◄UNIT 7: GLOBALISATIONUNIT 9:AGRICULTURAL DEVELOPMENT►

UNIT 8:ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

  • UNIT 8:ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

    Key unit Competency: 

    Analyse the determinants and indicators of economic growth and 

    development for an economy.

    8.1. Economic growth

    Introductory activity

    (Source:http://www.minecofin.gov.rw/fileadmin/templates/documents/NDPR/

    EDPRS_2_Abridged_Version.pdf)

    In your own view, what strategies has the government used to: 

    i) Achieve sustained average GDP growth of 11.5%.

    ii) Accelerated reduction of poverty to less than 30% of the population.

    8.1.1: Meaning and determinants of economic growth

    Activity 8.1.

    USA is said to be having a higher GDP growth than Rwanda. In your own view, 

    a)What do you understand by the term GDP growth and how is it related to 

    economic growth?

    b) What do you think are the reasons behind this phenomenon?

    8.1.1.1: Meaning of economic growth:

    Rwanda is one of the fastest growing economies in Africa. Although still 
    developing, the nation has made a significant progress in recent years. This has 
    been attributed to stable macroeconomic setting, good policy framework and 
    quality of leadership in the country. The service and industrial sector is growing 
    at a very high rate. All these have significantly impacted on the national income of 

    the country as shown by the persistent increase in the gross domestic product. 

    Economic growth can be defined as the persistent quantitative increase in 
    the volume of goods and services produced in a country. Or the persistent 

    increase in the volume of goods and services over a period of time. 

    Economic growth is a material concept. It concerns itself with the growth of 
    physical output, and does not take into account non-material factors like stress, 
    happiness, etc. It is generally considered that economic growth does cause 
    an increase in the standard of living provided that the increase in production 

    exceeds any increase in population.

    This concept of economic growth is usually illustrated by an outward shift of the 
    production possibility curve or production possibility frontier. 
    The outward shift of the curve illustrates an increasing capacity to produce 

    goods and services

    Economic growth trends

    8.1.1.2: Factors that determine economic growth

    Economic growth is an increase in real GDP; it means an increase in the value 
    of goods and services produced in an economy. The rate of economic growth is 
    the annual percentage increase in real GDP. There are several factors affecting 
    economic growth, of a country which can be grouped into Demand-side factors 
    (e.g. consumer spending) and Supply-side factors (e.g. productive capacity), 

    but generally, these factors are as explained below;

    - Political situation. When there is good political climate that builds 
    investor confidence, there will be increase in the volume of goods and 
    services while political instability will lead to low production of goods 

    and services.

    - Technological development: Technological development helps in 
    increasing productivity with the limited amount of resources. Countries 
    that have worked in the field of technological development grow 
    rapidly as compared to countries that have less focus on technological 
    development. The selection of right technology also plays an important 
    role for the growth of an economy. On the contrary, an inappropriate 

    technology- results in high cost of production.

    - Level of capital. When capital is available and in plenty, there will be 
    increased production of goods and services while absence of capital 

    leads to low production low economic growth.

    - Level of Market. Presence of a large market will encourage producers 
    to produce more goods and services while absence of market will lead 

    to low production

    - Size of population. A large population will make a big labour force 
    that will produce more goods and services while a smaller population will 

    imply low output.

    - Level of investment. The rate at which an economy comes up with 

    new investment determines economic growth. 

    - Level of entrepreneur development. Presence of large number of 
    entrepreneurs will lead to invention of new methods of production which 
    will increase output but when the level of entrepreneur development is 

    low, production and economic growth will be low

    - Levels of infrastructure. Investment in roads, transport and 
    communication can help firms reduce costs and expand production. 
    Without the necessary infrastructure, it can be difficult for firms to be 
    competitive in the international markets. This lack of infrastructure is 

    often a factor holding back some developing economies. 

    - Human resource: The quality of human resource is dependent on its 
    skills, creative abilities, training, and education. If the human resource 
    of a country is well skilled and trained then the output would also be of 
    high quality. On the other hand, a shortage of skilled labor hampers the 
    growth of an economy, whereas surplus of labor is of lesser significance 
    to economic growth. Therefore, the human resources of a country should 
    be adequate in number with required skills and abilities, so that economic 

    growth can be achieved.

    - Natural Resources: The natural resources of a country depend on the 
    climatic and environmental conditions. Countries having plenty of natural 
    resources enjoy good growth than countries with small amount of natural 
    resources. The efficient utilization or exploitation of natural resources 
    depends on the skills and abilities of human resource, technology used 
    and availability of funds. A country having skilled and educated workforce 

    with rich natural resources takes the economy on the growth path.

    - Government policy of subsidization and taxation. When the 
    government gives producers subsidies like loans, seeds etc, there will 
    be increase in the volume of goods while if the government over taxes 

    the people, production will be low.

    - Capital formation: Capital formation increases the availability of capital 
    per worker, which further increases capital/labor ratio. Consequently, the 
    productivity of labor increases, which ultimately results in the increase in 

    output and growth of the economy.

    - Social and Political Factors: Social factors involve customs, traditions, 
    values and beliefs, which contribute to the growth of an economy to a 
    considerable extent. For example, a society with conventional beliefs and 
    superstitions resists the adoption of modern ways of living. In such a 
    case, achieving becomes difficult. Apart from this, political factors, such 
    as participation of government in formulating and implementing various 

    policies, have a major part in economic growth.

    - Consumer confidence. Consumer and business confidence are very 
    important for determining economic growth. If consumers are confident 
    about the future they will be encouraged to borrow and spend thus 
    encouraging production which spearheads economic growth. If they 
    are pessimistic, they will save and reduce spending hence discouraging 

    production and economic growth.

