Economic Chapter 6: Economic growth, development and underdevelopment 

Economic growth

Economic growth is the sustained persistent quantitative increase in the country’s volume of goods and services as measured by an increase in Gross National Product (GNP) in a given period of time usually a year compared with the previous period.

Determinants of (factors affecting) economic growth

1. Availability of natural resources in term of quantity and quality e.g. land water, natural forest, national parks, etc. produce goods and services.
2. Capital accumulation through savings and channeling these savings into investment in agriculture, industry and infrastructure.
3. Improvement in quality and quantity of labour through formal and informal education. If the country   has a big and skilled   labour   force, production   increases   hence economic growth.  On the other hand, a small-unskilled labour force discourages   production   hence low levels of economic   growth.
4. Technological advancement to produce volume and quality of goods and service. Use of modem   technology    increases   production   at reduced   average costs hence economic   growth.  On  the  other  hand,  use  of poor  production   techniques    reduces output  hence  low level  of economic  growth.
5. Increase in the number and quality of entrepreneurs. Presence   of individuals   who have  the  ability   to  organize and  mobilize   other  factors   of  production   leads  to  an  increase   in  production    hence   economic growth  and  absence  of  such  individuals   discourages   production   hence  low  levels  of  economic growth.
6. Availability of market including local and foreign market. The  large  market   encourages investments   which  lead  to the production   of more  goods  and  services  hence  economic   growth. But a narrow   market   discourages   investment   and production    hence   low levels   of economic growth.
7. Ideal population growth to provide labour and market
8. Political stability. Political stability encourages investment and lead to economic growth
9. Socio-cultural attitude should be changed so as to stimulate economic growth
10. Appropriate planning and effective implementation of economic programs.
11. Level of investment. High level of investment in an economy increases the production of goods and services.
12.  The level of monetization of the economy. The higher the level of monetization    of the economy, the higher  the  level  of  economic   growth,  But  a large  subsistence   sector  discourages    production and exchange  hence low  levels  of economic  growth.
13.  The degree of specialization   and division of labour in production.   The   high   degree    of specialization    in  the  economy   leads  to  economies   of  large  scale  production    hence   economic growth  and  the low  degree  of specialization   discourages   large  scale  production   hence  low  level of economic  growth.
14. The level of social and economic infrastructure.  Presence   of adequate   social   and   economic infrastructure in form   of roads,   power   generation    plants,   banks   etc.   stimulates    production activities       hence   raising    the   rate   of   economic    growth.    On   the   other   hand,   low    levels   of infrastructural development    hinder   the mobilization of factors of production   hence retarding economic growth.
15. Degree of economic stability. If the country is economically    stable in form of stable prices of goods and services,   stable exchange rates etc.  investments   are encouraged   hence  increase   in the level  of  economic   growth.  But  if there  is high  levels  of  inflation,   investments   are  discouraged hence  low levels  of national  income.
16. Nature   of government     policy. Favourable   government   policies   in form  of providing   subsidies to the producers   , giving  tax holidays  to the investors   etc. promote  investments   hence economic growth  while  poor  government   policies   like  high  tax rates  discourage   investors   hence  limiting the rate of economic  growth.

Benefits (advantages)   of economic growth

1. It facilitates the exploitation   and utilization   of the idle local resources.   This increases   the level of national income in the economy.
2. It increases government    revenue   through   taxation.   Economic   growth  widens   the  tax  base  inform  of  numerous    production    activities    set  up  hence   generating    more   tax  revenue   to   the government,   The  revenue   realized   is used  to construct   social  and  economic   infrastructure    like hospitals,  roads,  schools  etc.
3. It leads to a fall in the general price level of goods and services hence improving   the standards of living of the people.  As the economy  grows,  a variety  of goods  and services  are produced  and this results  into a fall in the general  price  levels  hence  an increase  in the volume  of commodities consumed.
4. It facilitates technological development   in the country.   Economic   growth encourages   the use of modem   production   techniques   through   inventions   and innovations   hence increasing   efficiency in production.
5. It improves the balance   of payment    position    of the   country.    As  the  economy    grows   the production   of goods  and  services  for both  the  domestic   market  and  for exports   increases.   This helps the country to save and earn foreign exchange hence better balance of payment position.
6. It leads to an increase in employment opportunities.    This is in form of increased   resource utilization   and other economic activities set up. This increases the income of the people.
7. It leads to the development of social   and economic    infrastructure.     As  the  economy   grows, there  is development   of social  and economic   infrastructures   in form of roads,  schools,  hospitals, financial  institutions   etc. so as to facilitate  trade  in the economy.
8. It promotes urbanization    and industrialization     of the economy.   This is as a result of increased number of production   and economic activities.
9. It reduces the dependence of the economy    on other   economies.    As the economy   grows,   per capita income raises and this leads to an increase in self-reliance   and sustenance   of the economy.
10. It improves the standards of  living   of the  people.   This  is  due  to  increased   production    of  a variety  of goods  and  services  at reduced  prices  in the economy.  This increases   consumption   and utility maximization   by the people.                                                                                                                 .
11. It reduces income inequalities    in the economy.  As  the  economy   grows,  it is possible   for  the government   to redistribute   part  of  the increased   employment   opportunities   and  income  through the use of appropriate   government   policies  like progressive   taxation.
12. It increases the monetization    of the economy.   This is because economic   growth promotes   trade and commerce   in the economy.
13. It breaks  the  vicious  circle  of poverty   .As output    expands,   savings  and  incomes   increase  there by breaking  the vicious  circle  of poverty  .                                                                .
14. It promotes social cultural transformation. As the economy grows there is a change of life style of people as a result of increased   incomes.   This  helps  to  break  the  remove   the  high  levels  of conservatism   and backward   cultures  which  are obstacles  to development.

