8.When and why there was developed the theory of Big push? What are its core and main variants?

The big push model is a concept in development economics or welfare economics that emphasizes that a firm's decision whether to industrialize or not depends on its expectation of what other firms will do. It assumes economies of scale andoligopolistic market structure and explains when industrialization would happen.

The originator of this theory was Paul Rosenstein-Rodan in 1943. Further contributions were made later on by Murphy, Shleifer and Robert W. Vishny in 1989. Analysis of this economic model ordinarily involves using game theory.

The theory of the model emphasizes that underdeveloped countries require large amounts of investments to embark on the path of economic development from their present state of backwardness. This theory proposes that a 'bit by bit' investment programme will not impact the process of growth as much as is required for developing countries. In fact, injections of small quantities of investments will merely lead to a wastage of resources. Paul Rosenstein-Rodan approvingly quotes a Massachusetts Institute of Technology study in this regard, "There is a minimum level of resources that must be devoted to... a development programme if it is to have any chance of success. Launching a country into self-sustaining growth is a little like getting an airplane off the ground. There is a critical ground speed which must be passed before the craft can become airborne...."^[1]

Rosenstein-Rodan argued that the entire industry which is intended to be created should be treated and planned as a massive entity (a firm or trust). He supports this argument by stating that the social marginal product of an investment is always different from its private marginal product, so when a group of industries are planned together according to their social marginal products, the rate of growth of the economy is greater than it would have otherwise been.^[2] The three indivisibilities[edit]

According to Rosenstein-Rodan, there exist three indivisibilities in underdeveloped countries. These indivisibilities are responsible for external economies and thus justify the need for a big push. The externalities are as follows-

1. Indivisibility in production function

2. Indivisibility of demand

3. Indivisibility in the supply of savings

Indivisibility in production function[edit]

Indivisibilities in the production function may be with respect to any of the following:

• Inputs

• Processes

• Outputs

These lead to increasing returns (i.e., economies of scale), and may require a high optimum size of a firm. This can be achieved even in developing countries since at least one optimum scale firm can be established in many industries. But investment in social overhead capital comprises investment in all basic industries (like power, transport or communications) which must necessarily come before directly productive investment activities. Investment in social overhead capital is 'lumpy' in nature. Such capital requirements cannot be imported from other nations. Therefore, heavy initial investment necessarily needs to be made in social overhead capital (this is approximated to be about 30 to 40 percent of the total investment undertaken by underdeveloped countries). Social overhead capital is further characterized by four indivisibilities:

1. Irreversibility in time: It must precede other directly productive investments

2. Minimum durability of equipment:. Any lesser level of durability is either impossible due to technical reasons or much less efficient

3. Long gestation periods: The investment in social overhead capital takes time to generate returns and its impact in the economy is not immediately or directly visible

4. Irreducible minimum social overhead capital–industry mix: Investment needs to be of a certain minimum magnitude and spread across a mix of industries, without which it will not significantly impact the process of growth.

Indivisibility (or complementarity) of demand[edit]

Developing countries are characterized by low per-capita income and purchasing power. Markets in these countries are therefore small. In a closed economy, modernization and increased efficiency in a single industry has no impact on the economy as a whole since the output of that industry will fail to find a market. A large number of industries need to be set up simultaneously so that people employed in one industry consume the output of other industries and thus create complementarydemand.

To illustrate this, Rosenstein Rodan gives the example of a shoe industry. If a country makes large investments in the shoe industry, all the disguisedly employed labor from the other industries find work and a source of income, leading to a rise in production of shoes and their own incomes. This increased income will not be expended only on buying shoes. It is conceivable that the increased incomes will lead to increased spending on other products too. However, there is no corresponding supply of these products to satisfy this increased demand for the other goods. Following the basic market forces of demand and supply, the prices of these commodities will rise. To avoid such a situation, investment must be spread out amongst different industries.

The situation may be different in an open economy as the output of the new industry may replace former imports or possibly find its market by way of exports. But even if the world market acts as a substitute for domestic demand, a big push is still needed (though its required size may now be reduced due to the presence of international trade).

Indivisibility in the supply of savings[edit]

High levels of investment require a corresponding high level of savings. We cannot always rely on foreign aid as the huge levels of investments in the different sectorsneed to be made not only once, but multiple number of times. Hence domestic savings are a must. But in an underdeveloped economy,this is a challenge due to the low income levels.Marginal rate of savings needs to be increased following the rise in incomes due to higher investment.

