Walt Rostow's Five Stages of Economic Growth PDF

Walt Rostow: The Five Stages of Economic Growth The model asserted that all countries exist somewhere on this linear spectrum, and climb upward through each stage in the development process: 1. Traditional Society 2. Preconditions for change 3. Take-Off 4. Drive to Maturity 5. Ma...

Walt Rostow: The Five Stages of Economic Growth The model asserted that all countries exist somewhere on this linear spectrum, and climb upward through each stage in the development process: 1. Traditional Society 2. Preconditions for change 3. Take-Off 4. Drive to Maturity 5. Mass consumption Traditional Society Traditional Society: This stage is characterized by a subsistent, agricultural based economy, with intense labor and low levels of trading, and a population that does not have a scientific perspective on the world and technology. Economy is largely based on subsistence agriculture with limited technology. Society is static, with little social mobility and economic innovation. There is a heavy reliance on labor-intensive farming, and much of the population is involved in agriculture. Example: European countries before industrial revolution Preconditions for change A society begins to develop manufacturing, and a more national/international, as opposed to regional, outlook. External influences or internal factors spark the desire for economic process. New investments in infrastructure (e.g. roads, railways) and technological improvements begin to appear. Institutions such as banking, education, and governance improve. Emerging leadership promotes industrial development, often through centralized government action or foreign investment. Example: In countries like 19th-century Britain or early 20th-century Japan, this stage involved industrialization and the development of key industries. Take off Rostow describes this stage as a short period of intensive growth, in which industrialization begins to occur, and workers and institutions become concentrated around a new industry. Rapid industrialization begins, and the economy starts growing at a sustained rate. Key sectors like manufacturing grow quickly, and investment levels rise sharply.  Agricultural productivity increases due to the introduction of better technologies, freeing up labor for industrial sectors. Society begins to urbanize, and infrastructure development accelerates. Example: Post-WWII Japan and South Korea in the 1960s saw this type of rapid industrialization. Drive to Maturity This stage takes place over a long period of time, as standards of living rise, use of technology increases, and the national economy grows and diversifies. The economy diversifies as industries expand and modernize. Technology becomes widespread across sectors, increasing productivity in both agriculture and industry. The country starts producing more complex goods, such as high-tech products or advanced machinery. The infrastructure is well-developed, and exports grow in complexity and volume. Example: The United States in the late 19th and early 20th centuries, and more recently, China after the 1990s. Age of High Mass Consumption A country’s economy flourishes in a capitalist system, characterized by mass production and consumerism. The economy shafts from production-based growth to one driven by consumption. A large portion of the population enjoys higher living standards, with widespread access to goods and services. The service sector becomes dominant, and the focus shifts to consumer goods, welfare, and social services. More resources are allocated to education, healthcare, and welfare programs. Example: U.S. Nowadays. Goal of the Model The goal is industrialized, capitalist liberal democracy: the U.S. is the model. Modernization theory is basically a diffusionist theory: the premise is that development in the U.S. and Europe can be copied elsewhere. Kuznets Curve It is a hypothetical inverted U-Shaped curve that illustrates that with increasing GDP per capita (economic growth), countries initially experience increasing income inequality, but later on, the income inequality decreases. Early Stage (Pre-Industrial or Traditional Society): Inequality is relatively low because most of the population is engaged in subsistence agriculture, earning similar, low incomes. Middle Stage (Industrialization and Take-off): Urban industrial sector grows faster than the rural agricultural sector. Workers in cities earn higher wages than rural workers. Wealth starts to concentrate among those who own capital (factories, machinery) and land. Later Stage (Drive to Maturity and High Mass Consumption): As development continues, inequality begins to decrease.  