Long Term, Economic Growth

7/31/2019 Long Term, Economic Growth

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Long Term, Economic

GrowthUnit 5


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Model of Economic Growth

The issue of economic growth has been a centralconcern for a couple of centuries.

In Unit 1 in our explanation in the differencesbetween economic growth and economicdevelopment, we saw that economic growth isan important aspect of economic development.

Growth is required to provide a rising standardof living for a growing population..


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Model of Economic Growth

Thomas Malthus was one of those theorists who made theconnection between population and growth. Your readings andcourse material provide his perspective on this.

In this presentation, we will focus on Rostow stages economicgrowth for any society. Rostow theory focuses on the five stagesof development that all society experiences.

In 1960, the American Economic Historian, W. Rostowsuggested that countries passed through five stages of economicdevelopment


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Stages of Economic Growth

Stage 1 Traditional Society

The economy is dominated by subsistence activitywhere output is consumed by producers rather than

traded. Any trade is carried out by barter where goodsare exchanged directly for other goods.

Agriculture is the most important industry and

production is labor intensive using only limitedquantities of capital. Resource allocation is determined

very much by traditional methods of production.


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Stage 2 Transitional Stage (thepreconditions for takeoff)

Specialization generates surpluses for trading.There is an emergence of a transport

infrastructure to support trade. As incomes,savings and investment grow entrepreneursemerge.

External trade also occurs concentrating onprimary products


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Stage 3 Take Off

Industrialization increases, with workers switching from theagricultural sector to the manufacturing sector. Growth isconcentrated in a few regions of the country and in one or twomanufacturing industries. The level of investment reaches over10% of GNP.

The economic transitions are accompanied by the evolution ofnew political and social institutions that support theindustrialization.

The growth is self-sustaining as investment leads to increasingincomes in turn generating more savings to finance furtherinvestment.


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Stage 4 Drive to Maturity

The economy is diversifying into new areas.Technological innovation is providing a diverserange of investment opportunities. The

economy is producing a wide range of goodsand services and there is less reliance onimports.


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Stage 5 High Mass Consumption

The economy is geared towards mass consumption.The consumer durable industries flourish. The servicesector becomes increasingly dominant.

According to Rostow development requires substantialinvestment in capital. For the economies of LDCs togrow the right conditions for such investment would

have to be created. If aid is given or foreign directinvestment occurs at stage 3 the economy needs tohave reached stage 2. If the stage 2 has been reachedthen injections of investment may lead to rapid growth.


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Stage 5 High Mass Consumption

It is possible to identify all societies, in theireconomic dimensions, as lying within one of fivecategories: the traditional society, the

preconditions for take-off, the take-off, thedrive to maturity, and the age of high mass-consumption


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THE TRADITIONAL SOCIETY

Characteristics of the Traditional Society

Generally speaking, these societies, because of the limitation on productivity,had to devote a very high proportion of their resources to agriculture; andflowing from the agricultural system there was a hierarchical social structure,with relatively narrow scope--but some scope--for vertical mobility.

Family and clan connections played a large role in social organization. Thevalue system of these societies was generally geared to what might be called along-run fatalism; that is, the assumption that the range of possibilities opento one's grandchildren would be just about what it had been for onesgrandparents.

But this long-run fatalism by no means excluded the short-run option that,within a considerable range, it was possible and legitimate for the individual tostrive to improve his lot, within his lifetime..


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The Traditional Society

Although central political rule--in one form or another--often existed in traditional societies, transcending therelatively self-sufficient regions, the centre of gravity ofpolitical power generally lay in the regions, in the handsof those who owned or controlled the land.

The landowner maintained fluctuating but usually

profound influence over such central political power asexisted, backed by its entourage of civil servants andsoldiers, imbued with attitudes and controlled byinterests transcending the regions.


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THE PRECONDITIONS FOR

TAKE-OFF

The second stage of growth embraces societiesin the process of transition; that is, the periodwhen the preconditions for take-off are

developed; for it takes time to transform atraditional society in the ways necessary for it toexploit the fruits of modern science, to fend off

diminishing returns.


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TAKE-OFF The preconditions for take-off were initially developed, in a

clearly marked way, in Western Europe of the late seventeenthand early eighteenth centuries as the insights of modern sciencebegan to be translated into new production functions in bothagriculture and industry, in a setting given dynamism by the

lateral expansion of world markets and the internationalcompetition for them.

