Stages of Economic Maturation

Poverty reduction and disease eradication are goals valued by many in the developed and developing countries around the globe. The approaches taken to accomplish those goals remain questionable and daunting as one considers possibilities for modernizing underdeveloped societies. In general, the modernization of developing nations is an endeavor that appears to be loaded with challenge and diversity. Specifically, the extent to which we can unpack modernization perspectives to ensure their relevance to the economic maturation of developing countries remains open for further inquiry. According to the prominent work of W. W. Rostow, all societies fit into one of five stages of economic growth. The linearity of that growth model is certainly one source of its criticism. One way to move beyond those criticisms is to contemplate whether that model is really prescriptive or descriptive in nature and intent. Toward that end, this essay aims to enhance undergraduate student awareness of modernization theory and to explore the applicability of concepts from basic economics and development economics. In addition, it aims to provide those students with valuable insight into the methods for studying, addressing, and resolving the varied needs of developing countries.

Keywords Developing Countries; Development Economics; Economic Maturation; Five Stages of Economic Growth; Modernization Theory; W. W. Rostow

Economics > Stages of Economic Maturation

Overview

A variety of perspectives, publications, and college courses relate to the modernization of developing nations whether one refers to them as the Global South, the Third World, or whatever descriptor one can imagine. In reality, a multitude of approaches exist for thinking about and acting upon the goal of expediting social, political, and economic development within their countries. Whether those engagements occur at the conceptual or practical level, those individuals with an interest in the topic can expect to find references to modernization theory, growth theory, liberal development theory, dependency theory, world systems theory, and so on.

Plenty of material is available to support inquires that may run deep and/or wide. In the few pages ahead, this essay acknowledges some of those perspectives while directing attention to an articulate political and historical economist's perspective on economic growth and modernization. Many consider the five stages of economic growth model, which was the work of W. W. Rostow, a foundation for almost anyone who initiates a study on the industrial progress of a developing country. It is important to note that the work has generated a lot of controversy in the decades since its publication, which makes it all the more interesting and fascinating. Similar to what an undergraduate student would find in a course on economic development, this essay contains statements at various points highlighting the model's rationale, assumptions, strengths, and weaknesses.

It seems appropriate to suggest at this early point in the essay that the stages model offers hope to developing countries. In short, the model represents an itinerary for a journey that includes a drive along the winding road of economic maturity heading toward a state of mass consumption; as is the case with most journeys, getting there is half the fun. Nonetheless, many scholars and practitioners criticize the model asserting that it is overly optimistic for Third World realities and/or it is excessively linear for real maturation processes. Perhaps the greatest value of the growth model resides in its capacity for comparing stages between countries and for generating ideas among scholars and policy makers. In the sections ahead, readers will find a brief background on the intellectual history behind various theories of development, a summary of applicable economic concepts, and an application of those concepts to the topic at hand.

Applications

The main purposes of this essay include enhancing an awareness of the intellectual history behind the first modern theorists of development, refining an ability to assess the relevance of historical facts and recent debates, and recognizing various motivations for an economic development agenda. Sometimes those components are hidden and other times obvious. Perhaps the original and subsequent publication titles will spark some initial interest, which ties in very well with the apparent theme of sustaining a wide array of interest.

Rostow & The Stages of Economic Growth

Publication of the seminal article by W. W. Rostow in 1959 held the title The Stages of Economic Growth. In the following year, that 16-page publication became part of a 179-page book. More importantly, that famous and widely cited book received the subtitle A Non-Communist Manifesto. For reasons that become clear later in this essay, there was a real need to distinguish a superior path to modernization from an inferior one. As a matter of background and context, it is also worthwhile to point out that Rostow was a recipient of funding from the Ford Foundation while authoring those publications. In addition, he was an advisor to the US defense department during the Kennedy and Johnson administrations and later served as an assistant to President Johnson during the Vietnam conflict.

Perhaps those affiliations made the publications all the more controversial. Now in its third edition, total sales of the book reportedly number about 300,000 copies. Nonetheless, interest in the book has waned since the early 1980s. Some scholars suggest that this lull coincides with the onset of a postmodern era, the end of the Cold War, and/or allegations that the growth stages model is irrelevant to the maturation of countries comprising the Third World. Whatever the case may be, the book presents the growth of underdeveloped countries as a direct function of their ability to emulate developed countries in their drive toward economic maturation and as an indirect function of their rates of domestic saving. Certainly, the growth of developed countries corresponds highly with the savings rate given the notable absence of a guide to chart their progressive maturation.

