Group 5
Members: Zeeshan Karim, Rifat Jahan, Shabir Karim, Zehrish Iqbal, Muhammad
Irshad.
Linear stages of development
The study of early economic development theory, as highlighted by Seligson and
Passe-Smith (2003), was initially rooted in conventional economic theory that
equated development with growth and industrialization. This period saw Latin
American, Asian, and African countries being viewed as underdeveloped
compared to European nations, with the belief that they would eventually
progress to the standards of Europe and North America. The stages theory,
popularized by Gerschenkron and Rostow, suggested that all countries went
through similar stages of economic development, with underdeveloped nations
considered to be at an earlier stage in this linear progression compared to
developed nations. The Harrod-Domar growth model, developed by Evsy Domar
and Roy Harrod is another growth model which emphasizes the importance of
saving and capital efficiency in driving economic growth.
Developed nations, according to the stages theory, lacked the tools to analyze
economic growth in agrarian societies with limited modern economic structures.
It was believed that the right combination of saving, investment, and foreign aid
could propel Third World nations along a path followed historically by more
developed countries. Economic development was closely linked to rapid overall
economic growth during this period.
Rostow’s stages of Growth model
Rostow's stages of growth model, a significant historical model of economic
growth introduced by W.W. Rostow, proposed a linear progression through
stages of development. It outlined conditions relating to investment,
consumption, and social trends at each stage, with countries moving through
traditional society, preconditions for take-off, take-off, drive to maturity, and age
of high mass consumption. These stages were viewed not just descriptively but as
representing an underlying logic and continuity in the development process.
1) Traditional Society
In traditional societies, production was limited to the amount necessary for
survival, leading to a simple economy. Most goods produced were consumed
locally rather than traded. The barter system, where goods were exchanged
without money, was prevalent. These societies were primarily agriculture-
focused, with farming as the main industry. They relied on long-standing
traditional tools and methods for agricultural activities, and the rate of
investment was only up to 5%.
2) Preconditions for Take-off
This phase marks the transition from traditional ways to readiness for modern
economic growth. Societies invest in education to support modern economic
activities and in transport, communication, and raw materials. Trade expands
both domestically and internationally, although the economy still relies on
traditional, low-productivity methods. Specialization in specific jobs begins,
leading to surplus goods available for trade. The rate of investment increases to
between 5% and 10%.
3) Take-off
This stage brings revolutionary changes in both agriculture and industry.
Productivity levels rise sharply due to innovations and technological
advancements. Urbanization and industrialization accelerate, and the economy
becomes self-sufficient. New industries are established, and capital becomes
available from various sources. The rate of investment exceeds 10%.
4) Drive to Maturity
In the Drive to Maturity phase, the economy becomes self-sustaining. There are
diverse and multiple industries utilizing advanced technology and production
tools. The domestic economy becomes an indispensable part of the global
economy. Production increases to meet greater demand from a growing
population. The investment rate lies between 10% and 20%. There are more
export earnings, better employment opportunities, higher per capita income, and
a significantly improved standard of living.
5) Age of High Mass Consumption
In this stage of the linear stages of growth model, per capita income is high, and
the consumption of luxury goods increases. There is more military spending. With
increased production, employment issues nearly disappear, and people enjoy
more leisure time. The investment rate grows to more than 20%.
2) Harrod-Domar Model
The Harrod-Domar growth model, developed by Evsy Domar and Roy Harrod,
emphasizes the importance of saving and capital efficiency in driving economic
growth. It aims to determine the necessary investment rate for achieving a target
growth rate. The model states that economies need to save a portion of their
national income to replace old capital goods and grow through net additions to
the capital stock. It suggests that the rate of economic growth is influenced by the
national savings ratio and the national capital output ratio.
Some key assumptions of the model include steady growth in the labor market,
fixed ratios of savings and investments to total output, and fixed ratios of labor
and capital usage. The model highlights a direct relationship between the size of
the capital stock and total GDP, with economic growth determined by the
investment-output ratio and output-capital ratio.
