4 requires improvements in technology, which reduces the capital-output ratio.
  • Stages 2 and 3 call for increased savings and investment but many households may not have the funds to save; the banking channel between savers and firms may be inadequate; the productivity of individual investment projects may depend upon complementary investment in infrastructure.
  • Some Sub Saharan African countries have received significant external finance but have been slow to generate growth - many have remained stuck in Stages 1 or 2.
  • When the external finance has come in the shape of loans from developed countries, interest charges have been incurred which have acted as a drag on economic growth.
  • 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 globalisation 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.

Revision Presentation on the Human Development Index

Human Development Index - Revision Video

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