While avoiding the appearance of being ethnocentric, it is important for us to note that economic markets progress at varying degrees through several stages of economic growth. From a basic economic perspective, employments of the factors of production (land, labor and capital) in varied combinations ultimately generate physical outputs and nonphysical consequences. One may think of the progression as a successive movement through economies that depend on agriculture, manufacturing, services, information, or knowledge at some points during history. Though at times there is a significant correspondence between each stage and a dominant perspective, it is far more important to understand the historical context in order to gain a full and comparative meaning.

Modernization Theory & Practice

The extent to which modernization theories are relevant to the economic maturation of developing countries remains unsettled and open for further inquiry. Scholars continue to examine the plausibility of those theories and of Rostow's claim as set forth in The Stages of Economic Growth: A Non-Communist Manifesto. In the book, Rostow postulates that economic modernization occurs in five successive stages of varying length. These scholarly pursuits seek a fuller understanding of how changes in political, economic and social environments during the 1940's and 1950's connect with the evolution of modernization theories.

Classifications of society as traditional, modern, or postmodern are evident in the academic realm and literature. In general terms, modernization theory is oriented toward the study of the economic maturation of underdeveloped, developing, or Third World countries. However, the studies are usually conducted through the lens of observers from developed countries. Consequently, it is quite possible for some researchers to overstate the importance of twin pillars, which are the industrial base and the nation-state, to current modernization processes. At issue is whether contemporary growth originates primarily through domestic means and/or whether developed countries exert an inordinate amount of influence on the developing countries.

Many consider modernization as the goal desirable and attainable by all societies. As experience seems acceptable as a major source of learning, it is natural for a been-there, done-that attitude to manifest itself in any model. Being sensitive to a model's set of underlying assumptions and exercising some amount of care are required in order to avoid allegations of being an ethnocentric, which by definition is the act of judging others based on our own experiences and local customs and norms. The ethnocentric appearance of Rostow's work generates some of the criticisms lodged against the stages model. In sum, the experiences of the developed countries may or may not be directly transferable to developing countries especially when circumstances change with the passage of time.

Capitalism vs. Socialism

History reveals that two overarching ideologies had bearing on the post-world war path to modernity. In terms of political and economic orientations, there was the United States and its liberal form of capitalism at one end and there was the former Soviet Union and its form of socialism at the other end. Furthermore, the divisive effect of the Cold War influenced resource allocations in ways not yet fully understood. Nevertheless, it is evident that the United States moved into the age of mass consumption just because we are more familiar with a capitalistic economic system.

Capitalist and socialist economic systems represent rival solutions to the problem of underdevelopment. It is obvious that both can lead economies beyond agriculture, manufacturing, and into the post-industrial state of development, but any attempt to transition from one to the other takes a lot of time. The former Soviet Union serves as an example in this regard. One reason for a lengthy transition is that the market-based system accommodates household preferences in the production function. In contrast, a socialist economic system accommodates governmental preferences in the production function and households typically receive items in accordance with a market plan. It is clear that a plan- or command-based economy under a socialistic system is less likely to inhibit mass consumption in comparison to a market-based economy with a pluralistic political system.

If rapid progression through the stages of growth toward mass consumption is any indicator, then the superior path is that made possible through liberal capitalism. Many suggest the postmodern era is evident in the emergence of cultural and social analyses that began in the 1980's with the end of the Cold War and a few transitions away from socialism. As further evidence of that shift, many witnessed the formation of goals in the 1990's dealing with global reductions in poverty and disease.

Before we proceed to the next section and its focus on some relevant economic concepts, there are some additional perspectives on development economics and a few names aside from Rostow that are worthy of brief mention. The classical perspective on economic growth is available in the works of Smith, Malthus, Ricardo, and Marx. With the advent of a development economics perspective, soon after the end of World War II, a list of authors might include Keynes, Harrod, Domar, and Lewis. The next section covers some basic economic perspectives and concepts highly relevant to the five stages growth model.

Perspectives & Concepts Relevant to Development Economics

The linearity of the Rostow growth model is a source of criticism. It may be highly irrelevant for those countries that experience false starts and/or experience a temporary movement toward modernity. Cycles of expansion and contraction are certainly a feature common to most economies around the globe. Whether one refers to the developing or the developed countries, the employments of land, labor and capital occur in varying quantities over time. Nonetheless, some economists point out the inherent bias of Rostow's work because it seems to assume a western model of modernization and countries with large populations, renewable and/or abundant natural resources, and huge land masses.