    - Interest rates. Lower interest rates would make borrowing cheaper 
    and should encourage firms to invest and consumers to spend. People 
    with mortgages will have lower monthly mortgage payments so more 
    disposable income to spend thus encouraging economic growth and the 

    reverse is true when interest rates are high.

    - Value of exchange rate. If a country’s currency devalued, exports 
    would become more competitive and imports more expensive. This 
    would help to increase demand for domestic goods and services hence 
    economic growth. A depreciation could cause inflation, but in the short 
    term at least it can provide a boost to growth and vice versa. However, if 
    depreciation happens for a long period of time, it discourages production 

    and economic growth since businesses will no longer be profitable.

    - Banking sector. The banking sector is very influential in determining 
    investment and growth. If the banks lose money and no longer want to 
    lend, it can make it very difficult for firms and consumers leading to a 

    decline in investment and thus economic growth and vice versa.

    - The strength of labour markets. If labour markets are flexible, then 
    firms will find it easier to hire the workers they need. This will make 
    expansion easier. Highly regulated markets could discourage firms from 
    hiring in the first place, hence slowing down production and economic 

    growth.

    8.1.2: Benefits and costs of economic growth.

    Activity 8.2.

    Discuss the view that economic growth is a necessary evil.

    8.1.2.1 Benefits of economic growth.

    Economic growth means an increase in real GDP i.e. an increase in the value 
    of national output, income and expenditure. Essentially the benefit of economic 
    growth is higher living standards – higher real incomes and the ability to devote 
    more resources to areas like health care and education. There more other 

    various benefits to individuals and the entire economy as below.

    - There is increased production of goods and services which are vital to 

    society and help to reduce malnutrition and other related diseases.

    - Widens the tax base of the country through taxing the different economic 
    activities hence increasing revenue to the government that can be used for 

    development.

    - Economic independence is attained since the country produces a lot of 

    goods and services and this reduces relying on other countries for assistance.

    - Leads to increase in infrastructure development such as roads, hospitals 

    and schools among others which lead to the development of the country.

    - Urbanization and industrialization are achieved because of construction 

    of many industries to produce goods

    - General price level of goods and services will reduce because of the 

    increase in output

    - Reduction in balance of payment problems in the country because the 
    exports increase due to increased production and this improves the balance 

    of payment position

    - Political stability because people are well off and have a variety therefore 

    there are no food conflicts which is a major cause of Insecurities. 

    - Higher average incomes. Economic growth enables consumers to consume 
    more goods and services and enjoy better standards of living. This will reduce 

    absolute levels of poverty and thus enabling a rise in life expectancy. 

    - Lower unemployment. With higher output and positive economic growth, 
    firms tend to employ more workers creating more employment. Employment 
    opportunities come up because of the increase in economic activities and this 

    reduces the rates of poverty and its related problems.

    - Lower government borrowing. Economic growth creates higher tax 
    revenues, and there is less need to spend money on benefits such as 
    unemployment benefit. Therefore, economic growth helps to reduce 
    government borrowing. Economic growth also plays a role in reducing debt to 

    GDP ratios.

    - Improved public services. With increased tax revenues the government 
    can spend more on public services, such as health and education etc. This 
    can enable higher living standards, such as increased life expectancy, higher 

    rates of literacy and a greater understanding of civic and political issues.

    - Money can be spent on protecting the environment. With higher 
    economic growth a society can devote more resources to promoting recycling 

    and the use of renewable resources.

    - Investment. Economic growth encourages firms to invest, in order to meet 
    future demand. Higher investment increases the scope for future economic 

    growth – creating a virtuous cycle of economic growth/investment.

    - Increased research and development. High economic growth leads to 
    increased profitability for firms, enabling more spending on research and 
    development. Also, sustained economic growth increases confidence and 

    encourages firms to take risks and innovate.

    - Economic development. The biggest factor for promoting economic 
    development is sustained economic growth. Economic growth plays a major
    role in reducing absolute levels of poverty, increasing life expectancy thus 

    promoting development.

    - More choice. In less developed economies, a large proportion of the 
    population work in agriculture/subsistence farming, economic growth 
    enables a more diverse economy with people able to work in service sector, 

    manufacturing and having a greater choice of lifestyles.

    - Enhanced business confidence: Economic growth creates positive effect 
    as encourage people running their businesses. As profits of small firms and 
    business increase with economic growth, their business confidence and will 

    to grow up to meet more challenges.

    8.1.2.2: Costs of economic growth.

    Economic growth means an increase in real GDP i.e. an increase in real 
    income. This is usually considered beneficial, but also it brings about potential 

    and undesirable economic and social costs as seen below;

    - Pollution of air, sound and water. The industries set up to produce 
    and persistently increase output level may produce fumes that pollute the 
    environment and pour waste in air and water bodies. Noise from industrial 

    machines may also make the environment unsuitable for human living.

    - Environmental degradation. The ecosystem is normally tempered with 
    in order to increase the volume of goods and services produced. Swamps 
    are reclaimed, deforestation occur so as to give room to industries that 

    produce and persistently increase output level to attain economic growth.

    -Erosion of cultural values. In order to attain faster rates of economic growth, 
    nationals tend to adopt foreign ways of consumption, behavior and general 
    ways of living. This costs the nation of the discipline and order that had been 

    maintained for long.

    - Current consumption is normally foregone so as to save enough, 

    create capital assets that produce output to attain economic growth. 

    - People forego leisure which is an important aspect of improved standard 

    of living. They work so hard to increase output and attain economic growth.

    - Increased indebtedness of developing countries. In order to attain 
    economic growth, most developing countries borrow to set up production 
    ventures that produce and persistently increase the level of economic 

    growth. 

    - Industrial/occupational hazards. Several upcoming industries set 
    up to attain economic growth do not provide protective gadgets to the 
    workers, consequently, workers inhale poisonous fumes causing them 
    chronic diseases and death, and they sometimes lose body party to the 

    machines they are not oriented to.

