The Birth of Modern Economy: Stages of Economic Development (Part 1)

Lately, our articles have been revolving around the questions of how our modern economy emerged and what have been keeping it afloat until the present. At great length, we talked, but, it is not over yet! Not even close. We have yet to discuss in details the different stages the economy had to go through to arrive at its current form as witnessed in many developed nations today. Of course, developing nations, though may vary in the paths they take, are also making progress towards the same goal (or at least, that is what they have in mind).

In growth theory, economists often, argue whether or not least-developed and developing nations of the modern world will see their economies converged to the same state achieved by many developed nations nowadays. Some say that they will and some say they won’t. Some say that though the growth rate is high in many of the third-world countries (still partly thanks to the smaller base), they are in fact converging to lesser economic successes. Indeed, there are conflicting research findings when it comes to addressing such questions, but for us living outside of the academic world of economic discipline, these answers are probably of very little concern. Sometimes, such nonchalant attitude towards economics result from a true lack of interest (and you should not be blamed for human interests do not always coincide). Nonetheless, there have been occasions that could have sparked curiosity and thus inspired people to learn more, but then, people were often deterred by the lack of fundamental knowledge to further absorb and appreciate the more in-depth economic questions and answers. This article is an attempt to spark some interest in the topic of economic growth.

The question is not how to get from A to B, but what are there to consider along the way? It is not how to get to the end, but what sort of process do we need to undergo?

Still, why even bother learning about the different stages of development or economic growth?

Because economic growth is a topic of great significance as we are living right in the middle of it, and being able to grasp this core concept will enable us to make more sense of various economic policies out there to see if they fit into the context and whether or not policies embedding good intentions will yield favorable outcomes.

In every developing nation though (and even in many developed ones), millions are ignorant of this basic knowledge of the economy, which results in the discontent and resentment of the mass towards its own government due to the fact that a clear line is not drawn between ideal and feasibility.

Remember that a country with weak capability to generate internal revenue and mobilize external aids will need to focus on other pressing economic priorities first before moving on to providing luxurious public products such as free public healthcare (which is technically not free as it is largely funded by government’s revenue acquired through taxation). In emerging economies of the south in particular, a nation will more likely than not need to ensure that its citizens can meet their basic needs (enough nutrition, clean water, clothes, proper shelter, etc) before even considering allocating its already limited budget to the provision of something of grander scale like free public health care. Under this condition, resources are better off being used to build better public institutions and physical infrastructure, especially transportation, communication and energy. Inevitably, a country has to make some sacrifices as there are trade-offs to every economic decision. Of course, I am not saying that issues like those pertaining to environment and human rights should be overlooked. Regardless, to be able to raise consciousness about environmental and social issues, a nation needs to first be able to feed its people. Only when one can fill up one’s stomach can he or she be motivated to improve his/her surroundings. It is one of the facts of life that: a hungry man cannot think.

My point is effort should be made in every field of development, but a lot more should be put into the prioritized few. I am aware that these can never satisfy people’s immediate demands, but one has to see beyond the short-term gratification and consider development in the longer stretch of time. You have to understand that development is a step-by-step process that will require the existence of certain rudiments to support the subsequent ones. Thus, an abrupt change, a revolution, will most likely result in nothing but economic setback.

I strongly believe that economics pertains to us all, and hence, I feel somewhat compelled to (but not beyond the extent of my ability and qualification) make an attempt to write this article with the goal to explain to you the phases that a nation must go through before reaching its maturity (which can then vary based on what decisions are made along the way). Understanding this concept will not enable you to analyse or forecast the economy like a pro, but it will suffice to let you appreciate and further work by yourself to grasp the true rationale or purpose of various economic policies and the expected outcomes rather than be led by fallacious common sense and emotion (which, trust me on this one, happens a lot). Think about it this way. Common sense says we should raise minimum wages, but many economists come to a different conclusion with additional questions on top. Some findings show that raising minimum wages can in fact cause more unemployment as employers find it more expensive to hire. Sometimes, at very early stage of growth, raising minimum wage in labour-intensive (unskilled workforce) industries can attract more labour force to the sector with higher minimum wage resulting in labour shortage in other sectors and lead to the expansion of informal sector that does not pay tax. So, whose minimum wages should we raise? Will raising minimum wages make everyone better off? How should we compensate those adversely affected? You see, it is not such a straightforward matter.

I hope that by now, I have made enough repetitions to convince you that we should all learn more about economic development, especially the stages our economy has to go through to get some ideas of where we are and where we are supposed to go next. If you agree with me (and I hope you do), then we will now look at what exactly determines the different stages of economic development.