Some of the economics literature highlights the differences between economics and development economics. For example, readers will find assertions in the latter category that the totality of capitalism includes both the developing and the developed countries. Furthermore, some scholars suggest that the field of development economics is more complex than basic economics because of its denial of the simplistic focus on free trade, profit motives, and market exchanges. Polanyi (1957), who took into consideration politics and economics, contends that markets are sustainable only to the degree they interact with social and political institutions. He also advances the idea that institutions regulate, stabilize, and legitimatize markets and thereby challenge the usual notions of scarcity and of firms operating in price-taking markets. This line of reasoning argues that markets consist of reciprocity, redistribution, and exchange; it is interesting that Rostow's publications are without any reference to Polanyi though their ideas are similar and only two years separate their works.

Basic economics also tends to ignore the roles of institutions in bringing about changes in societal cultures and customs. Students who read Rostow and/or pursue a study in development economics will likely find a blend of microeconomics and macroeconomics. In terms of the former, they will find references to standard economic concepts such as the production function, the marginal revenue product of labor, the marginal efficiency of capital, comparative advantage, and diminishing returns. Add to that list an introduction and some unusual applications of the term "compound interest." Readers of the Stages book will find several references to that term. Furthermore, many authors who cite that book suggest it is a thesis about interest in the financial sense and about the benefits of saving money.

Striking some resemblance to those interpretations, the first reference in the book carries a footnote that seems to define the term in relation to the perpetual compounding nature of a nation's rate of income growth. Subsequent references seem to expand the meaning of the compound interest term relating it in diverse ways to a widespread focus on sustainable economic growth. In terms of the macroeconomic side, the Stages book defines economic growth as being an increase in per-capita real income. In contrast, some recent textbooks (Arnold, 2008; Guell, 2008; McConnell & Brue, 2008) define economic growth in terms of annual increases in per-capita constant-dollar Gross Domestic Product. Whatever the preferred definition may be, real economic growth ultimately leads societies to technological maturity. This process is quite complex, requiring examination through the application of multiple perspectives.

A Macroeconomic Foundation

An attempt to integrate modernization theory, development economics, and basic economics can easily become an exercise in futility unless one first explores the facets of each. In order to prepare readers for that exploration, a short lesson in macroeconomics seems to be appropriate at this juncture. Let's begin by remembering that savings results from an initial sacrifice in consumption. Personal savings translate into business investments. Some of that investment generates new technologies thereby allowing producers to extract larger amounts of output from a given amount of input. Additional outputs engage workers and earn revenues both of which represent increases in income and potential increases in savings and consumption. More importantly, outputs and consumption increase at a faster rate than does population. Drawing from the work of Rostow, an increase in per-capita consumption corresponds with technological maturity. In essence, this macroeconomic approach tells us that current growth leads to technological maturity and it is also a result of "compound interest" or prior growth. By extension, growth is sustainable by applications of economic concepts and other factors outside the realm of basic economics.

At this point, as we move toward the last section of this essay, the reader will find some additional relief as we close this section with economic concepts that are a bit more concise and straightforward. They are relevant to discussions of quality of life and standard of living. In terms of the latter, there are quantifiable measures such as the income distribution, the poverty rate, the life expectancy of a population, the access to health care, education, and durable goods. Furthermore, in contrast to the standard of living, the quality of life is more subjective because it is more difficult to measure the value of concepts such as leisure, safety, cultural resources, social life, mental health, and environmental quality, and so on. It is important to note that two nations may be comparable in terms of their standards of living, but vastly different in terms of the quality of life of their citizenry. Moreover, the concept of economic well-being is largely undefined and usually controversial. Almost any discussion of it will take on political dimensions.

This essay may begin to read more like a book review for some. At this juncture, readers should recall its main purpose is to convey some concepts central to understanding development economics. That understanding will, in turn, prepare them for pursuing their own survey of the literature on development economics and for the following summary of the five stages of growth. In terms of the pursuits ahead, one needs to consider whether the stages model is descriptive, prescriptive, or explanatory in its nature and intent.