How the big push works[edit]

Fig.1

Consider a country whose economy is characterized by a large number sectorswhich are so small that any increase in the productivity of one sector has no impact on the economy as a whole. Each sector can either rely on traditional methods or switch to modern methods of production which would increase its efficiency. Let us assume that there are {\displaystyle l}  workers in the economy and {\displaystyle n}  sectors. Each sector therefore has {\displaystyle {l}/{n}}  workers.

Using traditional technology, a sector would produce {\displaystyle {l}/{n}}  amount of output, with each worker producing one unit of the commodity.

Using modern technology a sector would produce more as the productivity would be greater than one unit per worker. However, a modern sector would require some of the workers (say {\displaystyle h} ) to perform administrative tasks.

In figure 1, the x-axis represents the labor employed and the y-axis represents the level of production. The production in the traditional sector is given by the curve T and the production in the modern sector is given by M. The curve M has a positive intercept on the x-axis, implying that even with zero production, there is a minimum level of {\displaystyle h}  workers who still remain employed for carrying out administrative activities. With our assumption of {\displaystyle {l/n}}  workers in the economy, the modern sector will have a higher level of productivity than the traditional sector. The production function of the modern sector is steeper than that of the traditional sector because of the higher productivity of workers in the former. The slope of both production functions is {\displaystyle {1}/{m}} , where {\displaystyle m}  is the marginal labor required to produce an additional unit of output. This level of {\displaystyle m}  is lower for the modern sector than it is for the traditional sector.

Fig.1

Assume that the traditional sector pays workers one unit of output which is subsequently spent equally by them in all sectors. The modern sector pays higher wages to workers. If all the workers are employed by the traditional sector, then the demand generated for the output of each sector is {\displaystyle D_{1}={1}/{n}} . Government intervention in a manner that investment is carried out on those industries that have higher forward and backward linkages. We have two possible cases:

• Wages are low – When low wages are prevalent in the economy, say {\displaystyle w_{1}} , a firm which faces demand {\displaystyle D_{1}}  will need to employ {\displaystyle l^{*}}  workers if it wants to modernize. This will cost the firm {\displaystyle w_{1}l^{*}} .

Now, wages are low. Therefore

{\displaystyle w_{1}l^{*}<D_{1}} .

This implies that costs (given by {\displaystyle w_{1}l^{*}} ) are lower than the earnings (given by {\displaystyle D_{1}} ). So the firm makes a profit and will choose to modernize (even if other firms do not).

• Wages are high – When high wages are prevalent in the economy, say {\displaystyle w_{2}} , a firm which faces demand {\displaystyle D_{1}}  will make losses if no other firms choose to modernize.

This is because

{\displaystyle w_{2}l^{*}>D_{1}} .

This implies that costs (given by {\displaystyle w_{2}l^{*}} ) are higher than the earnings (given by {\displaystyle D_{1}} ).

However, if all the other firms have modernized, the firm faces a higher demand {\displaystyle D_{2}} , arising out of higher income levels of workers of these modernized firms. The firm will hence choose to modernize as well so that it makes profits:

{\displaystyle w_{2}l^{*}<D_{2}} .

Indivisibilities and external economies[edit]

The concept of externalities is relevant for the Industrialization of underdeveloped countries, where decisions are to be made regarding distribution of savings among alternative investment opportunities. These arise from the interdependence in market economies.^[3]

Pecuniary economies are external economies transmitted through the price system, as prices are the signalling device (under conditions of perfect competition in a market economy). They arise in an industry (say industry X) due to internal economies of overcoming technical indivisibilities. This reduces the price of its product, which will benefit another industry (say industry Y) which use this output as an input or a factor of production.^[4] Subsequently, the profits of industry Y will rise, leading to its expansion and generating demand for the output of industry X. As a result, industry X's production and profits also expand.^[5]

However in underdeveloped countries, conditions of perfect competition are not present due to the decentralized and differentiated nature of the market. Prices fail to act as a signalling system in the following ways:^[3]

Prices express the situation as it is and do not predict future economic situations

Prices can decide present productive activities but cannot determine investments which would be appropriate for developing countries

The response of the private sector to price signals is inadequate and imperfect due to the differentiation and decentralisation in developing countries

This justifies the need for centralized pan-industry planning of investment in Developing countries, as the private sector cannot undertake such planning.