    - The dangers of rural urban migration like slum development, 
    unemployment and overcrowdings arise. This is mainly because people 
    leave villages for urban settings where they expect to find jobs and better 

    social living standards.

    - Inflation. If Aggregate Demand (AD) increases faster than Aggregate 
    Supply (AS), then economic growth will lead to higher inflation as firms 
    put up prices. Economic growth tends to cause inflation when the growth 
    rate is above the long run trend rate of growth. It may be destabilizing 
    for an economy as interest rate may increase and can cause a loss of 
    competitiveness in international markets. It is when demand increases too 

    quickly that we get a positive output gap and firms push up prices. 

    - Boom and bust economic cycles. If economic growth is unsustainable 

    then high inflationary growth may be followed by a recession. 

    - Increased economic growth tends to cause an increase in spending on 

    imports, therefore, causing a deterioration on the current account. 

    - Environmental costs: Increased economic growth will lead to increased 
    output and consumption. This causes an increase in pollution. Increased 
    pollution from economic growth will cause health problems such as asthma 

    and therefore will reduce the quality of life. 

    - Connected to the above, economic growth also leads to over exploitation 
    of the natural resources that leads to their quick depletion. This means 

    greater use of raw materials and can speed up depletion of non-renewable resources. 

    - It also can also lead to problems of congestion of traffic and houses
    as more people can afford to buy a car, but it is hard to increase the 
    supply of roads to meet demand. This leads to delays and easy disease 
    spread; traffic congestion occurs as vehicles are ever flowing in and out of 
    the industrial place causing unnecessary delays, workers in the industrial 
    place tend to be accommodated near industries causing slum areas 

    around and poor sanitation. 

    - Inequality: Higher rates of economic growth have often resulted in 
    increased inequality because growth can benefit a small section of society 
    more than others. For example, those with assets and wealth will see a 
    proportionally bigger rise in the market value of rents and their wealth. 

    Those unskilled without wealth may benefit much less from growth. 

    - Regional disparities: In connection to the above, although average 
    living standards may be rising, there is a gap between rich and poor. It 
    can widen the issues of poverty and make a wide gap between different 

    regions, and this hinders economic development.

    - Diseases/problems of affluence: With rising living standards it can 
    cause unintended consequences. For example, with rising incomes, 
    there are more goods to steal. Also, high growth can make people more 
    materialistic which encourages crime. Also, higher incomes enable people 
    to afford more food; this is a factor behind rise in obesity and health related 

    problems.

    8.1.3: Theories of growth.

    Activity 8.3.

    In the second quarter of 2019, GDP at current market prices was 
    estimated to be Frw 2,255 billion, up to Frw 2,001 billion in Q2 2018. In 
    this quarter, services sector contributed 47 percent of GDP, agriculture 
    sector contributed 28 percent of the GDP, Industry sector contributed 17 
    percent of the GDP and 8 percent was attributed to adjustment for taxes 

    and subsidies on products.

    (Source: NISR: GDP National Accounts (Second Quarter 2019) 

    It can be observed that the service sector contributed much more than the 

    other sectors.

    In reference to the above scenario and in your own view, what do you think 

    is the best approach towards growth of the economy and why? 

    (i) A balanced approach where all sectors contribute equally towards 

    GDP?

    (ii) An unbalanced approach where different sectors contribute differently 

    towards GDP?

    The theories of growth attempt to show the causes, sources and stages of 
    economic growth and they have been developed from the developed nations 
    to show the stages they passed through and how far they have gone. These 

    theories include,

    (a) Balanced growth theory

    (b) Un balanced growth theory

    (c) Big push theory

    (d) Rostow’s stages of growth

    8.1.3.1: BALANCED GROWTH THEORY. 

    Activity 8.4.

    Make research to find out the meaning, merits and demerits of the balanced 

    growth theory of economic growth, and make presentation in class.

    a) Meaning of Balanced growth theory:

    Balanced growth theory of economic growth advocates for a simultaneous 
    upbringing of all sectors in an economy so that sectors grow together in harmony 
    and complement each other. The theory advocates for a critical minimum 
    effort which is the minimum level of investment in all the sectors of the economy 

    to ensure interdependence and self-sustaining growth.

    b) Arguments in favour of balanced growth strategy

    - Encourages resource exploitation and utilization because it creates 

    high demand for these resources by the many sectors in operation

    - Widens the tax base of the country because all the developed sectors are 

    taxed by the government

    - Encourages forward and backward linkages in the economy since some 
    sectors provide raw materials while others provide market for those raw 

    materials

    - Employment is created because of the increased demand for labour to 

    work in the different developed sectors.

    - Balanced of payment position may be improved especially when 

    production is for export.

    - Development in technology is undertaken because of the need to 

    produce good quality goods and services.

    - Self-reliance is created since all sectors are developed at the same time 

    and there are a variety of goods and services needed in the society.

    - Reduced income inequality because most of the people are engaged in 

    the production of goods and services.

    - Brain drain is reduced because the people are able to find employment in 

    the country. 

    - Foreign exchange is saved because there is little to import since the 

    economy is self-sustaining

    c) Disadvantages of the theory

    - May lead to sectors being developed without quality since it calls for a 

    critical minimum effort.

    - Requires a lot of capital which may be lacking in developing countries. 

    This is because developing all sectors requires a lot on capital.

    - It may lead to over exploitation of resources. This is because all sectors 

    have to be developed.

    - May lead to uncoordinated plans and sectors which may not lead to 
    the development of the economy. The sectors may turn out to be without 

    linkages

    - Over ambitiousness may at times lead to inferior work since the expected 

    results cannot be achieved. 

    d) Limitations of balanced growth

    - A balanced growth strategy requires a lot of capital funds which are 

    not yet available in developing economies.

