West Bank and GazaVanuatuTongaTimor-LesteSolomon IslandsSingaporeSeychellesSanMarinoSamoaTuvaluQatarPalauNauruMauritiusMaltaMaldivesLebanonKuwaitIsraelFijiFederated States of MicronesiaMarshall IslandsCyprusComorosBrunei DarussalamBahrainZimbabweZambiaVietnamUzbekistanUnited ArabEmiratesUkraineUgandaTurkmenistanTurkeyTunisiaThailandTanzaniaTajikistanSyrianArab Rep.rlandSwedenSwazilandSudanSri LankaSouth AfricaSomaliaSloveniaSlovak RepublicSerbiaSaudi ArabiaRwandaR u s s i a n F e d e r a t i o nRomaniaRep. ofYemenRep. ofKoreaPolandPhilippinesPapua NewGuineaPakistanOmanwayriaNigerNepalNamibiaMyanmarMozambiqueMongoliaMoldovaMalaysiaMalawiMadagascarLithuaniaLibyaLesothoLatviaLaoP.D.R.Kyrgyz RepublicKenyaKazakhstanJordanJapanItalyIslamic Republicof IranIraqIndonesiaIndiaHungaryGreeceermanyGeorgiaGabonFYR MacedoniaFinlandEthiopiaEstoniaEritreaorial GuineaDjiboutinmarkDem. Rep.of CongoDem. PeoplesRep. of KoreaCzech RepublicCroatiaCongoC h i n aChadCentralAfricanRepublicameroonCambodiaBurundiBulgariaBotswanaBosnia and HerzegovinaBhutanmBelarusBangladeshAzerbaijanAustriaA u s t r a l i aNew ZealandArmeniaArab Rep.of EgyptAngolaAlbaniaMontenegroAfghanistanRéunion (Fr)NewCaledonia(Fr)N. Mariana Islands (US)Mayotte(Fr)Guam (US)American Samoa (US)Sub-Saharan Africa$952Europe & Central Asia$6,051South Asia$880East Asia & Pacific$2,180China$2,360India$950Russian Federation$7,560
iEconomicDevelopmentE L E V E N T H E D I T I O NMichael P. TodaroNew York UniversityStephen C. SmithThe George Washington UniversityAddison-WesleyBoston Columbus Indianapolis New York San Francisco Upper Saddle RiverAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
viiCase Studies and Boxes xviiPreface xixPart One Principles and Concepts 11 Introducing Economic Development:A Global Perspective 21.1 How the Other Half Live 21.2 Economics and Development Studies 7The Nature of Development Economics 7Why Study Development Economics? Some Critical Questions 9The Important Role of Values in Development Economics 12Economies as Social Systems: The Need to Go Beyond Simple Economics 131.3 What Do We Mean by Development? 14Traditional Economic Measures 14The New Economic View of Development 14Amartya Sen’s “Capability” Approach 16Development and Happiness 19Three Core Values of Development 20The Central Role of Women 22The Three Objectives of Development 221.4 The Millennium Development Goals 231.5 Conclusions 25■ Case Study 1: Progress in the Struggle for More Meaningful Development: Brazil 282 Comparative Economic Development 372.1 Defining the Developing World 382.2 Basic Indicators of Development: Real Income, Health, and Education 44Purchasing Power Parity 44Indicators of Health and Education 452.3 Holistic Measures of Living Levels and Capabilities 47The Traditional Human Development Index 47The New Human Development Index 542.4 Characteristics of the Developing World: Diversity within Commonality 56Contents
Lower Levels of Living and Productivity 57Lower Levels of Human Capital 59Higher Levels of Inequality and Absolute Poverty 61Higher Population Growth Rates 62Greater Social Fractionalization 64Larger Rural Populations but Rapid Rural-to-Urban Migration 65Lower Levels of Industrialization and Manufactured Exports 66Adverse Geography 67Underdeveloped Markets 68Lingering Colonial Impacts and Unequal International Relations 692.5 How Low-Income Countries Today Differ from Developed Countries in TheirEarlier Stages 71Physical and Human Resource Endowments 71Relative Levels of Per Capita Income and GDP 72Climatic Differences 72Population Size, Distribution, and Growth 73The Historical Role of International Migration 73The Growth Stimulus of International Trade 76Basic Scientific and Technological Research and Development Capabilities 76Efficacy of Domestic Institutions 772.6 Are Living Standards of Developing and Developed Nations Converging? 