Enlargement of the market size is another important externality which arises from the complementarity of industries. There exists an incentive to expand the scale of operations because the employees of one industry become the customers of another industry. In terms of products too (as in the above example of industries X and Y), one industry generates demand for the output of the other when the scale of operations increase.^[6]

Marshallian economies also accrue to a firm within a growing industry, resulting from agglomeration of industrial districts or clusters in a particular area. These occur due to the following advantages of agglomeration identified by Alfred Marshall:

1. Spillover of information

2. Specialization and division of labor

3. Development of a market for skilled labor.^[5]

Availability of skilled labour is an externality which arises when industrialization occurs, as workers acquire better training and skills. This is not achievable by mere establishment of a few industries, but requires a large program of industrial growth. It is one of the most important external economies because absence of skilled labor is a strong impediment to industrialization.^[7]

Role of the State[edit]

The large-scale programme of industrialization advocated by this model requires huge investments which are beyond the means of the private sector. The investment in infrastructure and basic industries (like power, transport and communications) is 'lumpy' and has long gestation periods. The role of the state in this theory is therefore critical for investment in social overhead capital. Even if the private sector had the requisite resources to invest in such a programme, it would not do so since it is driven by profit motives.^[7] Many investments are profitable in terms of social marginal net product but not in terms of private marginal net product. Due to this there is no incentive for individual entrepreneurs to invest and take advantage of external economies.^[1]

Criticisms[edit]

The theory has been criticized by Hla Myint and Celso Furtado, among others, primarily on the grounds of the massive effort required to be taken by underdeveloped countries to move along the path of industrialization. Some of the major criticisms are as follows.

Difficulties in execution and implementation: The execution of related projects during the course of industrialization may involve unexpected or unavoidable changes due to revisions of plans, delays and deviations from the planned process. Hla Myint notes that the various departments and agencies involved in the process of development need to coordinate closely and evaluate and revise plans continuously. This is a challenging task for the governments of developing countries.^[4]

Lack of absorptive capacity: The implementation of industrialization programmes may be constrained by ineffective disbursement,short-term bottlenecks,macroeconomic problems and volatility, loss of competitiveness and weakening of institutions. Credit is often utilized at low rates or after long time lags. There is often a loss of competitiveness due to the Dutch disease effect.^[8]

Historical inaccuracy: When viewed in light of historical experience of countries over the last two centuries, no country displayed any evidence of development due to massive industrialization programmes. Stationary economies do not develop simply by making large-scale investment in social overhead capital.^[9]

Problems in mixed economies: In a mixed economy, where the private and public sectors co-exist, the environment for growth may not be a conducive one. Unless there is a complementarity between the sectors, there is bound to arise competition between them, with the government departments keeping their plans confidential out of fear of speculative activities by the private sector. The private sector's activities are simultaneously inhibited due to lack of information of government policies and the general economic situation^[4]

Neglect of methods of production: Rather than capital formation, it is productive techniques which determine the success of a country in economic development. The big push model ignores productive techniques in its support for capital formation and industrialisation.^[9]

Shortage of resources in underdeveloped countries: Eugenio Gudin criticizes the theory of the big push on the grounds that underdeveloped countries lack thecapital required to provide the big push required for rapid development. If an underdeveloped nation had ample capital supply and scarce factors, it would not be classified as underdeveloped at all. Limited resource availability is the first impediment to such countries. Though this problem may be overcome by foreign aids, industrialization may not take off as expected if the aid flows are volatile.^[8]

Ignores the agricultural sector: With its heavy emphasis on industry, the model finds no place for agriculture. This is a gaping flaw in the theory, as in mostunderdeveloped countries it is this sector which is large and has labor surplus. Investments in agriculture need to go hand-in-hand with those in industry so as tostimulate the industrial sector by providing a market for industrial goods. If neglected, it would be difficult to meet the food requirements of the nation in the short runand to significantly expand the size of the market in the long run.