    - Developing countries do not have adequate skilled manpower to 

    scatter in all sectors being developed at the same time.

    - A balanced growth strategy requires proper planning and 
    implementation of plans so as to coordinate the different projects 
    running at the same time, developing countries are not blessed with 

    such planning skills.

    - A balanced growth strategy requires developed infrastructure in terms 
    of transport and telecommunication network, hydroelectric power, 
    among others, such developed infrastructure is still inadequate in 
    developing economies, and so they cannot sustain a balanced growth 

    strategy.

    - Developing countries have under developed technology; it is still 
    traditional and sometimes just intermediate that cannot support the 

    growth of a balanced growth strategy.

    - Developing economies have inadequate local and foreign market, 
    such a market cannot support the much output from all sectors of the 

    economy, thus it goes to wastage hence losses.

    8.1.3.2: UNBALANCED GROWTH STRATEGY.

    Activity 8.5.

    Make research and discuss the view that unbalanced growth strategy is 
    more suitable than balanced growth strategy in achieving high levels of 

    economic growth in developing economies.

    a) Meaning of unbalanced growth 

    Unbalanced growth strategy emphasizes the growth of a few vital leading 
    sectors in an economy such that they expand and others are developed at a later 
    stage. Here countries tend to concentrate so much on sectors like agriculture 
    and industry since they employ a large number of people. Others like fishing, 
    mining to mention but a few come at a later stage. The developed sectors will in 

    turn pull others that were left behind

    b) Advantages of the theory

    - Needs little capital and resources which makes it possible in developing 

    economies which have always dealt with deficit budgets

    - Requires less expenditure. This is because a few sectors are looked at first 

    then others come in later

    - Easy to control and manage because a few leading sectors can easily be 

    coordinated compared to the balanced growth theory

    - Production can be controlled basing on demand forces because the country 

    will be producing according to available markets

    - The theory reserves some resources for the future use since some sectors 

    are developed at a later stage

    - Specialization is possible since the country concentrates on some sectors 

    fast and others are developed later. This creates efficiency in production

    - Requires micro-planning since it involves a small number of sectors which 

    makes planning and implementation easy

    - There will be less reliance on foreign loans and donations leading to limited 

    balance of payment problems

    c) Demerits of the theory

    - Slows the rate of economic growth since the output from the few sectors is 
    low and may not serve the whole nation at large. This may lead to constant 

    importation 

    - Regional inequalities come up because some areas will develop at the 

    expenses of others hence creating dualism with its associated problems

    - Unemployment since there are a few sectors developed and worse still the 

    sectors may resort to capital intensive technology to produce good quality

    - Encourages dependence because the country cannot satisfy the needs of its 
    people thus it keeps on importing what it cannot produce hence worsening 

    the balance of payment position

    - Leading sectors may not be able to pull others hence they will develop at the 

    expense of others sine they may not be compatible

    - Less tax revenue will be collected from the few sectors leading to constant 

    borrowing with its associated problems

    - Some resources will remain idle since the developed sectors cannot use them 

    as resources hence under utilization 

    - A decline in one or two sectors will affect the economy drastically since it has 

    no alternative sectors to run to

    - There will be brain drain since few people will employed creating a vacuum in 
    the country since the would be skilled people have fled in search for greener 

    pastures

    d) Limitations of the theory

    - The strategy emphasizes specialization which has several weaknesses like 
    limited varieties which limits choice and development, total loss in case of 

    failure among others.

    - The strategy limits employment opportunities, one or a few sectors promoted 
    can employ only a few people and with special skills so limiting employment 

    opportunities.

    - The strategy denies the economy a chance to diversify which is a great 

    input to development.

    - Developing countries have a limited size of the market which cannot 
    consume all the output from the sector being emphasizes all over the 

    country, so it leads to wastage of resources.

    - The strategy encourages dependency on other nations, the output missed 
    from the neglected sectors is to be imported which worsens the dependency 

    problem and worsen the balance of payment problems of the country.

    - The leading sector may fail to have a serious impact on the country worse 

    still it may just make it under develop more.

    - The strategy may lead to lagging behind sectors, the neglected sectors lag 
    so behind that uplifting them later may be so expensive or even hard, and 

    this further widens the gap between the sectors of the country. 

    8.1.3.3: Big push theory

    Activity 8.6

    Identify any one huge investment especially in the infrastructures that the 
    government has initiated in the recent years or is planning to initiate in the 

    near future.

    In your own view, how have this and other massive investments in 

    infrastructure and industry promote the growth of the economy?

    a) Meaning of Big Push Theory:

    Big push theory was advanced by an economist called Paul Rosenstein 
    Rodan and it is the reason why some economists prefer calling it the Rodanian 

    theory.

     The theory states that developing countries must massively invest in a variety of 
    industries and economic infrastructure so as to transform a backward agricultural 

    economy into a self-sustained dynamic economy.”

    The theory advocates for a massive investment program to promote rapid 

    industrialization and huge economic infrastructure.

    b) Arguments in favor of big push strategy

    - The theory advocates for setting up complementary industries. This 
    rises the volume and variety of goods and services provided to the 
    nationals giving them several to choose from so economic growth and 

    development.

    - The massive investment program emphasized by the theory accelerates 

    a stagnant economy into high rates of economic growth.

    - The theory advocates for industrial growth that provides several 
    employment opportunities to nationals, this develops the nation 

    further.

    - The industrial progress that Walt Rodan advocated for provides 
    forward and backward linkages to the agricultural sector all of which 

    are necessary for the rapid development of developing countries.

    - The theory calls for maximum exploitation of resources of developing 

    countries and this reduces underutilization of resources

    - There is a high likelihood of having a balanced development of the 
    economy if the different varieties of industries are scattered in different 

    parts of the developing countries.