782.7 Long-Run Causes of Comparative Development 832.8 Concluding Observations 91■ Case Study 2: Comparative Economic Development: Pakistan and Bangladesh 943 Classic Theories of Economic Growth and Development 1093.1 Classic Theories of Economic Development: Four Approaches 1103.2 Development as Growth and the Linear-Stages Theories 110Rostow’s Stages of Growth 111The Harrod-Domar Growth Model 112Obstacles and Constraints 114Necessary versus Sufficient Conditions: Some Criticisms of the Stages Model 1143.3 Structural-Change Models 115The Lewis Theory of Development 115Structural Change and Patterns of Development 120Conclusions and Implications 1213.4 The International-Dependence Revolution 122The Neocolonial Dependence Model 122The False-Paradigm Model 124The Dualistic-Development Thesis 124Conclusions and Implications 1253.5 The Neoclassical Counterrevolution: Market Fundamentalism 126Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches 126Traditional Neoclassical Growth Theory 128Conclusions and Implications 1293.6 Classic Theories of Development: Reconciling the Differences 131■ Case Study 3: Schools of Thought in Context: South Korea and Argentina 133viii Contents
Appendix 3.1 Components of Economic Growth 140Appendix 3.2 The Solow Neoclassical Growth Model 146Appendix 3.3 Endogenous Growth Theory 1504 Contemporary Models of Development and Underdevelopment 1554.1 Underdevelopment as a Coordination Failure 1564.2 Multiple Equilibria: A Diagrammatic Approach 1594.3 Starting Economic Development: The Big Push 163The Big Push: A Graphical Model 165Other Cases in Which a Big Push May Be Necessary 170Why the Problem Cannot Be Solved by a Super-Entrepreneur 1714.4 Further Problems of Multiple Equilibria 1724.5 Michael Kremer’s O-Ring Theory of Economic Development 176The O-Ring Model 176Implications of the O-Ring Theory 1794.6 Economic Development as Self-Discovery 1804.7 The Hausmann-Rodrik-Velasco Growth Diagnostics Framework 1824.8 Conclusions 185■ Case Study 4: Understanding a Development Miracle: China 189Part Two Problems and Policies: Domestic 2015 Poverty, Inequality, and Development 2025.1 Measuring Inequality and Poverty 204Measuring Inequality 204Measuring Absolute Poverty 2115.2 Poverty, Inequality, and Social Welfare 219What’s So Bad about Extreme Inequality? 219Dualistic Development and Shifting Lorenz Curves: Some Stylized Typologies 221Kuznets’s Inverted-U Hypothesis 224Growth and Inequality 2285.3 Absolute Poverty: Extent and Magnitude 229Growth and Poverty 2325.4 Economic Characteristics of High-Poverty Groups 235Rural Poverty 236Women and Poverty 237Ethnic Minorities, Indigenous Populations, and Poverty 2405.5 Policy Options on Income Inequality and Poverty: Some BasicConsiderations 241Areas of Intervention 241Altering the Functional Distribution of Income through RelativeFactor Prices 242Modifying the Size Distribution through Increasing Assets ofthe Poor 244ixContents
Progressive Income and Wealth Taxes 245Direct Transfer Payments and the Public Provision of Goods and Services 2465.6 Summary and Conclusions: The Need for a Package of Policies 248■ Case Study 5: Institutions, Inequality, and Incomes: Ghana and Côte d’Ivoire 250Appendix 5.1 Appropriate Technology and Employment Generation: The Price Incentive Model 262Appendix 5.2 The Ahluwalia-Chenery Welfare Index 2656 Population Growth and Economic Development:Causes, Consequences, and Controversies 2696.1 The Basic Issue: Population Growth and the Quality of Life 2696.2 Population Growth: Past, Present, and Future 270World Population Growth throughout History 270Structure of the World’s Population 273The Hidden Momentum of Population Growth 2776.3 The Demographic Transition 2786.4 The Causes of High Fertility in Developing Countries: The Malthusianand Household Models 281The Malthusian Population Trap 281Criticisms of the Malthusian Model 284The Microeconomic Household Theory of Fertility 285The Demand for Children in Developing Countries 288Implications for Development and Fertility 2896.5 The Consequences of High Fertility: Some Conflicting Perspectives 290It’s Not a Real Problem 291It’s a Deliberately Contrived False Issue 292It’s a Desirable Phenomenon 292It Is a Real Problem 294Goals and Objectives: Toward a Consensus 2976.6 Some Policy Approaches 298What Developing Countries Can Do 298What the Developed Countries Can Do 300How Developed Countries Can Help Developing Countries with Their PopulationPrograms 301■ Case Study 6: Population, Poverty, and Development: China and India 3037 Urbanization and Rural-Urban Migration:Theory and Policy 3117.1 The Migration and Urbanization Dilemma 311Urbanization: Trends and Projections 3127.2 The Role of Cities 318Industrial Districts 318Efficient Urban Scale 3227.3 The Urban Giantism Problem 323First-City Bias 325Causes of Urban Giantism 3257.4 The Urban Informal Sector 327x Contents