This is because the benefits of economic growth become more widespread, reaching lower-income groups through education, social welfare programs, and improved productivity in both industry and agriculture. Eventually, the country achieves a more equal income distribution, with a growing middle class and greater access to goods and services. Westernization Non-Western countries develop and adopt economic, political, and cultural practices similar to those of Western nations, they may also experience changes in inequality patterns. Market capitalism Democratic systems and legal frameworks Social values: Increased emphasis on individualism, human rights, and equality. Capitalism and Inequality Capitalism builds on historically-inherited inequalities of class, ethnicity, and gender. Partly through the operation of markets, it can also enhance positive feedbacks that further magnify these differences. Because waged employees are not slaves, they cannot use their lifetime capacity for work as collateral to obtain money loans. By contrast, capitalists may use their property to make profits, and as collateral to borrow money, invest, and still make more money. Another source of inequality results from the inseparability of the worker from the work itself. By contrast, the owners of other factors of production are free to trade and seek other opportunities while their property makes money or yields other rewards. Westernization-market capitalism Increases productivity, attracts foreign investment, and fosters entrepreneurship Job creation Encourages competition, leading to better goods and services at lower prices Reduction in Government Inefficiency: Reduced bureaucracy and corruption in state-owned enterprises lead to better resource allocation. Income Inequality Market Failures: Public goods (e.g., education, healthcare) may be underprovided. Economic instability Profit-driven exploitation of natural resources Poor governance may lead to corruption and failure to manage the negative effects. Capitalism and Development To make sure that capitalism spurs economic growth, what rules do we have to set up? Rule of Law The Rule of Law refers to the principle that all individuals and institutions are subject to and accountable under the law. It ensures that no one, regardless of status or wealth, is above the law. Equal Application of the Law: Laws apply to everyone equally. Legal Certainty: Laws will be enforced in a consistent and predictable manner. Accountability: Governments and institutions are held accountable through legal processes, preventing abuses of power or corruption. Protection of Rights: The rule of law protects fundamental rights and freedoms, ensuring that individuals can seek justice if their rights are violated Property Rights Property rights refer to the legal right to own, use , transfer, or dispose of property. These rights allow individuals and businesses to control and benefit from their land, goods, capital, intellectual property, or other assets. Ownership: The right to own and control property Transferability: the right to sell, lease, or transfer property to others. Exclusivity: the right to exclude others from using or benefiting from their property. Individual Property vs. State Authority Tax Policy: Is a tax policy infringements on people's property rights? Capitalism, Inequality, and Democracy What other institution features do we want to have to ensure rule of law and property rights are properly defined and implemented? Judicial Independence ○ Fairness Transparent and Accountable Government Institutions: Democracy ○ Reliable Enforcement Why is democracy better? Inclusive Institutions ○ Labor Rights and Collective bargaining ○ Progressive policies Transparency and Accountability  ○ Fair Election Political Stability and Freedom Corruption The quality of the institution matters: corruption level Corruption: Government officials use their authority for private gain in designing and implementing public policies. Corruption distorts the government's role in resource allocation. Corruption the Tax System Biased tax systems: Tax Evasion: illegal non-payment or underpayment of taxes, usually by deliberately making a false declaration or no declaration by tax authorities. Regressive Tax Policies: A tax that takes a larger percentage of income from low-income groups than from low-income groups than from high-income groups. Flat tax is a common form of regressive tax. Policy Bias: Reducing taxes on capital gains, corporate income, and high earners, while increasing indirect taxes that disproportionately affect the poor. Corruption and Education System Diverting Public Funds in Education Support ○ Embezzlement of Funds ○ Ghost Teachers Unequal Access to Higher Education ○ Unfair admission ○ Private School Influence Low-Quality Education for the Poor ○ Underqualified teachers Corruption and other Social Welfare Programs Diversion of Funds Bribery the Access Poor Quality of Services Reduced trust in Public Institutions Why Corruption is so Persistent Weak Institution Lack of Political Will  Sophisticated Corruption Networks Inadequate Whistleblower Protections Low Civic Engagement: collective action problem Modernization Theory v.s. Dependency Theory Modernization Theory: Underdevelopment is a stage of the modernization Emphasizes internal social, cultural, and economic transformations: industrialization, urbanization, education, institution Dependency theory: Underdevelopment in poorer nations in the result of an unequal global economic system that benefits