    - The theory encourages self-sufficiency that is the major symptom of 
    development. The different varieties of industries produce different 

    varieties of output, so reducing the need to import from other countries.

    c) Disadvantages of the theory

    - The theory calls for massive expenditure, such funds are not readily 
    available in developing economies. It calls for borrowing from other 

    nations that increase the indebtedness of developing economies.

    - The big push theory increases ignores the role of agriculture in 
    development. Agriculture is the major supplier of foodstuffs and raw 
    materials to agro-based industries that developing countries can 

    sustain.

    - The massive industrialization that Rodan advocates for increases 

    pollution that reduces the quality of life of the people.

    - The theory calls for over exploitation of the natural resources due to 

    the massive industrialization, this leads to their quick depletion.

    - The heavy industrialization and economic infrastructural growth brings 
    about the use of machines in production, these replace laborers so 

    causing technological unemployment.

    - The massive industrialization required by the theory calls for the rich 
    foreign investors to developing countries. However these investors 
    repatriate all profits to their home countries leaving developing 

    economies in a worse state than they found them.

    d) Limitations of the theory

    - Inadequate funds and man power in developing economies to invest in

    the economy as the theory suggests.

    - Inadequate resources to act as raw materials may be a hindrance to the 

    development of industries 

    - Developing countries do not have adequate skilled manpower to 

    scatter in all sectors being developed at the same time.

    - Strategy requires proper planning and implementation of plans so 
    as to coordinate the different projects running at the same time, 

    developing countries are not blessed with such planning skills.

    - Strategy requires developed infrastructure in terms of transport and 
    telecommunication network, hydroelectric power, among others, such 
    developed infrastructure is still inadequate in developing economies, 

    and so they cannot sustain a balanced growth strategy.

    - Developing countries have under developed technology; it is still 
    traditional and sometimes just intermediate that cannot support the 

    growth strategy.

    - Developing economies have inadequate local and foreign market 
    that cannot support the much output from all the industries of the 

    economy.

    8.1.3.4: ROSTOW’S STAGES OF GROWTH

    Activity 8.7

    It has sometimes been argued that for developing countries to grow 
    and develop, they have to follow the footsteps taken by the developed 

    countries. Do you agree?

    a) Rostow’s stages of growth.

    Professor Walt Whitman Rostow described the following stages through which 
    societies pass to attain higher rates of economic growth and development. He 
    described the stages together with the features at those stages of the way of 
    life, way of doing work, level of capital accumulation, method of production, level 

    of saving and investment among others as below;

    3. Traditional stage

    4. Transitional stage

    5. Take off stage

    6. Drive to maturity stage

    7. Stage of high mass consumption

    1. Traditional stage

    This is the first stage in the development process where the economy is still 

    in infancy and there is little progress taking place. It has the following features

    - Subsistence production where output is for home consumption

    - No use of money as a medium of exchange

    - There is a high degree of communal organization where people work 

    together as a community

    - Traditional beliefs in culture lead to a lot of conservatism

    - There are cases of disease and the nearest hospital is the bush

    - Production is highly labour intensive

    - There is almost no formal employment and organized income 

    - There is nothing like investment and savings in the economy and the 

    economy is closed from external world

    - High levels of resource wastage through unproductive activities like funeral 

    rites, birth cerebrations, marriage etc 

    2. Transitional stage/ pre-condition to take off

    In this stage there are signs that the economy is preparing to take off. It has the 

    following features

    - Dualism arises at this stage. Dualism is the co-existence of two contradicting 

    sectors in an economy one developed and the other under developed. e.g. 

    commercial agriculture versus subsistence agriculture, agriculture versus 

    industry.

    - The society starts moving away from dominant subsistence sector and 

    traditional methods of production are reduced.

    - A market economy starts emerging where people exchange their output 

    for money.

    - Industrialization starts more so the processing industry, these are normally 

    agro-based industries processing agricultural output.

    - Entrepreneurs start to emerge.

    - Saving and investment start and rise up to 5% of the gross domestic 

    product.

    - Development of a national identity and shared economic interests.

    - Mobility of labour begins.

    3. Take off stage

    This is the stage that involves rapid transformation in the country’s social, 

    cultural, political and economic spheres. It has the following characteristics

    - Barriers to development are eliminated. Strong economic infrastructure 

    like banks, hospitals, schools are set up.

    - Savings and investment grow to between 5% and over 10% of the Gross 

    Domestic Product, new industries are introduced and industrial growth 

    takes faster rates.

    - More employment opportunities are created; peoples’ incomes rise 

    because wages are higher.

    - Idle resources are put to more efficient use through exploitation by the 

    industries

    - Modern and advanced technology is introduced in all sectors of the 

    economy.

    - Skilled and qualified labour and entrepreneurs start coming up.

    - Education and literacy rates increase at faster rates.

    - Rate of urbanization increases faster.

    4. Prematurity stage/ Drive to maturity stage (self-sustained growth)

    This is the stage which follows the take off stage and it has the following features

    - The rate of saving and investment is between 10% and 20% of GDP.

    - The economy undergoes fundamental political, social and economic 

    advancements, technology progresses rapidly.

    - Production for export grows further and there is limited importation of 

    manufactured goods.

    - The industrial sector is transformed from small scale to heavy 

    industrialization.

    - Agricultural mechanization emerges and such heavy agricultural machines 

    like tractors, combine harvesters, multi crop thresher are used to increase 

    agricultural productivity.

    - There is maximum utilization of the country’s resources.

    - Modernization of the economy is very high and traditional norms, beliefs 

    and customs are kicked away.

    - There are high levels of employment opportunities and white collar jobs 

    increase in availability.

    5. Stage of high mass consumption

    This is the last stage in growth where the economy has reached its climax. It has 

    the following characteristics

    - All resources in the country are fully exploited and utilized.

