Rostow identified five stages of economic growth.
Stage 1 Traditional Society - The economy is dominated by subsistence activity. Output is consumed by producers; it is not traded. Trade is barter where goods are exchanged directly for other goods. Agriculture is the most important industry. Production is labour intensive using only limited quantities of capital. Technology is limited, and resource allocation is determined very much by traditional methods of production.
Stage 2 Transitional Stage (Preconditions for Takeoff)
Increased specialization generates surpluses for trading. There is an emergence of a transport infrastructure to support trade. Entrepreneurs emerge as incomes, savings and investment grow. External trade also occurs concentrating on primary products. A strong central government encourages private enterprise.
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 within one or two manufacturing industries. The level of investment reaches over 10% of GNP. People save money.
The economic transitions are accompanied by the evolution of new political and social institutions that support 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. Urbanization increases. Technology is used more widely.
Stage 5 High Mass Consumption
The economy is geared towards mass consumption, and the level of economic activity is very high. Technology is extensively used but its expansion slows. The service sector becomes increasingly dominant. Urbanization is complete. Now, multinationals emerge. Income for large numbers of persons transcends basic food, shelter and clothing. Increased interest in social welfare.
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