Modernisation and Stages of Growth by Lewis and Rostow

Each
of the above-mentioned theories came to influence subsequent theory formation
and the international debates on development problems, but not to the same
extent, or with the same intensity, as two additional contributions from the
early period: those of W. Arthur Lewis, born in the British West Indies, and
the American, W.W. Rostow. 

These two economists, in their more elaborate and
detailed analyses with respect to conceptual framework and method and also
reached different conclusions. Yet they had so much in common that they cane to
function as mutually supplementary theoretical frames of reference,
particularly in the Western world’s development debate from the 1960s onwards.
Even in the 1990s, they continue to influence some of the basic notions of
economic development.

Lewis
and Rostow both focused on rising per capita income as the central measure of
growth; they conceived of economic development as a modernization process; they
used as their starting point a model of developing countries with an abundant
supply of labour in the traditional sector; they regarded the savings rate as
the central determinant for the investigation rate and further for the overall
growth rate; and finally they viewed the capitalist or entrepreneurial class as
an important driving force behind economic growth, essential, in particular ,
for initiating the process (Hunt, 1989: pp. 62).

More
specifically, Lewis took as his starting point a two-sector model of a closed
backward economy with an unlimited supply of labour at a subsistence wage; one sector was the capitalist, the other he characterised
as the subsequent sector. The capitalist sector employed wage earners, used
reproducible capital and paid capitalists for the use of capital. The
subsistence sector was characterised by being based primarily on family labour,
by not using reproducible capital and by low labour productivity. 

It was in the
subsistence sector that the abundant labour reserves were found not necessarily
in the shape of many unemployed, but rather in the shape of many underemployed.
These underemployed workers could be transferred to the capitalist sector
without bringing about a decline in the subsistence sector’s total production,
and a wage which was determined by the average in the subsistence sector — not
by their productivity in the capitalist sector.

Lewis’s
argument in the extension of this was that the most important barrier to economic
growth was the lack of accumulation of productive capital, caused, in turn, by
the low rate of savings. The central problem in the theory of economic
development was, therefore, to investigate under what circumstances it would be
possible to increase the rate of savings and investments in a backward and
stagnant economy, where these rates would typically be as low as four to five
per cent of national income, up to a level of between 12 and 15 per cent or
higher.

Lewis’s
answer t this central problem was that the poor in the subsistence sector and
the workers in the capitalist sector could not produce such increased savings,
because they were simply too poor to save a significant proportion of their
income. The rich in the subsistence sector could not either, because they were
mostly landowners, who used their rents and other income unproductively to buy
existing assets rather than to create new ones. 

Therefore, the capitalists, the
other component of the rich in the basic model, had to produce the necessary
increase in the savings rate. According to Lewis, they were capable of doing
so. On this point, he followed the classical political economics’ assumption that the capitalists’ profits would be both saved and invested.

Consequently,
the central problem was transformed into a question about how the profits could
be increased as a proportion of national income. This could be achieved by the
capitalist sector’s inherent dynamics. Lewis asserted that as soon as a core
capitalist sector was established under conditions of an unlimited supply of cheap
labour, the capitalists would reinvest at least a part of their profits and in
this way increase the total amount of capital available. 

This would attract
more workers from the subsistence sector into the capitalist sector, where
their productivity would be higher than reflected in their low wages
(determined primarily by the subsistence sector). As a result, a relative
increase of the profits in relation to total national income would occur and
thus bring about an increase in the areas of saving and investment. The final
outcome would be sustained economic growth, driven forward by the capitalists. Lewis
emphasized that the capitalists did not necessarily have to be private capital
owners; the state could play this role too.

In
the presentation of the argument so far as we have assumed a dosed economy
without trade or other transactions with other economies. However, Lewis
further extended his model to cove an open economy. This part of his model will
not be presented in detail but it should be noted that one of Lewis’s main
conclusions was that trade between developing countries and industrialised countries
did not promote growth and economic progress in the former. 

This was explained
chiefly with reference to the fact that wages in the poor countries, according
to the model, were determined by the supply (subsistence) price of labour, as
described above. The increased productivity of labour as a result of
transferring to the capitalist sector would therefore be passed on to consumers
in the industrialised countries in the shape of lower product prices. Lewis,
with this reasoning, anticipated central elements in Arghiri Emmanuel’s theory
of unequal exchange.

Summing
up, one can say that Lewis’s model gave reasons for optimism regarding the
possibilities for sustained growth in the capitalist sector. Lewis regarded
this as identical with economic development, but he stressed, at the same time,
that the working population in the developing countries, the vast majority, could not count on improvements in their standard of living in the short or
medium-term if the capitalist growth rate was to be maximized.

Lewis’s
economic model and his associated theories have been subjected to wide-ranging
criticism. However, this should not obscure the fact that his original
contribution to economic development theory was both interesting and
innovative. Some of the basic elements have since been taken over and amended
by some of the most structuralist-oriented development economists which will be
presented below. Moreover, Lewis’s model formed one of the important starting
points for Rostov’s theory of stages of economic growth and modernization.