    - Consumer durables like washing machines, cookers etc become 

    necessities in every house hold.

    - Incomes of the people are extremely high due to full employment conditions.

    - Industrial growth is at its peak and they start producing luxuries like 

    cosmetics, necklaces among others.

    - The rates of saving and investments are over 20% of gross domestic 

    product.

    - There are high rates of exportation and the country’s balance of payment 

    position improves.

    - Urbanization increases and there is an increase in the urban population.

    - Country starts lending and donating to other nations.

    - People reduce working hours and start enjoying leisure, they even start 

    going abroad to tour and rest.

    It is important to note that some stages over lap into others, so it may be 

    difficult to identify the exact stage at which a society lies according to the 

    features stated by Professor Walt Whitman Rostow.

    b) Applicability of the theory in developing countries.

    As talked about by Rostow, developing countries have tended to go through the 

    same path though still a long way to go. The following features can be seen in 

    the developing countries

    - Subsistence production where output is for home consumption is very 

    common in developing countries as a means for survival.

    - No use of money as a medium of exchange. In some areas, exchange 

    is through barter system while generally money is used as a medium of 

    exchange in all societies.

    - There is a high degree of communal organization where people work 

    together as a community through cooperatives.

    - Traditional beliefs in culture lead to a lot of conservatism. This is very 

    common in developing countries and it has led to low quality output

    - Production is highly labour intensive and this is because of the 

    inadequacy in capital in developing countries

    - High levels of resource wastage through unproductive activities like 

    funeral rites, birth cerebrations, marriage etc. are common practices in 

    developing countries

    - Dualism is common. Dualism is the co-existence of two contradicting 

    sectors in an economy one developed and the other under developed. 

    E.g. commercial agriculture versus subsistence agriculture, agriculture 

    versus industry.

    - Industrialization is common more so the processing industry, 

    these are normally agro-based industries processing agricultural output. 

    As talked about in the pre-conditions to take off stage

    - Entrepreneurs are emerging and this has increased saving and 

    investment leading to increase of the gross domestic product.

    - There are high cases of labour mobility in the developing countries both 

    internal and external 

    c) Criticisms of Rostow’s theory

    - Rostow talks about progressing from stage to stage but does not show 

    the mechanism of how it is done.

    - Rostow bases his theory on American and European history and defines the 

    American norm of high mass consumption as an integral to the economic 

    development process to all industrial societies, so his model has no impact 

    on other nations especially the developing agricultural nations.

    - Rostow fails to demarcate one stage from the other as the features of take 

    off and transitional stage tend to overlap into each other.

    - Rostow bases his theory on savings, showing that growth occurs as the 

    rate of savings increase with advancing stages but savings do not show a 

    picture of economic growth because they may be autonomous.

    - Whitman Rostow gives rates of savings and investment at different 

    stages but does not show how the rates are determined, so they become 

    unrealistic

    Application activity 8.1.

    3.1. Sector Achievements and Challenges.

    In the final year of the EDPRS II, the Rwandan economy has 

    achieved tremendous results. Between 2013 and 2016, the economy 

    expanded by more than 20%, over 600,000 jobs were added to the 

    economy, and exports increased by almost 25%. Temporary international 

    commodity price volatility was weathered and several key flagship initiatives 

    have commenced, which, together with continued strong institutional 

    performance, has firmly put Rwanda on the regional and global map, 

    including the Kigali Convention Centre and the Kigali Logistics Platform. 

    Rwanda is again the 2nd best performer in Africa in the World Bank’s 2017 

    Doing Business Indicators and also 2nd in Africa in the World Economic 

    Forum’s 2017-18 Global Competitiveness Report.

    (Source. Private Sector Development and Youth Employment 

    Strategy (PSDYES) 2018-2024 Page 3)

    In view of the above, examine the policy strategies that Rwanda has 

    employed to reach the above levels of growth.

    8.2. Economic development

    Activity 8.8

    Study and compare the set of pictures A&B, C&D, and E&F above and 

    answer the questions that follow: 

    i) What do you learn from the comparison?

    ii) What do you find desirable and undesirable about them?

    iii) iii) What can be done to change the undesirable to the desirable?

    8.2.1: Meaning of economic development 

    Economic development refers to the sustained quantitative and qualitative 

    increase in the volume of goods and services produced over a period of time 

    resulting into positive social, economic, and political institutional changes that 

    may improve the quality of life of the population. It can also be defined as the 

    process by which real GNP per-capita increases quantitatively and qualitatively 

    over a very long period of time in the country. 

    Economic development can be measured by;

    1. Increase in real per-capita income

    2. Increase in things that improve the quality of life of man like food, housing, 

    health care, security, leisure, freedom and others.

    Economic development has got the following objectives.

    - To reduce upon illiteracy rates and improve upon literacy among the 

    citizens in the country.

    - To attain higher rates of economic growth as shown by the increase in the 

    gross domestic product

    - To attain price stability/fight against inflationary tendencies in an economy 

    so as to create certainty in the markets

    - To reduce economic dependency or to attain self-reliance so as to reduce 

    excess capital outflow and at the same time develop local production 

    ventures

    - To fight against unemployment so as to reduce poverty and improve the 

    standards of living.

    - To attain even resource distribution so as to reduce income inequalities 

    among the people and regions. 

    - To improve upon skills of the people through education to reduce 

    dependence on foreign experts who seem expensive.

    - To improve upon security to life and property to ensure a good political 

    atmosphere that will attract investors.

    - To control population growth rates to desirable levels so as to reduce its 

    associated problems.

    - To attain equilibrium of the balance of payment position through increasing 

    and improving upon the volume and value of exports and reducing spending 

    on imports.

    8.2.2: Comparison between economic growth and 

    development.