Costs (demerits) of economic growth

 

Costs (demerits) of economic growth

1. It leads to rural-urban   migration. As the economy   grows,  people  tend  to shift  from  rural  areas to  urban  centers  where  there  are  better  opportunities    as  a result  of  urbanization    .This  leads  to development of   slums,   open   urban   unemployment,      increased    crime    rate   and   poor   living conditions  in general.
2. It leads to technological unemployment.  As the economy   grows, there  is increased   use  of capital intensive   techniques  of  production   which   in  the  long  run  replaces   labour   hence   technological unemployment.
3. Overexploitation of natural resources. Increased production  of goods and services leads to over exploitation    of natural   resources   like forests   and minerals.   This leads   to exhaustion    of nonrenewable resources hence lack of self-sustainability    in the long run.
4. Environmental degradation.  In  a  bid  to  increase   the  volume   of  goods   and   services   in  the country,   there  is development   of  more  industries   which  leads  to  environmental    degradation    in form of noise,  air and water  pollution.
5. It promotes regional income inequalities in economy. If economic   growth is emphasized   without equity, business owners realize high incomes as compared to the employees   and the rural peasants. This widens the income gap between the rich and the poor.
6. Economic growth involves foregoing current consumption and investing most of the incomes in order to increase  output in future.  Resources   are allocated   for the production   of capital   goods, provision of education,   health etc. which increases   the productive   capacity of a country in future. This leads to a decrease in current consumption   of goods and services.
7. Occupational hazards. Economic   growth leads to increase   in level of occupational hazards   in form of increased in workloads, high level of accidents at work, occupational   diseases etc.
8. It increases economic dependence of the economy.  This is due to increased borrowing   as a way of rising capital for investment   external economic   dependence.                                             .
9. Leisure is foregone. Individuals   forego leisure   due to hard work required   to achieve   economic growth yet leisure is vital in improving the welfare of people.
10. It accelerates profit repatriation. This is true if production is dominated    by Foreign   Direct Investments.
11. It leads to the loss of craftsmanship. The increased   dependence   on  the  use  of  machines   like computers  and other  capital  equipments  leads  to loss  of natural  creativity  in the long run.
12. Breakdown of cultural norms or values. With   modernization    people   tend to adopt   western cultures   and  neglect   the  good  cultural  and  social  values  which  can  bring people   together.   This undermines nationalism   in the economy.
13. Brain drain
14. Increased debt burden through borrowing
15. Leads to dualism

 

Economic development

• Economic development refers  to persistent  (sustained)   quantitative   and qualitative   increase  in the country’s   output  of  goods  and  services  over  time  accompanied    by positive   political,   economic, social, technological    and cultural  transformation.
• Economic development is a multi-dimensional process by which  real  GNP  per  capita  increases quantitatively   and  qualitatively   over  a long  period  of time. It is measured   by  the increase   in the real per  capita  income  and  items  which  improve   the  quality  of life  like better  education,   health, employment   opportunities;   freedom  as well as environmental   protection.
• Economic development  and economic growth  are related  in  that as  more  quality   goods  and services   are  continuously    produced   and  easily  accessed   by  the  masses,   economic   development takes  place  in  an  economy.   Economic   development    therefore   refers   to economic   growth   plus positive changes in the quality of human life.

Economic Development includes the following;

1. An increase in them volume of goods and services but of better quality.
2. Increase  in   the   volume    of   savings    hence    increased    levels    of   capital    accumulation      and
3. Technological development   or progress.
4. Structural changes which are usually tor the better within the entire economy.
5. A change or transformation of the economy from one that is subsistence   and dominated   by one or few sectors    to   one that   is economically modernized, commercialized (market    oriented production)   and diversified.
6. Social transformations that shift society from back ward conditions   to modernity.
7. Persistent institutional change (environmental, educational, health care, gender aspects, legal, political and other issues) to enhance improvement   in human welfare or for meeting   the current society requirements.

