Theory of Economic Growth According to W.W Rostow

THEORY OF ECONOMIC GROWTH ACCORDING TO W.W ROSTOW A. Understanding Development Theory If development is seen from the process, it is defined as modernization, namely the movement from an agricultural society towards an economy that focuses on rationality, industry and services. To emphasize the nature of ‘development’ as a process, Rostow uses the analogy of an airplane moving along a flight path until it can take off and then hover in space. Development, in the sense of objectives, is considered as a condition of a country characterized by the existence of: a) The large consumption capacity of the majority of society. b) Mostly non-agricultural. c) Very urban-based as part of modernization theory, this theory conceptualizes development as modernization achieved by following Western models of success. Economists consider that the theory of economic growth is the best example of what is termed 'modernization theory B. Rostow's five stages of economic growth According to Rostow, the process of economic growth can be seen in 5 stages, namely: 1. Traditional Society A society with a limited production function is characterized by a relatively primitive method of production (which is based on pre-Newtonian science and technology) and a way of life that is still strongly influenced by less rational values, but these habits have been passed down from generation to generation. The level of productivity per worker is still low, therefore most of society's resources are used for agricultural sector activities. In the agricultural sector, the social structure is hierarchical, that is, the possibility of vertical mobility of community members in the social structure is very small. What this means is that a person's position in society will not be different from that of their ancestors. Meanwhile, political and government activities at this time were described by Rostow in the fact that although there was sometimes centralization in government, the center of political power in the regions was in the hands of the landowners in the area. Central government policies are always influenced by the views of landowners in the area. 2. Takeoff Prerequisite Stage This prerequisite stage for take-off is defined by Rostow as a transition period in which society prepares itself to achieve growth on its own strength (self-sustained growth). According to Rostow, at this stage and afterward economic growth will occur automatically. This stage of the take-off prerequisites has 2 types. a) The first is the prerequisite stage for take-off experienced by European, Asian, Middle Eastern and African countries, where this stage was achieved by overhauling traditional societies that had long existed. b) Second is the prerequisite stage for take-off achieved by countries that are born free (according to Rostow) such as the United States, Canada, Australia, New Zealand, where these countries reach the take-off stage without having to overhaul traditional social systems. This is due to the nature of the society in these countries which consists of immigrants who already have the characteristics needed by a society for the prerequisite stages of take-off. As stated above, Rostow strongly emphasizes the need for multidimensional changes, because he is convinced of the truth of the view which states that development can be easily created only if the amount of savings is increased. According to this opinion, a high level of savings will result in a high level of investment, thereby accelerating economic growth which is reflected in an increase in national income. However, according to Rostow, economic growth will only be achieved if it is accompanied by other changes in society. These changes will enable an increase in savings and make the best use of those savings. The changes that Rostow refers to include society's ability to use modern science and make new discoveries that can reduce production costs. Apart from that, there must also be people who use these new discoveries to modernize production methods and must also be supported by community groups who create savings and lend them to innovative entrepreneurs to increase production and increase productivity. In short, the increase in investment that will create faster economic development than before depends not solely on an increase in the savings rate, but also on a radical change in society's attitude towards science, changes in production techniques, risk taking, and so on. Apart from the things above, Rostow also emphasized that an increase in investment levels is only possible if there is a change in the economic structure. Progress in the agricultural, mining and infrastructure sectors must occur together with the process of increasing investment. Economic development is only possible by increasing productivity in the agricultural sector and developments in the mining sector. According to Rostow, progress in the agricultural sector has an important role in the transition period before reaching the take-off stage. Meanwhile, infrastructure development, according to Rostow, could use up a large part of the investment funds. Investment in the infrastructure sector has 3 characteristics, namely the time lag between its construction and harvesting the results (gestation period) is very long, its construction must be carried out on a large scale so it requires a lot of money, and the benefits of its construction are felt by many people. Based on this nature, infrastructure development must primarily be carried out by the government. Apart from the things stated above, Rostow also shows the form of change in government leadership of a society experiencing transition. To guarantee the creation of orderly development, a new leadership must have the character of reactive nationalism, that is, react positively to pressure from developed countries. Rostow believes that without pressure or insults from developed countries, modernization will occur in the Staying Stage Landing. 