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Country-level Strategy: Is there a route for the development of countries?

Biologists, business managers, and economic theorists use models with many phases to improve the understanding of the evolutionary process in diverse areas, such as the development of new products or the growth of a colony of bacteria. Therefore, the lifecycle of a product, the technology adoption curve, the phases of a person´s life, and the management of complex projects share a common phased structure with different steps, each with their own characteristics.

Walt Rostow, when studied the economic development of countries, suggested that societies tended to follow a strategy with five stages to reach a high degree of economic development. Each of Rostow’s five phases builds on the previous one. A brief explanation of Rostow´s model of economic development will be presented below.

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  1. Traditional Society

In this stage, the countries have an agricultural economy characterized by a subsistence farming, with intensive labor and a population that does not have a scientific perspective on the world and technology. In this phase, very little of the agricultural output is left to be sold, either in domestic or overseas markets. Additionally, this stage is characterized by the non-realization of potential resources with little or no use of technology or innovation. This resulted from the fact that potentialities, which flow from modern science and technology, were neither available nor regularly and systematically applied. Many sub-Saharan countries, and several of the tiny island countries in the Pacific Ocean, for instance, are still in the Traditional Society phase.

  1. The Preconditions for Take-Off

This stage involves the establishment of the financing capabilities, institutional framework and physical infrastructure that will be necessary to develop manufacturing and a gradual expansion of trade. In addition, it starts to happen with the introduction of modern methods of production. Consequently, agriculture becomes more mechanized and more output is traded. Some external funding is required to support the early stages of growth widening the scope of commerce internally and externally. However, in this phase, traditional low-productivity and a more national/international trade, as opposed to a comprehensive and regional outlook of commerce, still mainly characterize societies. 

  1. The Take-Off Stage

In the take-off stage, the manufacturing industry assumes greater importance to the country, although there are still few industries. Political and social institutions become more sophisticated and agriculture assumes lesser importance in relative terms, although most people may remain employed in the farming sector. A dual economy surges because productivity and wealth in manufacturing and other industries rise while productivity and real income in agriculture remain low. In contrast to two previous phases, this stage is self-sustaining due to the establishment of major manufacturing industries and the transformation of political and social institutions. Most of the third world countries are in the third stage. In summary, this stage presents a short period of intensive growth based on an industrialization process in its early stages. 

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  1. The drive for maturity

In this stage, an economy demonstrates the capacity to move beyond the original industries. Industry becomes more diverse. Growth should spread to different parts of the country as the state of technology improves – the economy moves from being dependent on factor inputs for growth towards making better use of innovation bringing increases in real per capita incomes

The drive to maturity is also characterized by a steady consolidation of the newly industrialized society, a continuous growth of investment, large urban regional metropolitan development, and improvement of country´s infrastructure. 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.

  1. The age of high mass consumption

The last stage is characterized by mass production and mass consumption because real income per capita rose to a point where a consumer market demands items in addition to basic items such as food, shelter, and clothing. This phase presents the growth of service-based professionals (engineers, consultants, architects, lawyers, doctors), the existence of a welfare state, such as retirement and unemployment benefits, and the population is concentrated in urban centers. There is a shift towards tertiary sector activity and the growth is sustained by the expansion of a middle class of consumers. According to Rostow’s model, developed nations like Britain, USA, Germany, Japan, and Canada are in the fifth stage.

Where do Brazil and the rest of Latin America fit in the Rostow´s Stages of Economic Growth?

Brazil and Mexico provide examples of Rostow´s economic development theory. Brazilian late industrialization started after the World War II, allowed the country to reach the Take-Off stage (with urbanization, and the creation of secondary sector) and start the Drive to Maturity phase. Mexican industrialization, driven by the participation of Mexican firms in the Global Value Chains (GVC) of US manufacturing firms, also provides support to Rostow´s framework. However, neither countries totally reached the Age of Mass Consumption status, given that the average disposable income is quite low in Brazil. There are also many economic discrepancies within the country, a fact also shared by Mexico. Therefore, although the model presents five stages with boundaries between them, Brazil and Mexico provide examples of developing countries with characteristics in more than one stage simultaneously.

Chile and Uruguay present interesting cases because the countries clearly present some elements of the fifth era, the Age of Mass consumption, without a diversified industrial base, a characteristic of the fourth phase. In addition, both countries have small GDP and population, which can partially explain a leapfrog of the Drive for Maturity phase. Therefore, as any theoretical model, Rostow´s framework needs some improvements, which will be presented in the last topic of this article.

Argentina provides a rare case of a society that retrogressed in their development cycle. A very wealthy nation in the first three decades of the last century, the “Argentine Paradox” happened and a country that had achieved advanced development at the beginning of the 20th Century experienced a severe economic decline. For instance, by 1913, Argentina was the world’s 10th wealthiest nation per capita (as for today´s Australia), but due to political instability, the country faced a long, and slow severe economic regression. In fact, Argentina is a rare example of a nation that impoverished without the occurrence of an internal civil war. Consequently, Argentina solidly reached the Age of Mass consumption phase but retrogressed to the Take-Off stage. Unfortunately, that former rich southern country shows that economic improvement does not always happen. If things go wrong and bad decisions are taken economic contractions become natural. Finally, Venezuela, another Latin country, provides an even more extreme situation of impoverishment, in this case, due to political bias and a continuing ideological fight.

Criticism of the model

Although Rostow’s Stages of Growth model is one of the most influential development theories of the twentieth century, the framework receives some criticism. First, the model was developed based on western capitalist countries, which were industrialized and urbanized. Therefore, the model fails to explain the economic development of new-western countries, such as China. Second, Rostow´s paradigm does not discuss why certain countries seem to be stuck in certain phases. For instance, countries in Southeast Asia, Africa, and Latin America have received significant external finance but have been slow to generate growth as many have remained stuck in Stages 1 or 2.  Third, the model seems to induce a sort of linearity and does not explain why some countries reversed their economic growth. Venezuela, Zimbabwe, and Argentina, to some extent, are societies that impoverished in the last decades. Fourth, because the model was developed in the 1960s, it does not take into consideration the economic drivers that occurred in the late 1990s (information technology, communications, internet), the 2000s (digitization and creative industries) and the 2010s (Industry 4.0, Artificial Intelligence). Fifth, the model seems to be excessively pre-deterministic and shows no possibility of leapfrogging; according to Rostow, the economic development must follow an established path, without an alternative route of growth. Sixth, Rostow assumes that all countries have an equal chance to develop, regardless of population size, natural resources, or location. Finally, the stages or transition periods happen at varying lengths from country to country and even from region to region, an issue not covered by the economic model.    

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Conclusion

Rostow´s stages of economic development are a very useful paradigm to understand the development of countries because the model replicates the mechanism of economic growth experienced in the wealthier societies of the world. However, the model fails to consider modern drivers of growth, such as the adoption of new technologies and focuses almost only on western societies. The model succeeds in many aspects, such as the introduction of the idea that economic development follows a certain hierarchy and is subject to a specific order. The framework asserts that all countries exist somewhere on a linear spectrum and climb upward through each stage of the development process.  In addition, the model correctly expresses that the preconditions of development include industrialization, urbanization, and trade. The model also attracts the interest of strategist and policymakers because it is still seen as a roadmap for a country’s development. Despite the many critiques of Rostow’s model, it is still widely used by strategists to support the development of their public policies.

Opinions

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    In spite of Rostow’s theory, it was quite useful to take cognizance of Professor Evodio’s critical thinking about the development of Latin American countries. Very good!

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