Circumstances   leading to economic growth without economic development

Economic   growth is a necessary but not sufficient condition   for development.   It is therefore   possible to have   economic   growth   with no or little development.    Circumstances    under   which   economic growth may occur without necessarily   leading to economic development   in a country include:

1. When goods and services produced are of poor quality and do not match with the needs, tastes and preferences  of the population.
2. When there  is an increase in GDP followed by wide spread income inequalities  in the economy such  that  national  wealth  is concentrated   in the  hands  of a few rich  while  the  majority   remain poor.
3. When there is high unemployment level despite of increased GDP.  This could be due to increased use of labour saving technology   among other causes of unemployment.
4. When there is increased  output yet there are high rates of illiteracy and ignorance among the population.
5. When there are high levels of traditionalism and conservatism which negatively   affect peoples’ attitude towards development.
6. When  there   are  large  marginalized  or vulnerable  groups  like  the  orphans,   old  aged,   hand capped  etc. in the population   who are severely  deprived  of basic  needs  of life.
7. When the fundamental   human rights like freedom of worship,   expression,   speech are abused by the government   authorities.
8. When people are over working at the expense of leisure in order to produce  more goods and services.
9. When there is increased production of capital goods at the expense of consumer goods yet they do not directly contribute   to human welfare through consumption.
10. When there  is high degree of political instabilities in the  country  such  that  the  increased   GDP and per  capita  income  realized   in an economy  are  due  to increased  military   expenditure   rather than expenditure   on social  services.
11. When    there   is poor   leadership, management   as well as governance   of   the   economy. Development    process   is only possible   with good leaders   who can administer    and transform institutions   in the country.
12. When   there   is a narrow range of goods and services produced   in the   economy    whose accessibility by the citizens is severely limited.  For  instance  when  more  goods  that are available are neither   diversified  nor  widely  distributed  in an economy.
13. When there is rapid population growth that exceeds the growth rate of the national income such that  any  increase   ill output   is  consumed   rather  than  being  used  to  create   wealth   due  to high dependence   burdens.
14. When there is high level of environmental degradation as a result of increased industrial activity which causes pollution hence putting lives at risk.
15. When there  is  increased  external  economic  dependence  of  the  country  due  to  increased borrowing as a way of rising capital  for investment. This increases the debt burden on the current and future generation hence increased resource outflow in form of debt servicing.
16. When there is increase in GNP coupled by under developed infrastructure in an economy such that people cannot effectively transport and market their produce.
17. When there is high levels of corruption and embezzlement of public funds in the economy meant to provide social services to the people like education, health etc.
18. When there is increased rural -urban migration which leads to development of slums, open urban unemployment, increased crime rate and poor living conditions in general.
19. When there is economic growth followed by /zig” levels of economic instabilities like high rates of inflation which increase the cost of living in the economy.

Under development

• Under development is an economic situation where there is underutilization of the available resources in the economy leading to the low per capita income ,low economic  growth; poor health services, high death and birth rates, poor technology, unemployment, high income inequalities ,low levels of industrial development and generally low standards of living.
• An under developed country is one which is characterized by underutilization of resources, low incomes, poor technology, slow growth  of GDP,  low  living conditions  of people  with  high degree of international dependence.
• Under developed countries are sometimes referred to as developing, backward or poor countries but they are collectively referred to as third world countries.
• A least developed country is one which is stagnant characterized by very low levels of income, persistent unemployment and massive poverty with low living conditions which are far below the international poverty line.
• Most developing countries are in Africa, Asia and Latin America

