What are the Stages of Economic Development?

What are the Stages of Economic Development?

Before addressing the question of what are the stages of economic development, it is useful to focus first on the main difference between economic growth and economic development.

The Difference Between Economic Growth and Economic Development

Obviously, sustained economic growth typically implies economic development, but most development economists nevertheless use the two terms differently. Economic growth typically refers to an increase in gross domestic product (GDP), while economic development typically refers to a structural transformation, mostly of the economy.

Stages of Economic Growth and Economic Development

Unlike the stages of economic growth (which were proposed in 1960 by economist Walt Rostow as five basic stages: traditional society, preconditions for take-off, take-off, drive to maturity, and age of high mass consumption), there exists no clear definition for the stages of economic development. Still, most development economists agree that the key stages of development are related to three different transitions: a) a structural transformation of the economy, b) a demographic transition, and c) a process of urbanization.

Breaking Down the Key Economic Development Stages

  1. The structural transformation refers to a change in the composition of GDP. Initially, economic activities and jobs are based in the agricultural sector. With development, the share of agriculture in GDP decreases as economic activities and jobs shift towards the industrial sector, especially manufacturing. After some decades of industrialization, the service sector will slowly overtake the share of industry, while the share of agriculture continues to decrease. In other words, at the final stage of development, we typically have an economy in which people earn their livelihood predominantly from the service sector and a still important but diminished industry sector.
  2. The demographic transition is determined mostly by changes in the fertility rates (i.e., the number of children per woman) and changes in life expectancy. Initially, fertility rates are high, but due to relatively high death rates (especially high infant mortality rates), population growth is limited. In the next stage, both fertility rates and life expectancy are increasing, causing a sharp increase in the size of population. With continuous development, life expectancy continues to increase, but sharply declining fertility rates will limit population growth.
  3. The main factors leading to the process of urbanization is the migration of people from rural areas seeking jobs in the emerging urban centers, the transformation of originally semi-urban suburbs into fully urban centers, and differences in population dynamics between rural and urban areas.

An alternative, typically narrower definition of stages of development refers to patterns of development, focusing on the structural change of an economy. Two prominent World Bank economists, Hollis Chenery and Moises Syrquin defined a pattern of development as a systematic variation in any significant aspect of the economic or social structure associated with a rising level of income or other index of development.

The Master's in Applied Economics

A large number of American University's faculty, myself included, have expertise in economic development, and bring this expertise to the classroom.  Students in the MA in Applied Economics program can explore theories of economic development and empirical tests of these theories in Survey of Economic Development (ECON 661).  Alumni from the MA in Economics program have gone on to work in such development organizations as the World Bank, the Malawi Washington Foundation, and World Learning.

Suggested further reading: Branson, William H., Isabel M. Guerrero, and Bernhard G. Gunter (1998). Patterns of Development, 1970-1994. Washington, DC: World Bank, EDI Working Paper; available at: http://siteresources.worldbank.org/WBI/Resources/wbi37132.pdf

About the Author

Dr. Gunter is an international scholar in development economics. His areas of expertise include development macroeconomics, debt sustainability analysis, and the social impact of globalization. He is also interested in analyzing poverty reduction policies, macroeconomic development strategies, and the economic challenges of climate change. His current research focuses on development issues of Bangladesh. Learn more about Dr. Gunter.

To learn more about American University’s online Master of Arts Economics, Applied Economics specialization, request more information or call us toll free at 855-725-7614.