Rostow's Model [ Biz/ed Virtual Developing Country ]

The Virtual Developing Country is a case study of Zambia. There are a series of field trips available looking at different issues connected with economic development. This trip is the Copper Tour and this page looks at Rostow''s Model- the Stages of Economic Development.

Theories

Rostow's Model- the Stages of Economic Development

Next theory - Models of Demographic Transition >>

In 1960, the American Economic Historian, WW Rostow suggested that countries passed through five stages of economic development.

Stage 1 Traditional Society
The economy is dominated by subsistence activity where output is consumed by producers rather than traded. Any trade is carried out by barter where goods are exchanged directly for other goods. Agriculture is the most important industry and production is labour intensive using only limited quantities of capital. Resource allocation is determined very much by traditional methods of production.

Stage 2 Transitional Stage (the preconditions for takeoff)
Increased specialisation generates surpluses for trading. There is an emergence of a transport infrastructure to support trade. As incomes, savings and investment grow entrepreneurs emerge. External trade also occurs concentrating on primary products.

Stage 3 Take Off
Industrialisation increases, with workers switching from the agricultural sector to the manufacturing sector. Growth is concentrated in a few regions of the country and in one or two manufacturing industries. The level of investment reaches over 10% of GNP.

The economic transitions are accompanied by the evolution of new political and social institutions that support the industrialisation. The growth is self-sustaining as investment leads to increasing incomes in turn generating more savings to finance further investment.

Stage 4 Drive to Maturity
The economy is diversifying into new areas. Technological innovation is providing a diverse range of investment opportunities. The economy is producing a wide range of goods and services and there is less reliance on imports.

Stage 5 High Mass Consumption
The economy is geared towards mass consumption. The consumer durable industries flourish. The service sector becomes increasingly dominant.

According to Rostow development requires substantial investment in capital. For the economies of LDCs to grow the right conditions for such investment would have to be created. If aid is given or foreign direct investment occurs at stage 3 the economy needs to have reached stage 2. If the stage 2 has been reached then injections of investment may lead to rapid growth.

Limitations
Many development economists argue that Rostows's model was developed with Western cultures in mind and not applicable to LDCs. It addition its generalised nature makes it somewhat limited. It does not set down the detailed nature of the pre-conditions for growth. In reality policy makers are unable to clearly identify stages as they merge together. Thus as a predictive model it is not very helpful. Perhaps its main use is to highlight the need for investment. Like many of the other models of economic developments it is essentially a growth model and does not address the issue of development in the wider context.

Next theory - Models of Demographic Transition >>


Related Glossary Items:
Barter
Investment
Development
Capital
Subsistence Farming
Primary products
Infrastructure

Related Issues:
Industrialisation of Zambia
An Introduction to International Trade

Related Theories:
Fisher Clark's Theory of Structural Change
The Harrod-Domar Model
The Lewis Model of Development
Models of Demographic Transition
The Causes of Economic Growth