Characteristics /features   of economic underdeveloped Countries

1. Low standards of living for the majority of the people. The low levels of living are manifested, in form of low incomes, inadequate housing facilities, poor health conditions, high illiteracy rates, high infant mortality rates, low life expectance and general sense of hopelessness.
2. Low levels of labour productivity. Under developed countries are characterized by low levels of labour productivity due to absence or inadequate co-operant  factor inputs such as capital, better technology and low levels of education and skills.
3. High population growth rate and dependence burden. The high population growth rate is due to high birth rates with high fertility levels of women.  The major implication of this is demographic information is that a large proportion of the population is in the younger age group and this results into a high dependence burden which limits both savings and investments.
4. Persistent capital outflow due to importation of luxurious items to match the developed country style
5. Unfavorable terms of trade since the underdeveloped countries import more than they export
6. High corruption and embezzlement of funds by government official
7. High and increasing  levels of unemployment and under employment.  In developing countries there are many people of the working age who are able and willing to work but cannot find the jobs at the prevailing wage rates hence involuntary unemployment. This is mainly due to the limited employment creating ventures, abundant supply of unskilled labour, limited skills and experience needed at work and low rates of entrepreneurship.
8. High degree of dependence on agricultural production and primary exports. The majority of the people in developing countries depend on agricultural activities for food and source of economic activity for livelihood. The majority of the people live and work in rural areas where agriculture   is the  major  economic  activity  characterized   by low returns  and  highly  subjected   to natural  hazards.
9. Technology backwardness.     This   is   due   to   limited   capital   for   research;    innovations     and inventions   necessary   for technological   progress.   Technology   backwardness    is reflected   in low labour productivity   and production of poor quality goods and services.
10. High levels of economic    dependence.       Developing    countries   highly   depend   on developed countries   for consumer   and capital goods, technical,   financial resources   and manpower   as well as decision making.  This leads to foreign dominance   and influence by the rich nations.
11. Existence of dualism.   Most developing countries have dualistic   economies   in which there is co- existence of two different sectors with contrasting   characteristics.   For example   co-existence    of large traditional     subsistence sector   with   a commercialized market   economy, technological dualism with backward   technology coexisting with modem technology etc.
12. Poor and unreliable social and    economic     infrastructure.   Developing countries have inadequate and poor   quality   transport   systems,   banking   facilities,   communication     networks, and water and power supply facilities.   People   do not have   access to such   facilities   in order   to improve on their livelihoods.
13. High levels of conservatism and traditionalism.    Most  people  in developing   countries  believe  in cultural  norms  and they  are deeply  rooted  in cultural  beliefs  to the extent  that they  cannot  allow positive  reforms  necessary  for development   to take place.
14. Existence of  excess  capacity.  There is underutilization   of natural resources   in   most sectors of developing   economies   due to inadequate   capital,   use of poor technology,   limited markets   and poor management   and entrepreneurial   skills.   This leads to low economic growth rate.

12. High levels of political instability. This is due to greed for power and bad leadership by leaders of developing   countries.
13. High level of incomes inequalities.    The income   gap between   the rich and poor   keeps   on widening   in developing   countries. There are many extremely   poor people while a few remain extremely rich.
14. Existence of poor terms of trade and balance   of payment   problems.    This is reflected   in the exportation   of mainly cheap primary   products   and importation   of expensive   consumer   capital goods.
15. High levels of economic   instabilities.   This  is in form  of high  inflation  rates  and  fluctuations   in the foreign   exchange   rates  due  to  scarcity   of  goods  and  services   and  importation    of  highly priced  manufactured   and petroleum    products.
16. Existence of Limited domestic and foreign markets.   This is due to limited commercialization    of economic   activities,   low incomes and poor quality of goods and services produced.  This leads to low aggregate   demand in the economy.
17. There is existence of limited entrepreneurial skills.  This is due to poor education   system which trains job seekers rather than job creators.
18. Brain drainage due to increasing unemployment and poor working conditions
19. Existence of high levels of poverty.  This is reflected in low per capita income and low standards of living. The persistent poverty    is   due   to   the   vicious    circle of   poverty,     an   economic phenomenon characterized   by low incomes,   low savings,   low investments,   low output   or low capital accumulation and then back to low incomes.

 

 Causes of underdevelopment in developing   countries

Internal factors

1. High population growth rates. This discourages savings and investment   due to high dependence burden which leads to a reduction in the per capita income hence low standards of living.
2. Vicious circle of poverty. Developing countries are imprisoned by short comings arising from low incomes, low savings that lead to low investments and consequently low productivity and then back to low incomes.
3. Limited skilled manpower. This is reflected in the limited number of people with critical entrepreneurial skills and knowledge. This is due to the poor colonial education system which aims at white color jobs making development of technical skills difficult yet they are required in the exploitation of natural resources that can assist in enhancing economic   growth and development
4. Poor and inadequate social and economic infrastructure. This is reflected in form of poor transport network, few power generation plants and limited financial institutions. This makes it difficult to produce and market the produced goods and services.
5. Low levels of technology. Most developing countries use traditional, out dated and inefficient technology. This leads to resource underutilization and production of low output and ·of poor quality hence under development.
6. Economic instabilities.   These are in form of inflationary tendencies and exchange rate fluctuations and agricultural price fluctuations. Inflation increases the cost of production hence underdevelopment.
7. Limited number of entrepreneurs.  This  is  due  to  limited  skilled manpower  required  for business management and expansion which leads to low profit margins and capital accumulation in developing countries.
8. Limited capital. This is due to low levels of incomes and limited access to credit facilities from financial institutions due to lack of collateral securities.   This limits the expansion of business opportunities in developing countries.
9. Limited markets for the products. This is due to low aggregate demand resulting from high levels of poverty in developing countries.
10. Bad social cultural practices. These are manifested in form of negative traditional attitudes and conservative cultural beliefs and values that characterize ways of lives of people. Such practices limit positive social cultural transformation hence under development in developing countries.
11. Rampant political instabilities in developing countries. These are manifested in form of wars and political sabotage which discourage investments and other income generating activities hence under development.
12. Poor planning and resource misallocation   in developing   countries.   Developing countries allocate   resources    to unproductive    ventures   like   frequent   foreign   presidential    trips,   a large number   of well   facilitated    political    leaders   at various    levels   and   importation    of military hardware   at the expense   of investments    in education,   health,   agriculture    and industry   hence underdevelopment.