Rostow & the Five Stages of Economic Growth

As a matter of introduction to the five stages, W.W. Rostow argued that there was a "take-off" to economic growth in the US economy in the years 1843-1860. That take-off occurred during the 1840s. It was a period marked by developments in the rail transport and manufacturing sectors occurring at that time in the Eastern part of the United States. The next decade witnessed the great railway push into the Middle West and a heavy influx of foreign capital to support it. According to Rostow, all societies fit into one of those five categories or stages. As the reader will see, each corresponds with a specific set of economic dimensions and a succession of strategic choices.

First Stage: The Traditional Society

It is a time containing agriculture- and labor-intensive tasks including hunting, foraging, and fishing. Economic growth is an unfamiliar and unknown concept to members of the traditional society. Their social network consists primarily of what we refer to as extended family. Their acquisitions of basic needs have linkages to divine spirits and intervention. Any expansion of acreage contributes to an increase in agricultural output. However, the actual and potential levels of productivity are indeterminate and likely to be very low. Technology is virtually nonexistent remaining unavailable and/or without any interest in its application to existing production processes. Trading activities, if any, occur locally and fluctuate according to the dynamics of political, social, and physical elements.

Second Stage: The Preconditions for Take Off

Societies in this stage exhibit attempts to adopt technology, to handle diminishing returns, and to develop an investment culture. Their interests require changes in attitudes toward education, finance, and commerce. The list of prerequisites for growth includes the following: An initial commitment to education; an acknowledgement of capital mobility; an institution of a system for banking and currency management; and, an emergence of an entrepreneurial class. The entrepreneurs use land, labor, and capital in various combinations, but with limited success due their lack of familiarity with economic principles for optimizing output level. Nonetheless, increases in domestic output occur as manufacturing facilities open and nation-states emerge.

Third Stage: The Take-Off

Steady economic growth gains acceptance as a norm. Individuals gain a better understanding of the causes and consequences of economic growth. With an expansion in business-related concepts, economic processes rather than social traditions drive that growth. These norms and understandings represent the point at which there is a transition from a traditional or agriculture-based to a modern or industrial-based economy.

New technology and emergent political collaborations act as stimuli. In the process, new industries expand and communities around them develop into urban centers. At this point, there are increases in incomes coupled with a high rate of savings along with a growing interest in entrepreneurialism. With these interests and some calculated risk taking, all their efforts lead to additional discoveries and extractions of natural resources along with subsequent usage by various manufacturing facilities within a process of mass production.

Differentiated industrial processes during this stage include innovations such as the cotton gin, steam engines, and steel production. Rostow draws heavily on railroad history, for example, to demonstrate its multifaceted utility as a product of natural resources, its contribution to the national infrastructure, and its employment in the spatial distribution of industrial materials. Furthermore, he cites the rail transport of steel within countries such as the United States, Great Britain, Germany, and France as a robust example for sustaining economic growth.

Fourth Stage: The Drive to Maturity

This stage generally draws from the contributions of the automobile and the complementary system of roadways to economic maturation. In addition, this stage recognizes the need for diversification as a means of economic stability. This recognition provides some evidence of thoughts about the cyclical natures of an economy and its manufacturing sector. In other words, most members of society now take interest in and readily accept those fluctuations as a natural component of sustainable growth.

Compound interest becomes evident in the individual, the social, the political, and the economic dimensions of the industrial nation-state. Investments, both financial and non-financial in composition, generate outputs that increase at a rate exceeding the population growth rate. In essence, a larger society attributes changes in the composition of a domestic economy to innovation and industrialization. Technology and industry become more complex, shifting away from railway-type steam-driven heavy engineering toward greater industrial diversity that includes the manufacture and employments of machinery, tools, chemicals, and electric-driven equipment.

Enter international trade as factor in the maturity equation. Drawing from the work of Rostow, former imports of the colonization period become domestic manufactures of the modernization era. A positive trade balance emerges with exports exceeding imports. Readers should also take note that Rostow introduces a slight twist on the comparative advantage concept by suggesting that imports occur first, by omitting references to opportunity costs and resultant specialization, and by skipping over the gains from trade. Perhaps he denies applicability of the concept because of its assumption that climate is irrelevant to the production possibilities frontier.

In this stage, society holds a basic understanding of how innovative and entrepreneurial activities build the capacity to produce whatever specialization it so desires. Consequently, a technologically mature society becomes more dependent on its economic choices and its political priorities and less so on technological and institutional necessities. According to Rostow, some additional consequences of maturity include shifts in: The labor force as seen in a reduction in agricultural employments; the leadership composition as result of a reduction in trade employments; and, the domestic culture as it begins to exhibit some disenchantment with the industrial nature of the nation-state. Society becomes more interested in issues of national security, welfare, and leisure. Lastly, an optimistic economic outlook and real income growth also signify maturity.