Inflationary pressures: It follows from the neglect of the agricultural sector that food shortages are likely to occur with industrialization. Though it would take time for investments in social overhead capital to yield returns, the demand would increase immediately, thus imposing inflationary pressures on the economy. Cost escalations may even cause projects to be postponed and the development process in general to slow down.^[1]

Dependence on indivisibilities: The emphasis of this theory on indivisibility of processes is too much, as investments need not necessarily be on such a large scale to be economic. Social reforms are ignored, which are vital if a country is to grow on the basis of its own resources and initiatives. Development is bound to intensify if social reform is a part of the industrialization process.^[9]

Q9. What are the main conditions for self-sustaining growth in the theory of W. Rostow?

The Rostow's Stages of Economic Growth model is one of the major historical models of economic growth. It was published by American economist Walt Whitman Rostow in 1960. The model postulates that economic growth occurs in five basic stages, of varying length:^[1]

1. Traditional society

2. Preconditions for take-off

3. Take-off

4. Drive to maturity

5. Age of high mass consumption

Rostow's model is one of the more structuralist models of economic growth, particularly in comparison with the "backwardness" model developed by Alexander Gerschenkron, although the two models are not mutually exclusive.

Rostow argued that economic take-off must initially be led by a few individual sectors. This belief echoes David Ricardo'scomparative advantage thesis and criticizes Marxist revolutionaries' push for economic self-reliance in that it pushes for the "initial" development of only one or two sectors over the development of all sectors equally. This became one of the important concepts in the theory of modernization in social evolutionism.

Below is a detailed outline of Rostow's five stages:

• Traditional society

  • characterized by subsistence agriculture or hunting and gathering; almost wholly a "primary" sector economy

  • limited technology

  • A static or "rigid" society: lack of class or individual economic mobility, with stability prioritized and change seen negatively

• Pre-conditions to "take-off"

  • external demand for raw materials initiates economic change;

  • development of more productive, commercial agriculture and cash crops not consumed by producers and/or largely exported

  • widespread and enhanced investment in changes to the physical environment to expand production (i.e. irrigation, canals, ports)

  • increasing spread of technology and advances in existing technologies

  • changing social structure, with previous social equilibrium now in flux

  • individual social mobility begins

  • development of national identity and shared economic interests

• Take off

  • Urbanization increases, Industrialization proceeds, Technological break through occurs

  • the "secondary" (goods-producing) sector expands and ratio of secondary vs. primary sectors in the economy shifts quickly towards secondary

  • textiles and apparel are usually the first "take-off" industry, as happened in Great Britain's classic "Industrial Revolution"

• Drive to maturity

  • diversification of the industrial base; multiple industries expand and new ones take root quickly

  • manufacturing shifts from investment-driven (capital goods) towards consumer durables and domestic consumption

  • rapid development of transportation infrastructure

  • large-scale investment in social infrastructure (schools, universities, hospitals, etc.)

• Age of mass consumption

  • the industrial base dominates the economy; the primary sector is of greatly diminished weight in economy and society

  • widespread and normative consumption of high-value consumer goods (e.g. automobiles)

  • consumers typically (if not universally), have disposable income, beyond all basic needs, for additional goods

Rostow claimed that these stages of growth were designed to tackle a number of issues, some of which he identified himself, writing:

Under what impulses did traditional, agricultural societies begin the process of their modernization? When and how did regular growth become a built-in feature of each society? What forces drove the process of sustained growth along and determined its contours? What common social and political features of the growth process may be discerned at each stage? What forces have determined relations between the more developed and less developed areas; and what relation if any did the relative sequence of growth bear to outbreak of war? And finally where is compound interest taking us? Is it taking us to communism; or to the affluent suburbs, nicely rounded out with social overhead capital; to destruction; to the moon; or where?^[2][3]

Rostow asserts that countries go through each of these stages fairly linearly, and set out a number of conditions that were likely to occur in investment, consumption, and social trends at each state. Not all of the conditions were certain to occur at each stage, however, and the stages and transition periods may occur at varying lengths from country to country, and even from region to region.^[4]

Theoretical framework[edit]