 

13. High levels of corruption and embezzlement    of the public resources.   Such resources meant for productive   investment   are diverted for personal interests hence under development.
14. Lack of strategic   basic raw materials   like iron, coal, oil etc.  Most developing   countries   lack such resources which are a key to development.
15. Poor land tenure systems in developing   countries.   In developing   countries,   the system of land ownership   and use is poor.  Many people   do not own land and therefore,   they cannot   use it to effectively use it to carry out large scale production hence underdevelopment
16. Occurrence of unfavorable    natural   factors    like draught,   heavy   destructive    rains,   pests   and diseases all of which limit investments   in the agricultural   sector hence  under  development.

External factors

17. Unfavorable trade positions    of developing   countries.   They  experience   poor  terms  of trade  due to  the   exportation    of   cheap   primary   products    and  determination     of  prices   of   exports   by developed  countries  hence  low gains  from international   trade.
18. Persistent huge external public   debts.  This  leads  to capital  outflow  in  form  of  debt  servicing through  the repayment  of the interest  and principle  on the external  public  debts.
19. High levels of brain drain. Developing   countries  persistently   lose  highly  skilled  man  power  to developed   countries   in search  for  ‘greener   pastures’    in  form  of  good  working   conditions   and high pay. This leads to depletion of skilled human resource in developing   countries hence under development.
20. High levels of profit repatriation    in developing   countries.   This is due to the presence   of multinational   co operations   in developing   countries.   This limits capital accumulation    in developing countries hence underdevelopment.
21. Colonial factors. Despite of achieving   political independence   developing   countries   continue to be subjected to political   manipulation   and economic   exploitation   by developed   countries.   They have been forced to adopt unfavorable   policies which are not in their line of development   hence perpetuating   underdevelopment.                  .

Policy Measures to reduce under development in developing countries

1. Providing affordable   credit facilities    by the government.     Microfinance    institutions   as well  as credit  and  savings  societies   should  be encouraged   throughout   the country  to ensure  easy  access to cheap  credit  especially  to small  scale business  operators  and farmers  in rural  areas.
2. Construction and rehabilitation    of basic social and economic   infrastructure. There  is need  to undertake   the  construction   and  rehabilitation    of roads,  power  generation   plants,   water  sources and  other   infrastructural    facilities   to  facilitate   the  production,    distribution    and  marketing   of goods  and services  iii developing   countries.
3. Providing appropriate   education.   There  is need  to restructure the education system       to promote practical   science  and  vocational subjects     so as to equip  the  local  man power  with  the required entrepreneurial skills  necessary   for  creating   income   generating activities   instead   of  being  job seekers.
4. Economic liberalization    and diversification.    There is need for developing   countries   to remove unnecessary   restrictions   from economic    activities   to allow people to carry out business   freely with limited interference. In addition, economic diversification   should be under taken to reduce the over reliance   on a few economic   activities so as to widen the economic   base of developing countries.
5. Improvement in the level of technology. There is need for developing countries to encourage and promote the use of better techniques of production which are cost effective and are in line with the social and economic requirements of their societies. This helps to increase on the quantity and quality of the products hence economic growth and development.
6. Market expansion. There is need for governments of developing countries to expand markets through market research, economic integration and improving en the quality of their products so as to encourage production and exchange of goods and services hence development.
7. Adopting favourable government policies. Such policies include providing economic incentives like subsidization of factor inputs and tax holidays to investors. This is aimed at reducing the production costs hence promoting economic growth and development in developing countries.
8. Privatization of inefficient parastatals.  There is need for governments in developing countries to encourage and promote the private sector to allow the private individuals get involved in economic activities. This not only reduces government expenditure but also promotes efficient utilization and allocation of resources in the economy.
9. Fighting corruption and embezzlement of public resources. There is need for governments in developing countries to ensure proper accountability and transparency by government officials in allocating public funds. This should be done by setting up anti-corruption institutions like Inspector General of Government (lGG) and strengthening anti-corruption laws.
10. Controlling population growth rates. This should be done by encouraging family planning and promoting girl child education as a way of reducing high fertility rates. People should be educated about the importance of having small families as a way of encouraging savings and investments:
11. Ensuring political stability. This should be done by ensuring good leadership and governance based on democratic principles. This helps to promote a favorable atmosphere for investments.
12. Maintaining macroeconomic stability.  This  should  be  done  by  controlling  inflation  and stabilizing  exchange  rates  to  the  desired  levels  as  a  way  of  creating  the  good  working environment for potential investors and other entrepreneurs in developing countries.
13. Setting up import substituting industries.   There is need for governments in developing countries to establish and promote industries to produce goods and services formally imported. This helps to save the scarce foreign exchange in form of reduced import expenditure.
14. Ensuring equitable, distribution of resources. This should be done by decentralizing service delivery and use of progressive taxation to ensure equity and fair distribution of public resources in developing countries.
15. Land reform policies. These should be aimed at improving the existing land tenure system through and redistribution, leasing, consolidation and resettlement.  All this is aimed at improving the productivity and use of land. “
16. Agricultural modernization. This should be done by giving agricultural extension education and supplying farm inputs like equipments and planting materials to farmers at subsidized prices, In addition research in new technologies and varieties should be done to improve on productivity in the agricultural sector.