Policies for the Urban Informal Sector 329Women in the Informal Sector 3337.5 Migration and Development 3347.6 Toward an Economic Theory of Rural-Urban Migration 337A Verbal Description of the Todaro Model 337A Diagrammatic Presentation 340Five Policy Implications 3427.7 Summary and Conclusions: A Comprehensive Migration and Employment Strategy 344■ Case Study 7: Rural-Urban Migration and Urbanization in Developing Countries: Indiaand Botswana 347Appendix 7.1 A Mathematical Formulation of the Todaro Migration Model 3568 Human Capital: Education and Health in Economic Development 3598.1 The Central Roles of Education and Health 359Education and Health as Joint Investments for Development 361Improving Health and Education: Why Increasing Income Is Not Sufficient 3628.2 Investing in Education and Health: The Human Capital Approach 3658.3 Child Labor 3688.4 The Gender Gap: Discrimination in Education and Health 373Consequences of Gender Bias in Health and Education 3758.5 Educational Systems and Development 377The Political Economy of Educational Supply and Demand: The Relationship between EmploymentOpportunities and Educational Demands 377Social versus Private Benefits and Costs 379Distribution of Education 381Education, Inequality, and Poverty 383Education, Internal Migration, and the Brain Drain 3868.6 Health Measurement and Distribution 3868.7 Disease Burden 390HIV/AIDS 393Malaria 396Parasitic Worms and Other “Neglected Tropical Diseases” 3978.8 Health, Productivity, and Policy 399Productivity 399Health Systems Policy 400■ Case Study 8: Pathways out of Poverty: Progresa/Oportunidades 4049 Agricultural Transformation and Rural Development 4169.1 The Imperative of Agricultural Progress and Rural Development 4169.2 Agricultural Growth: Past Progress and Current Challenges 419Trends in Agricultural Productivity 419Market Failures and the Need for Government Policy 4229.3 The Structure of Agrarian Systems in the Developing World 423Three Systems of Agriculture 423Peasant Agriculture in Latin America, Asia, and Africa 425xiContents
Agrarian Patterns in Latin America: Progress and Remaining Poverty Challenges 427Transforming Economies: Problems of Fragmentation and Subdivision of Peasant Land in Asia 429Subsistence Agriculture and Extensive Cultivation in Africa 4329.4 The Important Role of Women 4339.5 The Microeconomics of Farmer Behavior and Agricultural Development 438The Transition from Peasant Subsistence to Specialized Commercial Farming 438Subsistence Farming: Risk Aversion, Uncertainty, and Survival 438The Economics of Sharecropping and Interlocking Factor Markets 442The Transition to Mixed or Diversified Farming 444From Divergence to Specialization: Modern Commercial Farming 4459.6 Core Requirements of a Strategy of Agricultural and Rural Development 447Improving Small-Scale Agriculture 448Conditions for Rural Development 450■ Case Study 9: The Need to Improve Agricultural Extension for Women Farmers: Kenya 45310 The Environment and Development 46510.1 Environment and Development: The Basic Issues 465Economics and the Environment 465Sustainable Development and Environmental Accounting 467Population, Resources, and the Environment 468Poverty and the Environment 469Growth versus the Environment 469Rural Development and the Environment 470Urban Development and the Environment 470The Global Environment and Economy 471The Nature and Pace of Greenhouse Gas–Induced Climate Change 471Natural Resource–Based Livelihoods as a Pathway out of Poverty: Promiseand Limitations 471The Scope of Domestic-Origin Environmental Degradation: An Overview 47210.2 Rural Development and the Environment: A Tale of Two Villages 473A Village in Sub-Saharan Africa 474A Settlement Near the Amazon 474Environmental Deterioration in Villages 47510.3 Global Warming and Climate Change: Scope, Mitigation, and Adaptation 476Scope of the Problem 476Mitigation 478Adaptation 47910.4 Economic Models of Environment Issues 481Privately Owned Resources 481Common Property Resources 483Public Goods and Bads: Regional Environmental Degradation and theFree-Rider Problem 486Limitations of the Public-Good Framework 48810.5 Urban Development and the Environment 488Environmental Problems of Urban Slums 488Industrialization and Urban Air Pollution 489Problems of Congestion, Clean Water, and Sanitation 49210.6 The Local and Global Costs of Rain Forest Destruction 493xii Contents