wealthy countries at the expense of poorer ones. Core and periphery countries Unequal exchanges Dependency theory The core nations produce high-value goods and advanced technologies. The periphery nations (e.g., countries in Latin America, Africa, Asia) are exploited for their raw materials, cheap labor, and agricultural products. They export low-value, primary goods and import high-value finished products from the core. The “Development of Underdevelopment” The wealth and industrialization of rich nations are built on the exploitation and impoverishment of poor nations. Underdevelopment in the periphery is not a natural stage of development but a result of the exploitative relationship with the core. Foreign Direct Investment Foreign Direct Investment (FDI) is when a company or individual from one country invests in a business in another country with the intent of gaining a lasting interest and influence over the foreign business. FDI involves long-term investments and typically acquiring or establishing assets such as factories, real estate, or entire businesses. Multinational Corporations Multinational Corporations (MNC’s) are large companies that operate in multiple countries. Global operations  Centralized Management Economies of Scale FDI and Inequality: ambiguity Despite the theoretical ambiguity, there is some evidence that FDI inflows enhance inequality between skilled and unskilled workers, particularly in developing host countries. FDI has the potential to reduce global inequality by promoting economic development and job creation in poorer countries. However, it can also exacerbate global inequality if the benefits of FDI are unevenly distributed or if it leads to the exploitation of resources and labor in developing countries. Bilateral Investment Treaties Protect Foreign Investments Promote Economic Relationships Encourage FDI: Provide a stable predictable legal framework to encourage Foreign Direct Investment (FDI) between the parties. Natural Resource Curse/Trap Countries rich in natural resources such as oil, gas, or minerals, often experience stunted economic growth, high corruption, political instability, and weaker governance than countries with fewer natural resources. Volatility in commodity prices → volatility in government revenue Crowding out of other export sector: The Dutch Disease Autocratic Instruction Dutch Disease Netherlands in the 1960s: when large natural gas reserves were discovered, leading to an economic imbalance. Inflow of foreign currency→ Local currency to appreciate → more expensive for foreign buyer→ hurt traditional exporters Inflow of foreign currency→ Local currency to appreciate→ Local wage and price increase, shifting resources away from the export-oriented sectors. How to Address Economic Diversification Strong Institutions and Governance Sovereign Wealth Funds (The Dutch Natural Gas Fund): The Dutch government established a natural gas fund, where much of the income from gas exports was set aside. The fund was used for long-term investments and to ensure that future generations would benefit from the resource wealth. Controlled Government Spending Case: Lagged policy effect Late 1950s: Structural adjustment program in Nigeria (IMF, World Bank) Currency Devaluation Trade Liberalization Privatization of State-Owned Enterprises Encouragement of Non-Oil Exports “Output grew more rapidly than at any time during the oil boom. But these few percentage points of growth in non-oil output were completely swamped by the fall in the value of oil.” Oil and Autocracy Effective of Democracy → government need to be accountable (tax as a key) Mypoic voters →Democracy tend to invest less and/or invest in white elephant project (high cost, low return) “Resource-rich countries do not need to tax, they do not provoke citizens into supplying the public good of scrutiny over how their taxes are being spent.” “Electoral competition forces political parties to attract votes in the most cost-effective.” Landlocked Countries Landlocked developing countries (LLDC’s): Lacking access to the sea Challenges Increased transportation trade cost Delays in the movement of goods Susceptibility to political and economic instability in transit countries The transport costs for a landlocked country depended upon neighboring countries Public spend on transport infrastructure Cross-Border political relations Political Stability  Economic development: spillover effect Landlocked Countries and Their Neighbors Neighbors access to coastal port Neighbors as a country to piggy-pack on What happens to countries that are landlocked and surrounded by bad neighbors (neighbors with conflict, stuck in economic development) Educational Global Inequality Educational global inequality refers to the significant disparities in access to, quality of, and outcomes of education across different countries and regions. Measurements: Literacy Rate: Percentage of the population that can read and write. Enrollment Rate: Number of students enrolled in primary, secondary, or tertiary education. Average years of schooling: the average number of completed years of