    Activity 8.9.

    Having acquired knowledge and understanding about economic growth in 

    sub section 8.1 and the meaning of economic development in subsection 

    8.2.1 of this unit, describe what you think are the distinguishing features 

    of economic growth and economic development.

    - Economic growth may involve the increase in the volume GDP only while 

    economic development involves both increase in the quality and quantity/

    volume of GDP.

    - Economic growth may take place even with uneven income distribution 

    while development involves fair income distribution

    - Growth can take place even with poor quality of output produced while 

    economic development involves improvement in quality of output

    - Economic growth may take a short period of time to achieve while 

    development may take a long time to achieve.

    - Economic growth may take place even with low quality of life of the 

    people while development involves change in the quality of life

    - Economic growth is a rapid process while economic development is a 

    slow process

    - Economic growth can be achieved without integration of economic 

    sectors with economic dependence while development takes place 

    when there is integration of economic sectors and self-sustenance.

    - Economic growth may take place without change in economic institutions 

    like banks while development takes place change with structural changes.

    8.2.3: Indicators of economic development.

    Activity 8.10.

    Make research on the economies of the Netherlands and that of Rwanda, 

    compare the two situations and explain what makes Netherlands economic 

    condition better than that of Rwanda?

    - Increase in per capita income since there is a high national income in the 

    country.

    - Better education and health services as shown by the increase in the 

    educational institutions as well as the health facilities.

    - Increased life expectancy i.e. number of years a person is expected to live 

    increases because of the improved wellbeing. 

    - Improved technology which produces good quality goods and services 

    that the people consume excessively.

    168

    - High levels of employment as showed by a fall in the unemployment rates.

    - Goods and services suit the tastes of the people where by production is 

    based on consumer sovereignty. 

    - Improvement in human and labour rights because of high rates of 

    democracy practiced in the countries.

    - Improved welfare of the people because of the good quality of the goods 

    that are produced in the country. 

    Application activity 8.2.

    Make research on the following countries and compare their economies 

    and categorize them into high income, middle income and low-income 

    status countries.

    8.3.: Under development:

    8.3.1: Meaning and characteristics of economic under 

    development:

    Activity 8.11.

    Study the pictures above and. 

    a) State what economic attachment is put onto the above pictures.

    b) What are the distinguishing features of countries that live in such 

    conditions.

    8.3.1.1: Meaning of economic underdevelopment:

    Economic underdevelopment is an economic situation where a society has 

    resources but has failed to put them to maximum use or maximum exploitation 

    so as to improve the welfare of individuals.

    Alternatively, economic underdevelopment is an economic situation where there 

    is persistently limited resource exploitation so as to satisfy nationals’ welfare to 

    desirable levels.

    8.3.1.2: Indicators/ characteristics or indicators of 

    underdevelopment.

    - Dualism. There is existence of two contrasting sectors one being 

    developed while the other poor eg rich and poor, commercial agriculture 

    and subsistence, educated and uneducated etc.

    - High population growth rate. People tend to produce more children 

    due to cultural factors.

    - High levels of dependence since the country hasn’t enough resources 

    to cater for its citizens.

    - Predominance of agriculture and most of output is for home 

    consumption. This is because the economies have little capital to invest in 

    other sectors like industry.

    - Weak and underdeveloped infrastructure especially the roads are of 

    poor quality and mainly are small feeder roads.

    - Predominance of a large subsistence sector. This is brought by the 

    small market in the country and worse still the quality is low.

    - Low level of productivity. This is brought by poor technology that is 

    rampant.

    - High levels of illiteracy and low-quality education. There are few 

    schools and worse still the available ones are of poor quality.

    - High levels of poverty among the people. This is brought about by 

    the high unemployment rates and still lack of capital to start up business.

    - Production is at excess capacity i.e. produce less than what is needed 

    by the people because of the poor techniques.

    - Political immaturity leading to instabilities are a common 

    characteristic because pf the constant struggle for power.

    8.3.2: Causes and policy measures to solve the problem of 

    underdevelopment in developing countries:

    Activity 8.12.

    Source: World fact book.

    According to the information in the above table, Singapore is smaller than 

    Rwanda by area. However, it has bigger GDP and Income per capita 

    figures than Rwanda. In your own view, 

    a) What factors explain this?

    b) Discuss the policy measures that Rwanda can put in place to overcome 

    underdevelopment.

    8.3.2.1: Causes of underdevelopment.

    Economic underdevelopment in developing countries arises due to both internal 

    and external factors as seen below;

    Internal causes 

    - Inadequate strategic raw materials and industrial inputs like coal, gold 

    which stimulate production, industrial growth and then production, this hinders 

    industrialization causing under development.

    - Political unrests. Peace and security are vital elements in the running and 

    functioning of any country. Most developing countries have failed to provide 

    security to their citizens. Civil strife, social unrest and political violence are 

    common phenomena in Africa. This hinders production, scares away investors 

    and destroy the already set capital assets for capital accumulation, causing 

    under development.

    - Capital Deficiency: Capital is of crucial importance for economic growth 

    and development. However, this is what the developing countries lack. With 

    the low level of national output much saving is not possible but whatever 

    there is, it is wasted away in conspicuous consumption and extravagance 

    in social ceremonies or is invested in real estate or jewelry. This handicaps 

    all productive enterprise and hinders economic growth and development in 

    developing countries. Such countries are caught up in a vicious circle of 

    poverty hence hampering development in their economies.

    - Limited Entrepreneurial and Managerial Talent. This is responsible for 

    missing available opportunities of profitable investment in most developing 

    countries. Hence such countries remain economically backward.

    - Limited Skilled Personnel and Technical Know-how: Another very 

    important bottleneck in the way of economic development is the scarcity 

    of technical know-how and skilled personnel in developing countries. 