Rostow's model is a part of the liberal school of economics, laying emphasis on the efficacy of modern concepts of free trade and the ideas of Adam Smith. It disagrees with Friedrich List's argument which states that economies which rely on exports of raw materials may get "locked in", and would not be able to diversify, regarding this Rostow's model states that economies may need to depend on raw material exports to finance the development of industrial sector which has not yet of achieved superior level of competitiveness in the early stages of take-off. Rostow's model does not disagree with John Maynard Keynes regarding the importance of government control over domestic development which is not generally accepted by some ardent free trade advocates. The basic assumption given by Rostow is that countries want to modernize and grow and that society will agree to the materialistic norms of economic growth.^[5]

Stages of development process[edit]

Traditional societies[edit]

An economy in this stage has a limited production function which barely attains the minimum level of potential output. This does not entirely mean that the economy's production level is static. The output level can still be increased, as there was often a surplus of uncultivated land which can be used for increasing agricultural production. States and individuals utilize irrigation systems in many instances, but most farming is still purely for subsistence. There have been technological innovations, but only on ad hoc basis. All this can result in increases in output, but never beyond an upper limit which cannot be crossed. Lacking modern science and technology, such innovation as occurs spreads slowly and inconsistently and is sometimes reversed or lost. Trade is predominantly regional and local, largely done through barter, and the monetary system is not well developed. Investment's share never exceeds 5% of total economic production.

Wars, famines and epidemics like plague cause initially expanding populations to halt or shrink, limiting the single greatest factor of production: human manual labor. Volume fluctuations in trade due to political instability are frequent; historically, trading was subject to great risk and transport of goods and raw materials was expensive, difficult, slow and unreliable. The manufacturing sector and other industries have a tendency to grow but are limited by inadequate scientific knowledge and a "backward" or highly traditionalist frame of mind which contributes to low labour productivity. In this stage, some regions are entirely self-sufficient.

In settled agricultural societies before the Industrial Revolution, a hierarchical social structure relied on near-absolute reverence for tradition, and an insistence on obedience and submission. This resulted in concentration of political power in the hands of landowners in most cases; everywhere, family and lineage, and marriage ties, constituted the primary social organization, along with religious customs, and the state only rarely interacted with local populations and in limited spheres of life. This social structure was generally feudalistic in nature. Under modern conditions, these characteristics have been modified by outside influences, but the least developed regions and societies fit this description quite accurately.

Pre-conditions for take-off[edit]

In the second stage of economic growth the economy undergoes a process of change for building up of conditions for growth and take off. Rostow said that these changes in society and the economy had to be of fundamental nature in the socio-political structure and production techniques.^[3] This pattern was followed in Europe, parts of Asia, the Middle East and Africa. There is also a second or third pattern in which he said that there was no need for change in socio-political structure because these economies were not deeply caught up in older, traditional social and political structures. The only changes required were in economic and technical dimensions. The nations which followed this pattern were in North America and Oceania (New Zealand and Australia).

There are three important dimensions to this transition: firstly, the shift from an agrarian to an industrial or manufacturing society begins, albeit slowly. Secondly, trade and other commercial activities of the nation broaden the market's reach not only to neighboring areas but also to far-flung regions, creating international markets. Lastly, the surplus attained should not be wasted on the conspicuous consumption of the land owners or the state, but should be spent on the development of industries, infrastructure and thereby prepare for self-sustained growth of the economy later on. Furthermore, agriculture becomes commercialized and mechanized via technological advancement; shifts increasingly towards cash or export-oriented crops; and there is a growth of agricultural entrepreneurship.^[6]

The strategic factor is that investment level should be above 5% of the national income. This rise in investment rate depends on many sectors of the economy. According to Rostow capital formation depends on the productivity of agriculture and the creation of social overhead capital. Agriculture plays a very important role in this transition process as the surplus quantity of the produce is to be utilized to support an increasing urban population of workers and also becomes a major exporting sector, earning foreign exchange for continued development and capital formation. Increases in agricultural productivity also lead to expansion of the domestic markets for manufactured goods and processed commodities, which adds to the growth of investment in the industrial sector.

Social overhead capital creation can only be undertaken by government, in Rostow's view. Government plays the driving role in development of social overhead capital as it is rarely profitable, it has a long gestation period, and the pay-offs accrue to all economic sectors, not primarily to the investing entity; thus the private sector is not interested in playing a major role in its development.