education Educational Inequality Geographic Location Urban vs. Rural Divide: ○ Rural areas often have fewer schools and long distances between students’ homes and educational institutions ○ Schools in urban areas typically have better infrastructure ○ Rural schools may struggle to attract and retain qualified teachers → Migration: Rural-Urban educational inequality can drive internal migration Developed vs. Developing Countries ○ Developed countries often have consistent and sufficient allocation of resources to education, which leads to better quality and facilities for learners. → Migration: Developed-Developing countries educational inequality can drive international migration→ Brian Drain Effect Education and Development Development and education is highly interdependent with each. Education is often considered both a driver and an outcome of development. Education can Provide  Skilled Workforce Entrepreneurship and Innovation Increased Earnings Informed Citizenry Economic Development can provide Increased Funding Better Facilities Efficient Administration Teacher Training Programs Inclusive Policy Socioeconomic Status and Health Socioeconomic Status (SES): an individual’s relative position within a society. Often use the following index to construct Eduction Income Occupational Social Class Financial Wealth Mortality risk increases as SES decreases The influence of SES is cumulative over an individuals’ life Life Expectancy Life expectancy has increased across the world There are wide differences in life expectancy around the world Women tend to live longer than men, but this gap has changed overtime Child Mortality Child mortality is one of the world's largest problems. Many of these deaths are preventable. Most are caused by malnutrition, birth conditions such as preterm birth, sepsis, and trauma. Substantial declines in child mortality have occurred across most regions. This dramatic decline has resulted from better nutrition, clean water, sanitation, neonatal healthcare, vaccinations, medicines. Major Breakthrough on Health Sector Vaccine: Smallpox, Polio Antibiotics: Penicillin, Broad-Spectrum Antibiotics  Prenatal Screening and Care Clean Water and Sanitation Innovations in Surgery and Medical Technology Inequality in Healthcare Big pharmaceutical companies contribute a lot to increase the health condition. But they also create significant health inequalities through the way they conduct business, prioritize markets, and price drugs. High costs of Medication→ consumption barrier, by SES groups Supply Chain Limitations →supply barrier, by region Patent Exclusivity → consumption barrier, by region Research and Development (R&D) Priorities: profitable market → lagged treatment/mistargeting. Foreign Aid Foreign Aid refers to the international transfer of capital, goods, or services in the form of grants or loans from a donor country to a recipient country with the aim of benefiting the latter’s development and welfare. Bilateral Aid: Direct assistance from one country to another Multilateral Aid: Aid channeled through international organizations Top Donors Countries United States, Germany, United Kingdom, Japan, France International Organizations The World Bank International Monetary Fund (IMF) United Nations Children’s Fund (UNICEF) United Nations Development Programme (UNDP) Foreign Aid Types Humanitarian Aid: Emergency assistance after natural disasters or conflicts. Developmental Aid: Long-term aid focused on infrastructure, health, education, and governance improvements. Military Aid: Assistance for security or defense-related purposes. Purposes Economic Development: To stimulate economic growth and improve infrastructure.  Social Development: To improve health, education, and social welfare. Humanitarian Reasons: Addressing crises and providing relief during disasters. Political and Strategic Objectives: To foster alliances and political stability. Foreign Aid Format Grants: Financial assistance that does not require repayment, aimed at projects like health initiatives, education, and infrastructure. Loans: Funding that must be repaid, sometimes with interest. While loans can support development projects, they can lead to debt not managed carefully. Debt Relief: Debt forgiveness programs help highly indebted countries by reducing their debt burdens, allowing them to reallocate funds to development Technical Assistance: Assistance in the form of knowledge, skills, and expertise, often in fields like agriculture, public health, and governance. Foreign Aid and Economic Growth Aid Effectiveness: Challenges and Criticisms Aid Dependency: Persistent aid might lead to dependency and limit self-sustainability Misallocation and Misuse: Often, aid doesn’t reach the intended beneficiaries due to corruption or mismanagement. Debt Burden: Loans, if not managed or utilized effectively, might create significant debt burdens for the recipient country. Foreign Aid Conditionality What potential conditions could exist in foreign aid distribution? - Donors are countries - Donors are international organizations Economic Condition These conditions require