10.7 Policy Options in Developing and Developed Countries 496What Developing Countries Can Do 496How Developed Countries Can Help Developing Countries 498What Developed Countries Can Do for the Global Environment 500■ Case Study 10: A World of Contrasts on One Island: Haiti and the Dominican Republic 50211 Development Policymaking and the Roles of Market, State,and Civil Society 51111.1 A Question of Balance 51111.2 Development Planning: Concepts and Rationale 512The Planning Mystique 512The Nature of Development Planning 513Planning in Mixed Developing Economies 513The Rationale for Development Planning 51411.3 The Development Planning Process: Some Basic Models 516Three Stages of Planning 516Aggregate Growth Models: Projecting Macro Variables 517Multisector Models and Sectoral Projections 519Project Appraisal and Social Cost-Benefit Analysis 52011.4 Government Failure and the Resurgent Preference for Markets over Planning 524Problems of Plan Implementation and Plan Failure 524The 1980s Policy Shift toward Free Markets 52611.5 The Market Economy 528Sociocultural Preconditions and Economic Requirements 52811.6 The Washington Consensus on the Role of the State in Development andIts Subsequent Evolution 530Toward a New Consensus 53111.7 Development Political Economy: Theories of Policy Formulation and Reform 533Understanding Voting Patterns on Policy Reform 534Institutions and Path Dependency 536Democracy versus Autocracy: Which Facilitates Faster Growth? 53711.8 Development Roles of NGOs and the Broader Citizen Sector 53911.9 Trends in Governance and Reform 546Tackling the Problem of Corruption 546Decentralization 547Development Participation 549■ Case Study 11: The Role of Development NGOs: The BRAC Model 552Part Three Problems and Policies: International and Macro 56312 International Trade Theory and Development Strategy 56412.1 Economic Globalization: An Introduction 56412.2 International Trade: Some Key Issues 567Five Basic Questions about Trade and Development 569Importance of Exports to Different Developing Nations 571xiiiContents
Demand Elasticities and Export Earnings Instability 572The Terms of Trade and the Prebisch-Singer Hypothesis 57312.3 The Traditional Theory of International Trade 575Comparative Advantage 575Relative Factor Endowments and International Specialization: The Neoclassical Model 576Trade Theory and Development: The Traditional Arguments 58112.4 The Critique of Traditional Free-Trade Theory in the Context ofDeveloping-Country Experience 582Fixed Resources, Full Employment, and the International Immobility of Capitaland Skilled Labor 583Fixed, Freely Available Technology and Consumer Sovereignty 586Internal Factor Mobility, Perfect Competition, and Uncertainty: Increasing Returns, ImperfectCompetition and Issues in Specialization 586The Absence of National Governments in Trading Relations 589Balanced Trade and International Price Adjustments 590Trade Gains Accruing to Nationals 590Some Conclusions on Trade Theory and Economic Development Strategy 59112.5 Traditional Trade Strategies for Development: Export Promotion versusImport Substitution 593Export Promotion: Looking Outward and Seeing Trade Barriers 595Expanding Exports of Manufactured Goods 597Import Substitution: Looking Inward but Still Paying Outward 599The IS Industrialization Strategy and Results 602Foreign-Exchange Rates, Exchange Controls, and the Devaluation Decision 607Trade Optimists and Trade Pessimists: Summarizing the Traditional Debate 61112.6 The Industrialization Strategy Approach to Export Policy 61312.7 South-South Trade and Economic Integration 617Economic Integration: Theory and Practice 617Regional Trading Blocs and the Globalization of Trade 61912.8 Trade Policies of Developed Countries: The Need for Reform and Resistanceto New Protectionist Pressures 620■ Case Study 12: A Pioneer in Development Success through Trade: Taiwan 62413 Balance of Payments, Debt, Financial Crises, and StabilizationPolicies 63813.1 International Finance and Investment: Key Issues 63813.2 The Balance of Payments Account 639General Considerations 639A Hypothetical Illustration: Deficits and Debts 64213.3 The Issue of Payments Deficits 644Some Initial Policy Issues 644Trends in the Balance of Payments 64813.4 Accumulation of Debt and Emergence of the Debt Crisis 650Background and Analysis 650Origins of the 1980s Debt Crisis 652xiv Contents