All these changes effectively prepare the way for "take-off" only if there is basic change in attitude of society towards risk taking, changes in working environment, and openness to change in social and political organisations and structures. The pre-conditions of take-off closely track the historic stages of the (initially) British Industrial Revolution.^[7]

Referring to the graph of savings and investment, notably, there is a steep increase in the rate of savings and investment from the stage of "Pre Take-off" till "Drive to Maturity:" then, following that stage, the growing rate of savings and investment moderates. This initial and accelerating steep increase in savings and investment is a pre-condition for the economy to reach the "Take-off" stage and far beyond.

Take-off[edit]

This stage is characterized by dynamic economic growth. As Rostow suggests, all is premised on a sharp stimulus (or multiple stimuli) that is/are any or all of economic, political and technological change. The main feature of this stage is rapid, self-sustained growth.^[3][7] Take-off occurs when sector led growth becomes common and society is driven more by economic processes than traditions. At this point, the norms of economic growth are well established and growth becomes a nation's "second nature" and a shared goal.^[1] In discussing the take-off, Rostow is noted to have adopted the term "transition", which describes the process of a traditional economy becoming a modern one. After take-off, a country will generally take as long as fifty to one hundred years to reach the mature stage according to the model, as occurred in countries that participated in the Industrial Revolution and were established as such when Rostow developed his ideas in the 1950s.

Per Rostow there are three main requirements for take-off:

1. The rate of productive investment should rise from approximately 5% to over 10% of national income or net national product

2. The development of one or more substantial manufacturing sectors, with a high rate of growth;

3. The existence or quick emergence of a political, social and institutional framework which exploits the impulses to expansion in the modern sector and the potential external economy effects of the take-off.^[2]

The third requirement implies that the needed capital must be mobilized from domestic resources and steered into the economy, rather than into domestic or state consumption.Industrialization becomes a crucial phenomenon as it helps to prepare the basic structure for structural changes on a massive scale. Rostow says that this transition does not follow a set trend as there are a variety of different motivations or stimulus which began this growth process.

Take off requires a large and sufficient amount of loanable funds for expansion of the industrial sector which generally come from two sources which are:

1. Shifts in income flows by way of taxation, implementation of land reforms and various other fiscal measures.

2. Re-investment of profits earned from foreign trade as has been observed in many East Asian countries. While there are other examples of "Take-off" based on rapidly increasing demand for domestically produced goods for sale in domestic markets, more countries have followed the export-based model, overall and in the recent past. The US, Canada, Russia and Sweden are examples of domestically based "take-off"; all of them, however, were characterized by massive capital imports and rapid adoption of their trading partners' technological advances.^[3][8] This entire process of expansion of the industrial sector yields an increase in rate of return to some individuals who save at high rates and invest their savings in the industrial sector activities. The economy exploit their underutilized natural resources to increase their production.^[1]

Tentative take-off dates.^[2]

The take-off also needs a group of entrepreneurs in the society who pursue innovation and accelerate the rate of growth in the economy. For such an entrepreneurial class to develop, firstly, an ethos of "delayed gratification", a preference for capital accumulation over expenditure, and high tolerance of risk must be present. Secondly, entrepreneurial groups typically develop because they can not secure prestige and power in their society via marriage, via participating in well-established industries, or through government or military service (among other routes to prominence) because of some disqualifying social or legal attribute; and lastly, their rapidly changing society must tolerate unorthodox paths to economic and political power.

A country's making it through this stage depends on the following major factors:

• Existence of enlarged, sustained effective demand for the product of key sectors.

• Introduction of new productive technologies and techniques in these sectors.

• The society's increasing capacity to generate or earn enough capital to complete the take-off transition.

• Activities in the key sector should induce a chain of growth in other sectors of the economy, that also develop rapidly.

An example of a country in the Take-off stage of development is Equatorial Guinea. It has the largest increases in GDP growth since 1980 and the rate of productive investment has risen from 5% to over 10% of income or product.

In the table note that Take-off periods of different countries are the same as the industrial revolution in those countries.

Drive to maturity[edit]

After take-off, there follows a long interval of sustained growth known as the stage of drive to maturity. Rostow defines it "as the period when a society has effectively applied the range of modern technology to the bulk of its resources."^[2][3] Now regularly growing economy drives to extend modern technology over the whole front of its economic activity. Some 10-20% of the national income is steadily invested, permitting output regularly to outstrip the increase in population. The make-up of the economy changes unceasingly as technique improves, new industries accelerate, older industries level off. The economy finds its place in the international economy: goods formerly imported are produced at home; new import requirements develop, and new export commodities to match them. The leading sectors will in an economy be determined by the nature of resource endowments and not only by technology.

