Economic Enviroment of USA and China

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Identify economic environment of USA and China, and compare and contrast it using Rostow and Galbraith

Rostow’s Stages of Development
Walt Whitman Rostow (1916- 2003)

In 1960, the American Economic Historian, W. W. Rostow, suggested that countries passed through five stages of economic development.

Stage 1 — Traditional Society
The economy is dominated by subsistence activity where output is consumed by producers rather than traded. Any trade is carried out by barter where goods are exchanged directly for other goods. Agriculture is the most important industry and production is labor intensive using only limited quantities of capital. Resource allocation is determined very much by traditional methods of production.

Stage 2 — Transitional Stage (the preconditions for takeoff)
Increased specialization generates surpluses for trading. There is an emergence of a transport infrastructure to support trade. As incomes, savings and investment grow entrepreneurs emerge. External trade also occurs concentrating on primary products.

Stage 3 — Take Off
Industrialization increases, with workers switching from the agricultural sector to the manufacturing sector. Growth is concentrated in a few regions of the country and in one or two manufacturing industries. The level of investment reaches over 10% of GNP.

The economic transitions are accompanied by the evolution of new political and social institutions that support the industrialization. The growth is self-sustaining as investment leads to increasing incomes in turn generating more savings to finance further investment.

Stage 4 — Drive to Maturity
The economy is diversifying into new areas. Technological innovation is providing a diverse range of investment opportunities. The economy is producing a wide range of goods and services and there is less reliance on imports.

Stage 5 — High Mass Consumption
The economy is geared towards mass consumption. The consumer durable industries flourish. The service sector becomes increasingly dominant.

According to Rostow, development requires substantial investment in capital. For the economies of LDCs to grow, the right conditions for such investment would have to be created. If aid is given or foreign direct investment occurs at stage 3 the economy needs to have reached stage 2. If the stage 2 has been reached then injections of investment may lead to rapid growth.

Many development economists argue that Rostows’s model was developed with Western cultures in mind and not applicable to LDCs. It addition its generalized nature makes it somewhat limited. It does not set down the detailed nature of the pre-conditions for growth. In reality, policy makers are unable to clearly identify stages as they merge together. Thus as a predictive model it is not very helpful. Perhaps its main use is to highlight the need for investment. Like many of the other models of economic developments it is essentially a growth model and does not address the issue of development in the wider context.

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Last updated on April 22, 2004
© Kaya V. P. Ford, 2004