3. Takeoff stage At the beginning of this stage, drastic changes occur in society, such as political revolutions, rapid progress in innovation, or the opening of new markets. As a result of these changes, innovations and increased investment will regularly be created. This increasingly high investment will accelerate the rate of growth of national income and exceed the rate of population growth. Thus the level of per capita income increases. Rostow stated 3 main characteristics and countries that have reached the take-off period, namely: a) There has been an increase in productive investment from 5 percent or less to 10 percent of Net National Product (Net National Product= NNP). b) The development of one or several industrial sectors with very high growth rates (leading sectors). c) The creation of a basic political, social and institutional framework that can create the development of the modern sector and economic externalities that can cause continued economic growth. This also includes the country's ability to mobilize domestic capital sources, because the increase in domestic savings plays a huge role in creating the take-off stage. Britain and Japan, for example, achieved take-off without importing any capital (foreign aid) at all. According to Rostow, the development of the leading sector varies for each country. In England, cotton textiles were the leading sector at the time of its take-off, while the development of the railway network played a similar role in the United States, France, Germany, Canada and Russia. In Sweden, the leading sector is the wood industry, in Japan silk, and in Argentina it is the import substitution industry for consumer goods. Based on this fact, Rostow came to the conclusion that to reach the take-off stage there is not one economic sector that is standard for all countries which can create economic development. Therefore, a particular country cannot simply copy the development pattern of other countries' leading sectors. However, there are four important factors that must be considered in creating a leading sector, namely: • There must be the possibility of expanding the market for goods produced which have the possibility of growing quickly. • In this sector modern production techniques must be developed and production capacity must be expanded. • Savings must be created in society and entrepreneurs must reinvest their profits to finance the development of leading sectors. • Development and technological transformation of the leading sector must be able to create the need for capacity expansion and modernization of other sectors 4. Stage towards maturity This stage towards maturity is defined by Rostow as a period where society has effectively used modern technology in almost all production activities. At this stage new leading sectors will emerge to replace old leading sectors which will experience decline. The pattern of these new leading sectors is determined by technological developments, natural resources, the nature of the take-off stage that is occurring, and also by government policy. In analyzing the characteristics of the stages leading to maturity, Rostow emphasizes his analysis of the changing patterns of leading sectors in several countries that are now advanced. He also shows that in each of these countries the types of leading sectors at the post-takeoff stage are different from those at the take-off stage. In England, for example, the textile industry that had spearheaded development at the take-off stage had been replaced by the iron, coal and heavy engineering equipment industries. Meanwhile, in the United States, France and Germany, where the construction of the railroad network played an important role at the take-off stage, it has been replaced by the steel industry and heavy equipment industry at the stage of maturity. Furthermore, Rostow also stated the noneconomic characteristics of a society that has reached the stage of maturity as follows: a. The structure and skills of the workforce are changing. The role of the industrial sector is increasingly important, while the agricultural sector is declining. b. The nature of leadership in companies is changing. The role of professional managers is increasingly important and replaces the position of entrepreneur-owner. c. Criticisms of industrialization began to emerge as a result of dissatisfaction with the impacts of industrialization. 5. High Consumption Stage This high consumption stage is the final stage of Rostow's theory of economic development. At this stage, public attention has placed more emphasis on issues related to consumption and social welfare, no longer on production issues. At this high consumption stage there are 3 types of goals of society (the state), namely: a. Increasing power and influence abroad and this tendency could end in colonization of other nations. b. Creating a welfare state by seeking to create a more even distribution of income through a progressive tax system. c. Increasing public consumption beyond basic needs (clothing, food and shelter) to include durable consumer goods and luxury goods.