Tentative drive to maturity dates.^[2]

On comparing the dates of take-off and drive to maturity, these countries reached the stage of maturity in approximately 60 years.

The structural changes in the society during this stage are in three ways:

• Work force composition in agriculture shifts from 75% of the working population to 20%. The workers acquire greater skill and their wages increase in real terms.

• The character of leadership changes significantly in the industries and a high degree of professionalism is introduced

• Environmental and health cost of industrialization is recognized and policy changes are thus made.

During this stage a country has to decide whether the industrial power and technology it has generated is to be used for the welfare of its people or to gain supremacy over others, or the world in toto.

A prime example of a country in the Drive to Maturity stage is South Africa. It is developing a world-class infrastructure- including a modern transport network, widely available energy, and sophisticated telecommunications facilities. Additionally, the commercial farm sector shed 140,000 jobs, a decline of roughly 20%, in the eleven-year period from 1988 to 1998.

This diversity leads to reduction in poverty rate and increasing standards of living, as the society no longer needs to sacrifice its comfort in order to build up certain sectors.^[9]

Age of high mass consumption[edit]

The age of high mass consumption refers to the period of contemporary comfort afforded many western nations, wherein consumers concentrate on durable goods, and hardly remember the subsistence concerns of previous stages. Rostow uses the Buddenbrooks dynamics metaphor to describe this change in attitude. In Thomas Mann's 1901 novel, Buddenbrooks, a family is chronicled for three generations. The first generation is interested in economic development, the second in its position in society. The third, already having money and prestige, concerns itself with the arts and music, worrying little about those previous, earthly concerns. So too, in the age of high mass consumption, a society is able to choose between concentrating on military and security issues, on equality and welfare issues, or on developing greatluxuries for its upper class. Each country in this position chooses its own balance between these three goals. There is a desire to develop an egalitarian society and measures are taken to reach this goal. According to Rostow, a country tries to determine its uniqueness and factors affecting it are its political, geographical and cultural structure and also values present in its society.^[9]

Historically, the United States is said to have reached this stage first, followed by other western European nations, and then Japan in the 1950s.^[3]

Criticism of the model[edit]

1. Rostow is historical in the sense that the end result is known at the outset and is derived from the historical geography of a developed, bureaucratic society.

2. Rostow is mechanical in the sense that the underlying motor of change is not disclosed and therefore the stages become little more than a classificatory system based on data from developed countries.

3. His model is based on American and European history and defines the American norm of high mass consumption as integral to the economic development process of all industrialized societies.

4. His model assumes the inevitable adoption of Neoliberal trade policies which allow the manufacturing base of a given advanced polity to be relocated to lower-wage regions.

5. Rostow's model does not apply to the Asian and the African countries as events in these countries are not justified in any stage of his model.^{[citation needed]}

6. The stages are not identifiable properly as the conditions of the take-off and pre take-off stage are very similar and also overlap.

7. According to Rostow growth becomes automatic by the time it reaches the maturity stage but Kuznets asserts that no growth can be automatic there is need for push always.^{[citation needed]}

8. There are two unrelated theories of take off one is that take is a sectoral and a non-linear notion and other is that it is highly aggregative.^[10]

Rostow's thesis is biased towards a western model of modernization, but at the time of Rostow the world's only mature economies were in the west, and no controlled economies were in the "era of high mass consumption." The model de-emphasizes differences between sectors in capitalistic vs. communistic societies, but seems to innately recognize that modernization can be achieved in different ways in different types of economies.^{[citation needed]}

The most disabling assumption that Rostow took is of trying to fit economic progress into a linear system. This assumption is false as due to empirical evidence of many countries making false starts then reaching a degree of progress and change and then slipping back. E.g.: In the case of contemporary Russia slipping back from high mass consumption to a country in transition, the main cause being the end of the Cold War and geopolitical struggles.^{[citation needed]}

Another problem that Rostow's work has is that it considered large countries with a large population (Japan), with natural resources available at just the right time in its history (Coal in Northern European countries), or with a large land mass (Argentina). He has little to say and indeed offers little hope for small countries, such asRwanda, which do not have such advantages. Neo-liberal economic theory to Rostow, and many others, does offer hope to much of the world that economic maturity is coming and the age of high mass consumption is nigh. But that does leave a sort of "grim meathook future" for the outliers, which do not have the resources, political will, or external backing to become competitive.^[11] (See Dependency theory)

Q 15 What is in common and what are the differences between Domar’s and Harrod’s economic models? What are the sources of investments according to these models and what is the recommended ratio of investments to GDP?