13.5 Attempts at Alleviation: Macroeconomic Instability, Classic IMF StabilizationPolicies, and Their Critics 654The IMF Stabilization Program 654Tactics for Debt Relief 65613.6 “Odious Debt” and Its Prevention 66113.7 Resolution of 1980s–1990s Debt Crises and Continued Vulnerabilities 66213.8 The Global Financial Crisis and the Developing Countries 664Causes of the Crisis and Challenges to Lasting Recovery 664Economic Impacts on Developing Countries 666Differing Impacts across Developing Regions 670Prospects for Recovery and Stability 672Opportunities as Well as Dangers? 673■ Case Study 13: Trade, Capital Flows, and Development Strategy: South Korea 67514 Foreign Finance, Investment, and Aid: Controversiesand Opportunities 68414.1 The International Flow of Financial Resources 68414.2 Private Foreign Direct Investment and the MultinationalCorporation 685Private Foreign Investment: Some Pros and Cons for Development 688Private Portfolio Investment: Benefits and Risks 69414.3 The Role and Growth of Remittances 69514.4 Foreign Aid: The Development Assistance Debate 697Conceptual and Measurement Problems 697Amounts and Allocations: Public Aid 699Why Donors Give Aid 701Why Recipient Countries Accept Aid 705The Role of Nongovernmental Organizations in Aid 706The Effects of Aid 70714.5 Conflict and Development 708The Scope of Violent Conflict and Conflict Risks 708The Consequences of Armed Conflict 708The Causes of Armed Conflict and Risks of Conflict 712The Resolution and Prevention of Armed Conflict 713■ Case Study 14: African Success Story at Risk: Botswana 71815 Finance and Fiscal Policy for Development 72915.1 The Role of the Financial System in Economic Development 730Differences between Developed and Developing Financial Systems 73115.2 The Role of Central Banks and Alternative Arrangements 734The Role of Development Banking 73815.3 Informal Finance and the Rise of Microfinance 739Traditional Informal Finance 739Microfinance Institutions 741xvContents
15.4 Reforming Financial Systems 746Financial Liberalization, Real Interest Rates, Savings, and Investment 746Financial Policy and the Role of the State 747Debate on the Role of Stock Markets 74915.5 Fiscal Policy for Development 751Macrostability and Resource Mobilization 751Taxation: Direct and Indirect 75115.6 State-Owned Enterprises and Privatization 756Improving the Performance of SOEs 757Privatization: Theory and Experience 75815.7 Public Administration: The Scarcest Resource 761■ Case Study 15: Making Microfinance Work for the Poor: The Grameen Bank of Bangladesh 763Glossary 773Name Index 787Subject Index 797xvi Contents
xviiCase Studies1 Progress in the Struggle for More Meaningful Development: Brazil 282 Comparative Economic Development: Pakistan and Bangladesh 943 Schools of Thought in Context: South Korea and Argentina 1334 Understanding a Development Miracle: China 1895 Institutions, Inequality, and Incomes: Ghana and Côte d’Ivoire 2506 Population, Poverty, and Development: China and India 3037 Rural-Urban Migration and Urbanization in Developing Countries:India and Botswana 3478 Pathways out of Poverty: Progresa/Oportunidades 4049 The Need to Improve Agricultural Extension for Women Farmers: Kenya 45310 A World of Contrasts on One Island: Haiti and the Dominican Republic 50211 The Role of Development NGOs: The BRAC Model 55212 A Pioneer in Development Success through Trade: Taiwan 62413 Trade, Capital Flows, and Development Strategy: South Korea 67514 African Success Story at Risk: Botswana 71815 Making Microfinance Work for the Poor: The Grameen Bank of Bangladesh 763Boxes1.1 The Experience of Poverty: Voices of the Poor 62.1 Computing the NHDI: The Case of China 552.2 FINDINGS Instruments to Test Theories of Comparative Development: Inequality 882.3 FINDINGS Legacy of Colonial Land Tenure Systems 894.1 Synchronizing Expectations: Resetting “Latin American Time” 1634.2 FINDINGS Three Country Case Study Applications of Growth Diagnostics 1855.1 Problems of Gender Relations in Developing Countries: Voices of the Poor 2397.1 FINDINGS The Emergence of Industrial