countries to implement specific economic reforms (IMF, WB) Structural Adjustment Programs (SAPs): a set of economic reforms that a country must adhere to in order to secure a loan from the International Monetary Fund or the World Bank. Trade Liberalization Structural Adjustment Programs (SAPs) The economic conditions imposed by SAPs are aimed to make the recipient country competitive and to reduce economic dependence:  Cutting public spending Privatizing Industry Easing regulations in order to attract investment Closing tax loopholes and improving tax collection Criticism Austerity policies on already- poor nations: cut funding for education Prioritizing export-led growth: encourage the exploitation of natural resources → exploitative investment Privatization: reduction in public sector jobs and increase costs for essential services → Job loss, wage reduction, increase price, social movement Case In the 1980s and 1990s, Zambia faced a severe economic crisis and sought assistance from the IMF and the World Bank. The SAPs implemented in Zambia included measures like currency devaluation, trade liberalization, reduction of subsidies, and privatization of state-owned enterprises. Outcome: increase poverty, unemployment, loss of government revenue, environmental degradation. Political Condition This type of conditionality aims to influence governance practices. Transparency Democracy → democratization Anti-corruption measures Other political behavior: geopolitical and strategic interests Positive Relationship (deprivation theory) Inequality creates grievances among disadvantaged groups, who may perceive the distribution of wealth and power as unjust. These grievances can lead to protests, strikes, and even violent rebellion. Negative Relationship (power structure theory) In highly unequal societies, elites may use their wealth and power to suppress dissent through patronage, coercion, or authoritarian control. Marginalized groups may lack the resources, organizational capacity, or political power to mobilize against elites. Concave Relationship - At low levels of inequality, there is less grievance, as most individuals feed they are treated fairly. - At moderate levels of inequality, economic disparities become more visible, creating significant grievances among disadvantaged groups.  - At high levels of inequality, the power of elites becomes entrenched, and the disadvantaged lack the resources or opportunities to effectively challenge the system, leading to reduced conflict. Convex Relationship - At low levels of inequality, conflict arises because elites feel their privileges are threatened. - At moderate levels of inequality, society may achieve a balance where grievances are addressed, and elites are not threatened. - At high levels of inequality, conflict increases again as grievances among the disadvantaged grow. Collier’s Conflict Trap Theory Civil war begets more civil war The long-term risk of conflict in a country or region increases considerably after the first conflict onset. It is estimated that the probability of re-incidence of civil war within 12 years is approximately 40%. Outcome 1: Economic Costs of Conflict “Civil war is development in reverse” A doubling of per capita income in the poorest countries would on average reduce the probability of conflict by around 30% Alternatively, a single year of average civil war will reduce a country's economic growth by around 2 percentage points - James Fearon and David Laitin Economic Cost of Conflict Economically: Destruction of Infrastructure Loss of Lives and Injuries Refugee Migration Spread of Infectious Diseases Collapse of Domestic Markets Outcome 2: Creation of Conflict Capital The Greed Model of Conflict: Rebel groups or elites may engage in conflict as a means of self-enrichment, particularly in resource-rich countries.  Access to lootable resources like diamonds, oil, or timber field insurgencies, as these provide financial incentives to sustain rebellions. Blood Diamonds Blood Diamonds (conflict diamonds) are diamonds mined in war zones and sold to finance armed conflicts, particularly civil wars in Africa. Countries most affected: Sierra Leone, Angola, Democratic Republic of Congo Used to fund rebel movements and purchase weapons Peak period of blood diamond trade: 1991-2002 Approximately 4% of global diamond production historically linked to conflicts Outcome 3: Institution Erosion Politically Erosion of Governance Centralized Power: military leaders Shift to Military Spending Dependence on Foreign Aid Conflict Trap: Feature Poverty as a Driver: Poverty lowers the opportunity cost of rebellion Economic Devastation: Conflict leads to a loss of GDP, infrastructure destruction, making recovery difficult Natural Resource Dependency: Countries dependent on natural resources are at higher risk of conflict, as resource wealth is often a target for rebels and a source of corruption. Spillover Effect of Conflict Neighborhood Bearing Costs: Spillover Effects Conflicts can disrupt trade routes, deter investment Refugees seeing safety in neighboring countries Conflicts can spill over borders