Note:  Trickle-down  effect  is  the  process  in which  economic  gains  from  economic  growth  are transmitted throughout the entire society eventually giving rise to development.

Rostov’s    theory of economic   growth

Rostov’s theory of economic growth describes the stages of economic growth in a historical perspective.  According to W.W. Rostov,  economies inevitably pass  through  a series of  distinct stages of economic growth through which they are transformed  from subsistence  traditional  and stagnant low per  capita income  state to the advanced modern  and industrialized  state.   Rostov distinguishes  five  successive  stages  of  economic  growth  through  which  an  economy  passes  to achieve  economic   development,    with  accumulated   savings   and  capital  as  the  driving   force.   These stages include;

1. The traditional   stage (Subsistence   stage)
2. The Pre-condition   for take-off (Transition)   stage
3. The take-off stage
4. The drive to maturity stage
5. The maturity stage (Age of high mass consumption)

 

The traditional (subsistence) stage

This is the first stage of economic growth according to Rostov.  It is characterized   by the following;

1. There  is great    use   of primitive     tools   of production   (traditional    backward     technology). Traditional    methods   of production    are dominant.   For example   use of rudimentary    tools   like hoes, pangas, slashes etc.
2. The society  is communal.    Wealth   is collectively   owned.  Family and clan connections    play a dominant role in the social structure of societies.
3. There is no savings hence unnoticeable   capital accumulation   due to subsistence   production.
4. Existence of high   levels   of conservatism    and traditionalism.     Traditional   beliefs   and values dominate societies and these hinder socio-economic transformation.
5. It is dominated by the traditional    subsistence    sector.   People   mainly   produce   for their own consumption   rather than for the market.
6. The economy is a closed.  There is no international   trade to influence   economic   activities   in the economy.
7. There  are high   levels of illiteracy   and ignorance    among   the population   due to low levels   of education
8. Barter trade is the main system of exchange with hardly any monetary exchange-taking  place.
9. The economy is generally static with high levels of poverty   and virtually no growth.
10. People  are not profit   motivated   and there is minimal   competition   between   in the  production process.

The Pre-condition   for Take-off (Transition)   stage

This is Rostov’s    second   stage of economic   growth   in which the initial transformation    of society takes place.  It is a stage in which the pre-conditions    for self-sustained   growth are laid down.   It is associated with radical change and dualism.  It is characterized   by the following;

1. There is appearance    of  entrepreneurs  in  society  who  begin  to  establish   some  investments, trade  and commerce.
2. Savings increase up to 5 % of GDP
3. Financial institutions that mobilize savings such as banks and micro finance institutions   begin to appear.
4. There is an increase in the level of investment to about 5% of the GDP.
5. Investment is mainly directed   towards   social   overhead.   For  example   construction    of  roads, power  plants,  railway  lines,  hospitals   and other  communication    facilities  in order  to enlarge  the market  and  exploit  natural  resources.
6. Use  of modern    scientific    technology    begins    in the   agricultural    sector   and   this   reduces subsistence   output while increasing commercial   production.
7. Modern manufacturing     enterprises   begin to appear using the new production   methods.
8. Reduction in illiteracy and ignorance   due to the spread of modem education.
9. The society breaks the ties of traditionalism and there is a change in attitude  and beliefs   from traditional to modem ways.
10. Emergency of international trade, with agriculture as the leading export sector.
11. Emergency of economic transformation from the traditional society. People begin to demand products  of modem   industry   and technology    due to the influence   of powerful    international demonstration   effect.
12. Increase in the rate of economic growth due to increased production  and emergence    and the monetary sector.
13. Emergence of dualistic characteristics  in the economy.