W.W.
Rostow formed his basic theory during the 1950s and presented it in its
totality in 1960 in the book, The Stages of Economic Growth (Rostow, 1960).
Variations and extensions have since been published (Rostow, 1978, 1980).
Rostow, like Lewis, distinguished between the traditional sector and the modern
capitalist sector. 

Further, he agreed with Lewis that a crucial precondition
for lifting an economy out of low-income stagnation and into sustained growth
was a significant increase in the share of savings and investment in national
income. But Rostow was more interested in describing the whole process through
which a society develops in different stages. 

The aim was to identify strategic
or critical variables that may be presumed to constitute the necessary and
sufficient conditions for change and transition to a qualitatively new stage.
Rostow’s stage theory was essentially unilinear and universal, and assumed
irreversibility.

Rostov
divided the development process into the following give stages:

·     
The traditional society

·     
The establishment of the
preconditions for take off

·     
The take off stage

·     
The drive to maturity

·     
The époque of high mass
consumption.

Each
of the stages was thoroughly described in his 1960 book and illustrated with
examples from the historical development of selected countries.

One
of Rostow’s central points was that ail societies, sooner or later, will pass
through the same sequence of five economic stages. Whether this will happen
sooner or later is determined primarily by natural and economic circumstances,
but Rostow’s also assigned some importance to political and cultural
conditions.

The
conceptualization of the five stages is not characterised by the same precision
in its formulation, or the same internal consistency of reasoning as found in
Lewis’s theoretical model. Rather, what we find in Rostow are somewhat loosely
substantiated generalisations based mainly on experience from a few
industrialised countries. This, however, did not prevent Rostow’s theory from
becoming one of the most popular among decision makers, consultants, and
government officials involved in economic planning in the Third World. This
applies, in particular, to this propositions concerning take off into
self-sustained growth.

It
should be added that Rostow himself, unlike many economic planners and
consultants, was quite careful about specifying a long list of preconditions
for the takeoff. In fact, it is in the discussion of the preconditions for
take-off that Rostov has probably delivered his most crucial contribution and
on this point even influenced theorists who have not accepted his notion that
all economies will pass through an identical series of stages. Therefore, a
little more should be said about these preconditions.

Rostow
imagined, as noted that the developing countries would follow the same
development pattern as the industrialised countries, despite their being
surrounded by a quite different international economic system than were the
advanced countries at the time when they took the big leap forward. In this
sense, Rostow adhered to a mono-economic approach and thus placed himself, in
this respect, outside the mainstream of development economics. However, in
other respects he set the course for this mainstream, not so much in the sense
that others adopted his theories, only a few did that, but more by inspiring
critical revisions and amendments to the theory’s central assumptions and
hypotheses.

One
of these hypotheses claimed that a markedly increased savings rate would lead
to a corresponding increased investment rate, which further would cause
significant industrial growth. A second, related thesis asserted that capital
accumulation was the central source of growth in developing countries. 

Both
these claims were rejected or heavily modified in later theory formation as we
shall see in the next section. But prior to that, it may be of interest to
compare Rostow’s basic development thinking the concept of modernization through an irreversible process divided into stages with corresponding conceptions in
more mechanistic Marxism including, especially some of the Soviet theories,

Rostow
launched his theory in 1960 as ‘An anti-communist manifesto’ (the book’s
subtitle) as an alternative to Karl Marx’s theory of modern history, and that
is what it was in many respects. Among other things, Rostow refuted the Marxist
theories of exploitation and suppression of the backward and underdeveloped
areas. 

He proposed a number of other interpretations and underdeveloped areas.
He proposed a number of other interpretations and explanations in opposition to
Marxist assertions and warned against forcing development or turning it in
another direction with assistance from the communist countries. That, Rostow
declared, could only lead to worse results. 

At the same time, however, it is
interesting to note that Rostow and many development theorists with a
mechanistic interpretation of Marxism have in common the idea that all
societies, with almost compelling necessity, must pass sequentially through an
identical series of stages or modes of production. The Marxist stage theories
emphasise other characteristics and are often more comprehensive and complex
than Rostov’s theory.

Yet
one cannot avoid noticing the striking similarities, especially with regard to
the early, more dogmatic Soviet Marxist stage theories (Solodovnikov and
Bogoslovsky, 1975). They suggested in opposition to Rostow — that the
underdevelopment countries could escape or completely avoid the capitalist
stage by following a special non-capitalist road to development. 

However, in
principle, they simply swapped Rostow’s model of a capitalist industrial country
with the Soviet version of a ‘socialist’ industrial country. Thus the Soviet
Marxist theory became a special form of modernisation theory. 

This applied also
in the sense that they proposed a positive evaluation of imperialism, only here it was of Soviet imperialism and not the Western industrial
countries’ imperialism. One of the points to note in this context is that the
non-capitalist road to development was only possible with support from the USSR
and Eastern Europe.

It has to be added
that these remarks on Soviet Marxist theory apply only to the earlier
prevailing conceptions. The theoretical debate on the Soviet Union was already,
long before the dismantling of the Eastern Bloc, much richer and more nuanced.
Many researchers even raised questions about the relevance to Third World
countries of the Soviet and East European development model. Furthermore, there
was an emerging consensus that the backward countries were too different to
follow an identical path of change.