Modernisation Theory and Stages of Growth

Each of the earlier-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 alsointhe 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.