Note.  Many developing   countries   including   Uganda   are still at this stage of economic   growth   and development

The Take- off Stage

According   to Rostov, this is the most important   but very short stage in which the economy   begins to take off into a self-sustaining   stage hence reducing   foreign dependence.   Rostov  defines   this  stage  as an  industrial   revolution,   tied  to radical   social,   economic   and  political   transformation    in  the  whole economy.  It is characterized   by the following;

1. The economy moves into self-sustaining economic growth. The obstacles  to steady growth are removed leading to a reduction in foreign dependence.
2. Savings increase up to about 5 -1 0 % of national income.
3. Investments   increase up to about   5 -1 0 % of GDP.
4. Development  of one or more leading manufacturing   sectors with a high rate of growth   and possibilities   of increasing resource exploitation,   innovations   and technological   transformation.
5. Great  changes in the social and political (institutional) framework   with   a high   degree   of economic   stability.
6. High level of employment created due to high levels of investments.
7. Increased commercial and economic activities as a result of the expanded market and increased urbanization.
8. The economy ceases to be dualistic. That is, it is fully transformed   into a modem   economy.
9. There are high rates of literacy and educational levels in the economy.
10. There is a high level of industrialization with forward and backward linkages.
11. There  is  continued  expansion  and  improvement  in  the  social  overhead  capital  in  form   of roads,  power  plants,  communication   facilities  etc.

The drive to maturity stage

This is a stage of a long period of sustained   economic   growth.   Society progressively    grows   and effectively    applies   the range   of modem   technology    in all sectors and economic, activities    of the economy.   The economy   finds its position   in the international   economy.   The stage is characterized by;

1. Long sustainable economic growth. Most constraints: to economic growth are removed   leading to self-sustaining   economy in the long run.
2. Use of advanced technology in all sectors of the economy  due to high   levels   of research   and innovation   (New production   techniques   substitute   old ones).
3. Investments  are high to about 10-20 % of GDP.
4. The level of savings are high up to about 10- 20% of the GDP.
5. The economy is able to withstand unexpected   external   and internal economic shocks.
6. Development of heavy industries like’ iron and steel industries  which   increase   the productive capacity of the economy.
7. High levels of monetization    of the economy,   and real wages start rising as workers   unionize   to have greater economic and social security.
8. High level of skill development and employment    with an increasing role of professionals    in the production process.
9. High level of urbanization    as many skilled   and high income-people   prefer   to live in urban areas than in rural.
10. Balance of payment surplus is   experienced    because    goods   formerly    imported    are   now domestically produced and new export commodities are supplied
11. High levels   of infrastructural     development    in the economy,   hence   equitable distribution    of certain goods and services.
12. There are high levels of research and discoveries   and the available resources are fully utilized.

The Age of High Mass Consumption   (Maturity stage)

According   to Rostov,   this is the last and longest   stage of economic   growth   according.   It is also referred to as the welfare or high standards   of living stage.  This stage is characterized   by;

1. High standards of living since all the basic needs are available in the society.
2. Extensive use of automobiles.
3. High consumption of durable consumer   goods and the use of modern household   gadgets.
4. High levels of investments in all sectors of the economy and foreign economies.   That is, under taking investments   and business in other countries via Multi-national   corporations.
5. There is use of highly sophiscated technology   in all the activities and sectors of the economy.
6. High degree of infrastructure    development.
7. High preference for leisure and holiday travels by the society.
8. There is high proportion   of labor force   engaged in tertiary production    (service provision).
9. More equitable distribution   of incomes   and increased social security and political   stability.
10. Increased influence   of the global economy   due to high level of involvement   and intervention   in international   social, economic and political issues.
11. The savings rate exceeds 20% of total national income.
12. Most of the macroeconomic problems like inflation,   unemployment    and balance   of payment deficits are completely   removed.
13. The structure of the population  changes   to predominantly     urban
14. Resources are fully   utilized and the economy is fully developed.
15. The proportion    of the people   employed   in offices   and skilled   industrial   jobs    dominate   the working class

Note.  Historically,   the  first  countries   to reach  this  stage  were  USA  in the  1920s  and  Britain  in  the

1930s, followed by Japan and Western Europe in the 1950s.  These  countries have     the  characteristics of the Age of high mass  consumption.

