Walt Rostow took an historical approach in suggesting that developed countries have tended to pass through 5 stages to reach their current degree of 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 productivity and very 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, to perhaps 5% of GDP. Some external funding is required.
3.Take-off. Manufacturing assumes greater importance, although the number of industries remains small. Political and social institutions develop - external finance may be required. Savings and investment grow, perhaps to 15% of GDP. Agriculture assumes lesser importance in relative terms
4.Drive to maturity. Industry becomes more diverse. Growth should spread to different parts of the country as technology improves
5.Age of mass consumption. Output levels grow, enabling increased consumer expenditure. There is a shift towards tertiary sector activity
Evaluation:
There is overlap with the Harrod-Domar model: 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; corrupt 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.
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