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Business Marketing Guide: the Six Stages of Economic Development

Some markets are more advanced and/or growing more rapidly than others.  And some countries – or parts of a country – are at different stages of economic development.  This means their demands – and their marketing systems – vary.

To get some idea of the many possible differences in potential markets, it is important to discuss the six stages of economic development.  These stages are helpful, but they greatly oversimplify the real world for two reasons:  First, different parts of the same country may be at different stages of development – so it isn’t possible to identify a single country or region with only one stage.  Second, some countries skip one or two stages due to investments by foreign firms or investments by their own eager governments.  For example, the building of uneconomical steel mills to boost national pride – or the arrival of multinational car producers – might lead to a big jump in stages.  This "stage-jumping" does not destroy the six-stage process – it just explains why more rapid movements take place in some situations.

Stage 1 – Self-supporting agriculture:

In this stage, most people are subsistence farmers.  A simple marketing system may exist, but most of the people are not part of a money economy.  Some parts of Africa and New Guinea are in this stage.  In a practical sense, these people are not a market because they have no money to buy products.

Stage 2 – Preindustrial or commercial:

Some countries in sub-Saharan Africa and the Middle East are in this second stage.  During this stage, we see more market-oriented activity.  Raw materials such as oil, tin, and copper are extracted and exported.  Agricultural and forest crops such as sugar, rubber, and timber are grown and exported.  Often this is done with the help of foreign technical skills and capital.  A commercial economy may develop along with – but unrelated to – the subsistence economy.  These activities may require the beginnings of a transportation system to tie the extracting or growing areas to shipping points.  A money economy operates in this stage.

Stage 3 – Primary manufacturing:

In this third stage, a country may do some processing of metal ores or agricultural products it once exported in raw form.  Sugar and rubber, for example, are both produced and processed in Indonesia.  Companies based elsewhere in the world may set up factories to take advantage of low-cost labor.  Most of the output from these factories is exported, but the income earned by the workers stimulates economic development.  In addition, a growing group of professionals and technicians is needed to run the developing agricultural-industrial complex.  The demands of this group -and the growing number of wealthy natives – differ dramatically from the needs of the lower class and the emerging middle class.  Even though the local market expands in this third stage, a large part of the population continues to be almost entirely outside the money economy – and local producers are likely to have trouble finding enough demand to keep them in business.

Stage 4 – Nondurable and semidurable consumer products manufacturing:

At this stage, small local manufacturing begins – especially in those lines that need only a small investment to get started.  Often, these industries grow from the small firms that supplied the processors dominating the last stage.  For example, plants making explosives for extracting minerals might expand into soap manufacturing.  Multinational firms speed development of countries in this stage by investing in promising opportunities.  Paint, drug, food and beverage, and textile industries develop in this stage.  Because clothing is a necessity, the textile industry is usually one of the first to develop.  This early emphasis on the textile industry in developing nations is one reason the world textile market is so competitive.  As some of the small producers become members of the middle- or even upper-income class, they help to expand the demand for imported products.  As this market grows, local businesses begin to see enough volume to operate profitably.  So there is less need for imports to supply nondurable and semidurable products.  But most consumer durables and capital equipment are still imported.

Stage 5 – Capital equipment and consumer durable products manufacturing:

In this stage, the production of capital equipment and consumer durable products begins – including cars, refrigerators, and machinery for local industries.  Such manufacturing creates other demands – raw materials for the local factories, and food and clothing for the rural population entering the industrial labor force.  Industrialization begins, but the economy still depends on exports of raw materials – either wholly unprocessed or slightly processed.  The country may still have to import special heavy machinery and equipment in this stage, and imports of consumer durables may still compete with local products.

Stage 6 – Exporting manufactured products:

Countries that haven’t gone beyond the fifth stage are mainly exporters of raw materials.  They import manufactured products to build their industrial base.  In the sixth stage, countries begin exporting manufactured products.  Countries often specialize in certain types of manufactured products – such as iron and steel, watches, cameras, electronic equipment, and processed food.  These countries have grown richer.  They have needs – and the purchasing power – for a wide variety of products.  In fact, countries in this stage often carry on a great deal of trade with each other.  Each trades those products in which it has production advantages.  In this stage, almost all consumers are in the money economy.  And there may be a large middle-income class.  The United States, most of the Western European countries, and Japan are at this last stage.

It is important to see that it is not necessary to label a whole country or geographic region as being in one stage.  In fact, different parts of the United States have developed differently and are in different stages.