But all that lies behind the break-up of the Middle Ages isrelevant to the creation of the preconditions for take-off in

Western Europe. Among the Western European states, Britain,favored by geography, natural resources, trading possibilities,social and political structure, was the first to develop fully thepreconditions for take-off.


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TAKE-OFF

Although the period of transition--between thetraditional society and the take-off--saw major changesin both the economy itself and in the balance of social

values, a decisive feature was often political.

Politically, the building of an effective centralizednational state--on the basis of coalitions touched with a

new nationalism, in opposition to the traditional landedregional interests, the colonial power, or both, was adecisive aspect of the preconditions period; and it was,almost universally, a necessary condition for take-off.


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THE TAKE-OFF

The take-off is the interval when the old blocksand resistances to steady growth are finallyovercome. The forces making for economic

progress, which yielded limited bursts andenclaves of modern activity, expand and cometo dominate the society.

Growth becomes its normal condition.


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THE TAKE-OFF

During the take-off new industries expand rapidly, yieldingprofits a large proportion of which are reinvested in new plant;and these new industries, in turn, stimulate, through their rapidlyexpanding requirement for factory workers, the services to

support them, and for other manufactured goods, a furtherexpansion in urban areas and in other modern industrial plants.

The whole process of expansion in the modern sector yields anincrease of income in the hands of those who not only save at

high rates but place their savings at the disposal of those engagedin modern sector activities.


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THE TAKE-OFF

The new class of entrepreneurs expands; and it directsthe enlarging flows of investment in the private sector.

The economy exploits hitherto unused naturalresources and methods of production.

New techniques spread in agriculture as well asindustry, as agriculture is commercialized, and

increasing numbers of farmers are prepared to acceptthe new methods and the deep changes they bring toways of life.


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THE TAKE-OFF

The revolutionary changes in agriculturalproductivity are an essential condition forsuccessful take-off; for modernization of a

society increases radically its bill for agriculturalproducts. In a decade or two both the basicstructure of the economy and the social and

political structure of the society are transformedin such a way that a steady rate of growth canbe, thereafter, regularly sustained.


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THE DRIVE TO MATURITY

Formally, we can define maturity as the stage in whichan economy demonstrates the capacity to move beyondthe original industries which powered its take-off and toabsorb and to apply efficiently over a very wide rangeof its resources--if not the whole range--the mostadvanced fruits of (then) modern technology.

This is the stage in which an economy demonstratesthat it has the technological and entrepreneurial skills toproduce not everything, but anything that it chooses toproduce.


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THE DRIVE TO MATURITY

It may lack (like contemporary Sweden andSwitzerland, for example) the raw materials orother supply conditions required to produce a

given type of output economically; but itsdependence is a matter of economic choice orpolitical priority rather than a technological or

institutional necessity.


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THE AGE OF HIGH MASS-

CONSUMPTION

As societies achieved maturity in the twentieth centurytwo things happened: real income per head rose to apoint where a large number of persons gained a

command over consumption which transcended basicfood, shelter, and clothing; and the structure of the

working force changed in ways which increased notonly the proportion of urban to total population, but

also the proportion of the population working inoffices or in skilled factory jobs-aware of and anxiousto acquire the consumption fruits of a mature economy.


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CONSUMPTION

In addition to these economic changes, the society ceased toaccept the further extension of modern technology as anoverriding objective. It is in this post-maturity stage, for example,that, through the political process, Western societies have chosen

to allocate increased resources to social welfare and security.

The emergence of the welfare state is one manifestation of asociety's moving beyond technical maturity; but it is also at thisstage that resources tend increasingly to be directed to the

production of consumers' durables and to the diffusion ofservices on a mass basis, if consumers' sovereignty reigns.


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CONSUMPTION

The sewing-machine, the bicycle, and then thevarious electric-powered household gadgetswere gradually diffused. Historically, however,

the decisive element has been the cheap massautomobile with its quite revolutionary effects--social as well as economic--on the life and

expectations of society.


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Limitations

Many development economists argue that Rostows'smodel was developed with Western cultures in mindand not applicable to LDCs.

In addition its generalized nature makes it somewhatlimited.

It does not set down the detailed nature of the pre-conditions for growth. In reality policy makers areunable to clearly identify stages as they merge together.


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Limitations

Thus as a predictive model it is not very helpful.Perhaps its main use is to highlight the need forinvestment.

Like many of the other models of economicdevelopments it is essentially a growth model

and does not address the issue of developmentin the wider context.


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END

Reference:www.bized.co.uk/virtual/dc/copper/theory

Long Term, Economic Growth

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