1. The 3 (or 5) Sectors

Please bear in mind from here on that there are different stages to development, and each stage is (at least for the purpose of this article) determined by the differences in the composition of the economy, i.e. how much output is accountable by each of the following sectors:

– Primary Sector: involves the extraction of natural resources. Economic activities like agriculture, mining, fishing, logging, and so forth are all parts of primary sector. A nation at its primitive form and early stage of modern development depends heavily on this particular sector to generate its revenue locally and internationally. A nation, in this early stage, faces the risk of being trapped in growth stagnancy (due to resource curse and/or dutch disease) if resources are not well-managed. Further discussion below will cover this intriguing phenomenon.

– Secondary Sector: primarily concerned with converting raw materials (from primary sector) into intermediate or final goods. This sector is where final products are made, where potatoes turned into chips, wood into tables and chairs, cotton into clothes, sand into glasses, metals into cars, etc. Intermediate products like nails, plastic, and yarn used in the making of other finished/final goods are also being manufactured in secondary sector. Secondary sector is like a milestone along the development highway because there is only so much we can obtain directly from nature. In other words, there is a natural limit to the amount of resources we can extract from the earth. A country where only primary sector thrives will sooner or later face a crisis because they subsist on the supply of raw materials that remain finite no matter how great their demand becomes. Thus, secondary sector is almost always the next focus and the most common development route for emerging economies. This was also a major cause of population explosion about 2 centuries ago after the advent of industrial revolution that marked the rise in secondary sector. Could it be a mere coincidence? Not possible. Secondary sector simply raised production by many folds due to the arrival of new techniques and systems employed especially in agriculture and the production of other necessities of life, and consequently, it contributed considerably to the dramatic rise in population on top of prolonging human life span.

– Tertiary Sector: concerned with the supply of services (intangible products) to the economy. This sector is where people sell their their expertise (knowledge/experience) and time to facilitate and bring improvement to the other two sectors, to enhance productivity, performance, convenience, availability and accessibility at both the producer and consumer sides of the economy. People like bankers, lawyers, accountants, economists, consultants, professors, researchers, architects, etc., are those who fit into this particular category of the workforce. These people are the one pushing development of a nation further into the future and the one whose contributions play a major role in transforming their society to a more civilized and modern society. Nations in the transition phase towards an advanced economy will go through “tertiarization” a process in which a huge portion of its labour force evolves into pikachu… just kidding… into service providers as mentioned earlier. This is also the time when the former two sectors (primary and secondary) shrink but simultaneously becoming greatly efficient as fewer inputs of labour can produce a huge amount of outputs.

Though in most cases, economic sectors can be described meaningfully by the 3 sectors as stated, there also exist, within the last sector, “tertiary sector”, 2 more distinct sub-ordinate categories. And you guess it, they are called: Quaternary and Quinary economic sectors.

Tertiary Sector:

+ Quarternary Sector:basically defined as a knowledge-based sector consisting primarily of intellectual activities like scientific research, financial consulation, education, and others of similar nature. What distinguishes this from the general activities in service sector or tertiary sector is pretty much the knowledge element. To be precise, think of a waitress and a professor. While both are working in tertiary sector, the waitress is not a part of the Quaternary sector, but the professor is – because the professor is passing knowledge to his students and his work involves a much greater degree of engagement with intellectual activities like researching and attending academic conference.

+ Quinary Sector:is a branch of quaternary sector that contains the top level decision-making bodies, like those high-ranking officials in government, public institutions, and international organizations like the UN and World Bank, and those top executives in media and companies like Microsoft and Apple, just to name a few. They are the ones whose individual decisions will have immense and long-lasting consequences on their society and the entire globe. Therefore, despite the fact that all sectors are inter-linked, Quinary Sector, though tiny in size, has a uniquely profound impact on all the previous 4 sectors in a sense that it points out the general directions and determines the future outcomes of virtually every field.


Note that at different stages of development, different sectors take turn in pushing the economy onwards. Probably, it is not that hard to see that at the early stage (for least-developed nations), primary sector plays a major part in generating revenue for the country and its people. Later on, they will move towards light and heavy industries of the secondary sector (probably you have heard of the term “industrialization”). That is basically economic growth in a nutshell. However, there are lots to say about each stage of development, and that is what the second part of our article is all about. We will look closely into the transformation of a nation from the state of poverty to the state of abundance, and probably some discussion about how economic development can liberalize thoughts and re-shape a nation’s political and social landscape.

That is all for now. Until next time!