    These elements of productive power take long in building up and foreign 

    technicians are very costly. Hence, the underdeveloped countries remain 

    under-developed since they lack them.

    - Limited Size of the Market: The purchasing power of the people of 

    most people in developing countries is very low on account of their rampant 

    poverty. Hence the productive enterprises are handicapped in the sale of 

    goods. Only an expanding market can provide a fruitful field for profitable 

    investment hence economic development in the developing countries.

    - Weak Infrastructure: The developing countries lack an adequate and 

    efficient means of transport and communications, a well-organized and 

    developed banking system and adequate facilities for technical education. 

    Without these no country can develop economically. Lack of adequate 

    infrastructure is a big abstracted to economic growth.

    - Social and Institutional Set-up: Social customs and attitudes of the 

    people of developing countries are a great bar to economic progress. 

    Conservatism, superstition, lack of ambition, undue regard for custom and 

    status are a strain on economic progress. Economic backwardness in most 

    developing countries is in no small measure due to joint family system, caste 

    system, peculiar laws of inheritance and the other-worldly attitude of the 

    people.

    - Growing Population: The explosive rate of population growth in the 

    developing countries undoubtedly retards their economic development. 

    Whatever development takes place is swallowed up by the rising wave of 

    population. The fruits of development are hardly sufficient to feed the tide of 

    babies.

    - Dependence on Agriculture: The majority of the population is engaged 

    in agriculture which is carried on in a primitive manner. Naturally the national 

    income remains at a low level. Economic development cannot be brought 

    about in the absence of rapid industrialization

    External causes include

    - Profit repatriation. Several of the investments in developing countries are 

    owned by foreigners, these take back the benefits ploughed out of these 

    investments back to their home countries leaving developing countries in a 

    worse state than they were found.

    - The debt servicing burden. Developing countries contract loans to set 

    up investments for development, all benefits obtained flow back to the 

    lenders in servicing these debts and paying them back rather than re-investing them. 

    These cause further under development of the developing 

    countries.

    - High levels of Brain drain. Several of the educated and high skilled 

    personnel in developing countries go abroad for greener pastures. This 

    leaves LDCs with the weak, dull, lazy and the unskilled labour force that 

    cannot aid further development.

    - The unfavorable trade position. Several LDCs produce and export 

    primary products which are semi processed or not processed at all, 

    consequently they fetch less revenue because of their low value causing 

    under development.

    - Alien Rule / Neocolonialism: Most of these countries have been under 

    foreign rule which has kept them down. The foreign rulers could not be 

    expected to take any genuine interest in the economic regeneration of 

    the people. Economic backwardness of most developing countries may 

    be largely attributed to the policies followed by colonial masters. Several 

    developing countries, though claim to be independent still follow the 

    principles, practices and policies of their former colonial masters which can 

    no longer develop them, they continue to get loans from former colonialists, 

    increasing their indebtedness causing further under development.

    8.3.2.2: Policy measures to solve the problem of 

    underdevelopment

    - Education reforms have been undertaken. This has helped many people to 

    access education so that they can be prepared to get jobs and remove the 

    people from poverty 

    - Land tenure reforms. This is through land redistribution policies and 

    making it accessible to all people in society so that they can be able to carry 

    out agriculture.

    - Kick start funds like the one cow per family has helped people to access 

    cows that can be used as source of income through selling the milk

    - Progressive taxation. This has reduced the gap between the rich and the 

    poor people since the revenues collected are used to subsidize the poor and 

    further infrastructure development

    - Improving infrastructure like roads which helps in the movement of people 

    and goods from areas of production to markets helps people to increase their 

    earnings

    - Liberalization of the economy. This has helped people to participate in 

    economic activities and trade hence increasing their incomes and standards 

    of living

    - Controlling population growth. This has helped to reduce the ratio of 

    resources to the population and also dependence burden among the families.

    - Modernizing agriculture. This has helped reduce the level of poverty in 

    rural areas where the activity is fully based. The people are able to increase 

    the quality and quantity of their products hence receiving more incomes.

    - Improvement of the investment climate. This has been through giving 

    tax holidays and free land like the free investment zone in Masoro. This has 

    attracted more investors and hence creating employment opportunities

    - Improvement of the political climate. This has created good environment 

    for production where by the people are not scared of carrying out any activity

    - Encouraging development of small scale enterprises. These have also 

    created more employment for the people in Rwanda and hence improving 

    their standard of living

    - Formation of co-operatives. This has been the basis for reducing income 

    inequalities among the people. These such as Saccos like umurenge sacco, 

    umwalimu sacco, producer co-operatives among others have encouraged 

    micro savings and given small loans to the local people.

    Application activity 8.3.

    The Government of Rwanda Vision 2020 seeks to transform Rwanda into 

    a middle-income country by 2020 and recently adopted vision 2050 that 

    will turn Rwanda into upper middle income by 2035 and high-income 

    country by 2050. In order to pave the way towards our long- term vision, 

    the National Strategy for Transformation (NST) for the next 7 years from 

    2018-2024 has an ambitious objective to increase the quality of life of 

    all Rwanda through rapid sustainable economic growth and accelerated 

    Moving towards a Poverty Free Rwanda.

    (Source: DRAFT REPORT. RWANDA FINANCIAL SECTOR STRATEGY 

    2018/2024. Page 10)

    In your own view, what policy issues should the government put in place 

    to drive the economy to reach a high-income status by 2050.

    End unit assesment

    1. Examine the factors that influence Rwanda’s level of GDP growth 

    rates. 

    2. What conditions are there to show that Rwanda’s economy is an 

    underdeveloped economy?

    3. Suggest measures that can be used to reduce the level of 

    underdevelopment in developing economies.

    ◄UNIT 7: GLOBALISATIONUNIT 9:AGRICULTURAL DEVELOPMENT►