Fifth Stage: The Age of High Mass Consumption

This stage seems to suggest that mass production ultimately leads to mass consumption. If so, that process would entail the following simple sequence of events. An initial increase in incomes when the savings rate is stable leads to an increase in savings. Those savings initially displace consumption and they provide a source of funding to business investments. Those investments generate additional increases in output and incomes. Those incomes increase savings and consumption. Those increases generate additional income. The sequence repeats itself along as there is optimism. Eventually, consumer optimism paves the way for their purchases of durable goods and diverse services.

There are two outcomes reported for this final stage. First, per-capita income increases lead society past its need for basic items such as food, clothing, and shelter and toward its want for luxury items. Second, migrations of the labor force head toward urbanized areas and population centers. In essence, the number of employments in urban office settings increases while those in factory settings decrease. Consequently, the urbanization phase generates widespread interest in the arts, cultural events, professional sports, and other forms of mass consumption and entertainment.

Conclusion

In conclusion, this essay presented the reader with an overview of five stages of economic growth. It also presents some information with which to distinguish between development economics and basic economics. In closing, the author hopes readers are better equipped to study and address the needs of developing countries, to compare and contrast countries in terms of their economic growth stage, and to recognize and contemplate the value of linear progression models. Perhaps those models are most useful as a tool for description.

Terms & Concepts

Comparative Advantage: Originates from production decisions that involve identifying and minimizing the costs of alternative output combinations with the goal of specializing in one product and trading it for the other product in such a manner that yields gains from trade.

Diminishing Returns: The notion that additional inputs of capital and labor combinations into the production process eventually reach a point at which the output per unit of input decreases.

Ethnocentric: The act of judging other yet unfamiliar entities based on values originating from what is familiar.

Macroeconomics: The branch of economics that examines factors such as inflation, unemployment, and output at the level of the national or overall economy.

Marginal Efficiency of Capital: A measure of the additional output generated from an additional unit of a physical resource such as equipment, machinery, tools, and buildings; taken as an assessment of the productivity of capital.

Marginal Revenue Product of Labor: A measure of the additional revenue generated from employing one additional worker; taken as an assessment of the productivity of labor.

Microeconomics: The branch of economics that examines factors such as the prices and the outputs of goods and services, production costs, producer and consumer behaviors; at the firm, market, or industry level.

Production Function: An expression of the relationship between outputs and costs.

Bibliography

Arnold, R.A. (2008). Economics(8^th ed.) Mason, OH: Thomson South-Western.

Austin, K.F., & McKinney, L.A. (2012). Disease, war, hunger, and deprivation: A cross-national investigation of the determinants of life expectancy in less-developed and sub-Saharan African nations. Sociological Perspectives, 55(3), 421-447. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=80234819&site=ehost-live

Gualerzi, D. (2012). Development Economics. International Journal Of Political Economy, 41(3), 3-23. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86457269&site=ehost-live

Guell, R. C. (2008). Issues in economics today(4th ed.). Boston, MA: McGraw-Hill Irwin.

McConnell, C. R. & Brue, S. L. (2008). Economics(17^th ed.). Boston, MA: McGraw-Hill Irwin.

Meierrieks, D. (2012). Rooted in urban poverty? failed modernization and terrorism. Peace Economics, Peace Science, & Public Policy, 18(3), 1-9. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87067323&site=ehost-live

Rostow, W.W. (1959). The stages of economic growth. The Economic History Review, 12(1), 1-16.

Rostow, W.W. (1960).The Stages of Economic Growth: A Non-Communist Manifesto. New York: Cambridge University Press.

Suggested Reading

Chang, J., Chen, B., & Hsu, M. (2006). Agricultural productivity and economic growth: Role of tax revenues and infrastructures. Southern Economic Journal, 72(4), 891-914. Retrieved December 28, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=20652471&site=ehost-live

Kapoor, I. (2004). Hyper-self-reflexive development? Spivak on representing the Third World 'Other'. Third World Quarterly, 25(4), 627-647. Retrieved December 28, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=13516296&site=ehost-live

Mobarak, A. (2005). Democracy, volatility, and economic development. Review of Economics & Statistics, 87(2), 348-361. Retrieved December 28, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=17109293&site=ehost-live

Polyani, K. (1957). The great transformation: The political and economic origins of our time. Boston: Beacon Press.