Criticisms (Limitations) of Rostov’s theory of Economic Growth

1. The assumption    that all countries   must pass through   the five stages as suggested   by Rostov  is unrealistic.          This  because   some  developed   have  already  reached   the  last  stage  but  did  not  go through  the fourth stage  for example  countries   like Canada  and Malaysia.
2. He  assumed   that  capital   accumulation   through   savings  is the  major  driving   force  and  a major determinant   of economic   growth  but he did not consider the other economic and non-economic factors   without   which  capital  accumulation   alone  cannot  lead  to  economic  growth,   For example  education,  human  rights,  political  stability  etc.
3. He did not consider the market limitation in his theory yet the market  size greatly   determines economic growth.
4. According   to this  model,  it is not easy to distinguish  some stages from  one another  due  to the presence   of  similar  characteristics    among  some  stages.  For instance   agriculture    is dominant   in traditional   and pre-condition    for takeoff stages.  In  addition   to  this,  stages   four  and  five  have similar  characteristics    hence  making  it very  difficult   to associate   the  economy   with  a particular stage.
5. It is possible for the country to attain a certain stage without passing through the others. The conditions  for  takeoff  may  not  necessarily   come  before  the  take  off  stage  because   there  is no reason    to   believe    that   an   agricultural    revolution    and   accumulated     social    overheads     like infrastructure   must  take  place  before  the  takeoff   can  occur.  In  addition,   the  Age  of  high  mass consumption   may  not  necessarily   occur  after  a country  has  passed  through   the  drive  to maturity stage for example  Canada  achieved  this stage without  passing  through  the drive  to maturity   stage.
6. Rostov  assumed  that there is nothing  like discontinuity  in growth  because   all  countries   must pass  from  one  stage   to  another,   which  is unrealistic  in development    process.   Disruptions    in growth are common in developing   countries mainly due to political instabilities.
7. The model suggests that for an economy to grow there should be increased   savings.  However   the theory  does not  suggest  how  to increase savings  or accumulate  capital  through  borrowing externally from other  countries.
8. The theory is not a development   strategy but simply describes economies at different stages of economic   growth.   For   example   it  does  not  suggest  what  developing  countries   can   do   to accelerate  growth  so as to achieve  high  levels  of production.
9. The traditional stage is not an essential stage for economic growth.  This is because   some countries   like  USA  were  born  free  of  the  traditional   stage  as  people   migrated to  USA.  from already  advanced  societies  like Britain.                                                                                                .
10. Possibilities of failure at some stages like take-off stage were not considered. Some  countries have  achieved  high  savings  of about  (10-15)  % of GDP  but  have  never  taken  off  due  to lack  of adequate  co-operant   factors.
11. He assumed that a country   cannot take off with agriculture as the major sector yet there are small countries   like Denmark,   Netherlands   etc.  have taken  off  with  agriculture    as  the  leading sector.

Relevance of Rostov’s   theory of economic growth

To some extent,  Rostov’s   theory  has some relevancy  in the following  ways;

1. Savings emphasized in this theory are vital for investment as well as for industrialization in developing  countries.   Capital accumulation   through savings is therefore   necessary   for economic growth as cited in the theory
2. The concept of take-off is suitable for the industrialization of under developed  countries.
3. It stresses unbalanced growth, which is relevant to capital deficient developing   countries.
4. It   emphasizes   institutional   reforms, which    are   vital for   economic    growth    in   developing countries.
5. It emphasizes technological and infrastructure development which are essential  for growth and development   to occur.  This is reflected in most stages of growth according to Rostov.
6. Development of leading sectors like agriculture in the first and second  stages is relevant   and vital for development of developing countries.

Revision questions

Section A questions

1 (a) What is meant by economic growth.

(b) Mention any three costs of economic growth.

2    State any four social indicators of economic under development   in your country.

3   (a)   State the big push theory of development

(b)   Give three conditions necessary tor the economy   to take off.

4   Mention four features of “take-off stage” of economic   growth

5   Mention four features of Rostov’s   drive to maturity stage of economic   development

6   Mention four ways in which economic growth and economic   development   may occur at the same time.

Section B questions

1  (a) Explain  the circumstances   under  which  economic   growth  may lead to economic   development

(b) Explain the factors necessary   for economic growth of your country.

2  a) Discuss  Rostov’s   stages  of economic   growth

1. b) With reasons, suggest the Rostovian stage at which Uganda’s   current level of development

3  a) What is meant  by “under  development”

1. b) Explain the features of under development in developing   countries
2. (a) Distinguish   between  a developing   country  and a least developed country.

(b)  Why is your country still considered   as an underdeveloped    economy?

5. (a) Discuss  the factors  that influence  the level  of economic  growth  in an economy,

(b)  Examine the consequences   of economic growth of your country.

6   (a)   Explain    the   circumstances     under    which    economic    growth   may   not   lead   to   economic development

(b)  Explain the factors that determine the rate of economic growth in your country

 

Dr. Bbosa Science +256 778 633682