The Harrod Domar Growth model is a growth model and not a growth strategy!

A model helps to explain how growth has occurred and how it may occur again in the future. Growth strategies are the things a government might introduce to replicate the outcome suggested by the model.

Basically, the model suggests that the economy's rate of growth depends on:

• The level of national saving (S)

• The productivity of capital investment (this is known as the capital-output ratio)

The Capital-Output Ratio (COR)

• For example, if £100 worth of capital equipment produces each £10 of annual output, a capital-output ratio of 10 to 1 exists. A 3 to 1 capital-output ratio indicates that only £30 of capital is required to produce each £10 of output annually.

• If the capital-output ratio is low, an economy can produce a lot of output from a little capital. If the capital-output ratio is high then it needs a lot of capital for production, and it will not get as much value of output for the same amount of capital.

Key point: When the quality capital resources is high, then the capital output ratio will be lower

Basic Harrod-Domar model says:

Rate of growth of GDP = Savings ratio / capital output ratio

Numerical examples:

• If the savings rate is 10% and the capital output ratio is 2, then a country would grow at 5% per year.

• If the savings rate is 20% and the capital output ratio is 1.5, then a country would grow at 13.3% per year.

• If the savings rate is 8% and the capital output ratio is 4, then the country would grow at 2% per year.

Based on the model therefore the rate of growth in an economy can be increased in one of two ways:

• Increased level of savings in the economy (i.e. gross national savings as a % of GDP)

• Reducing the capital output ratio (i.e. increasing the quality / productivity of capital inputs)

LDCs often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development. Boosting investment generates economic growth which leads to a higher level of national income. Higher incomes allow more people to save.

What are some of the key limitations / problems of the Harrod-Domar Growth Model?

• Increasing the savings ratio in lower-income countries is not easy. Many developing countries have low marginal propensities to save. Extra income gained is often spent on increased consumption rather than saved. Many countries suffer from a persistentdomestic savings gap.

• Many developing countries lack a sound financial system. Increased saving by households does not necessarily mean there will be greater funds available for firms to borrow to invest.

• Efficiency gains that reduce the capital/output ratio are difficult to achieve in developing countries due to weaknesses in human capital, causing capital to be used inefficiently

• Research and development (R&D) needed to improve the capital/output ratio is often under-funded - this is a cause of market failure

• Borrowing from overseas to fill the savings gap causes external debt repayment problems later.

• The accumulation of capital will increase if the economy starts growing dynamically – a rise in capital spending is not necessarily a pre-condition for economic growth and development – as a country gets richer, incomes rise, so too does saving, and the higher income fuels rising demand which itself prompts a rise in capital investment spending.

The Harrod–Domar model is an early post-Keynesian model of economic growth. It is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital. It suggests that there is no natural reason for an economy to have balanced growth. The model was developed independently by Roy F. Harrod in 1939,^[1] and Evsey Domar in 1946,^[2] although a similar model had been proposed by Gustav Cassel in 1924.^[3] The Harrod–Domar model was the precursor to the exogenous growth model.^[4]

Neoclassical economists claimed shortcomings in the Harrod–Domar model—in particular the instability of its solution^[5]—and, by the late 1950s, started an academic dialogue that led to the development of the Solow–Swan model.^[6][7]

According to the Harrod–Domar model there are three kinds of growth: warranted growth, actual growth and natural rate of growth.

Warranted growth rate is the rate of growth at which the economy does not expand indefinitely or go into recession. Actual growth is the real rate increase in a country's GDP per year. (See also: Gross domestic product and Natural gross domestic product) . Natural Growth is the growth in economy required to maintain full employment. For example If the labor force grows at 3 percent per year, then to maintain full employment, the economy’s annual growth rate must be 3 percent.