Districts or Clusters in China 3208.1 Health and Education: Voices of the Poor 3618.2 Linkages between Investments in Health and Education 3628.3 FINDINGS School Impact of a Low-Cost Health Intervention 3648.4 FINDINGS Impacts of Tutor and Computer-Assisted Learning Programs 3848.5 Health Challenges Faced by Developing Countries 3908.6 AIDS: Crisis and Response to Uganda 3959.1 FINDINGS Learning about Farming: The Diffusion of Pineapple Growing in Ghana 44610.1 FINDINGS Autonomous Adaptation to Climate Change by Farmers in Africa 48010.2 FINDINGS Elinor Ostrom’s Design Principles Derived from Studies ofLong-Enduring Institutions for Governing Sustainable Resources 48511.1 Some Problems of Government Intervention in Developing Countries 527Case StudiesandBoxes
Boxes (Continued)11.2 The New Consensus 53211.3 FINDINGS Reducing Teacher Absenteeism in an NGO School 54512.1 FINDINGS Four Centuries of Evidence on the Prebisch-Singer Hypothesis 57413.1 The History and Role of the International Monetary Fund 64113.2 The History and Role of the World Bank 64513.3 Mexico: Crisis, Debt Reduction, and the Struggle for Renewed Growth 65914.1 Disputed Issues about the Role and Impact of Multinational Corporations inDeveloping Countries 69215.1 FINDINGS The Financial Lives of the Poor 74015.2 FINDINGS: Combining Microfinance with Training 74415.3 Privatization—What, When, and to Whom? Chile and Poland 760xviii Case Studies and Boxes
xixPrefaceEconomic Development, Eleventh Edition, presents the latest thinking in eco-nomic development with the clear and comprehensive approach that has beenso well received in both the developed and developing worlds.The pace and scope of economic development continues its rapid, uneven, andsometimes unexpected evolution. This text explains the unprecedented progressthat has been made in many parts of the developing world—but fully confrontsthe enormous problems and challenges that remain to be addressed in the yearsahead. The text shows the wide diversity across the developing world, and the dif-fering positions in the global economy held by developing countries. The princi-ples of development economics are key to understanding how we got to where weare, and why many development problems are so difficult to solve; and to the de-sign of successful economic development policy and programs as we look ahead.The field of economic development is versatile and has much to contributeregarding these differing scenarios. Thus the text also underlines common featuresexhibited by a majority of developing nations using the insights of the study ofeconomic development. The few countries that have essentially completed thetransformation to become developed economies such as South Korea are also ex-amined as potential models for other developing countries to follow.Both theory and empirical analysis in development economics have mademajor strides, and the Eleventh Edition brings these ideas and findings to stu-dents. Legitimate controversies are actively debated in development economics,and so the text presents contending theories and interpretations of evidence,with three goals. The first goal is to ensure that students understand real condi-tions and institutions across the developing world. The second, is to help stu-dents develop analytic skills while broadening their perspectives of the widescope of the field. The third, is to provide students with the resources to drawindependent conclusions as they confront development problems, their some-times ambiguous evidence, and real-life development policy choices—ulti-mately to play an informed role in the struggle for economic development andpoverty alleviation.New to This Edition• Global crisis. A major new section of the text addresses potential longer-termimpacts of the recent global financial crisis on economic development, exam-ining conditions that caused the crisis, its aftermath, and possible broaderimplications and potential differences for developing nations and regions.
• Violent conflict. The Eleventh Edition provides an entirely new major sectionon the causes and consequences of violent conflict, postconflict recoveryand development, and prevention of conflict through an improved under-standing of its major causes. In the last several years, substantial advanceshave been made in theory, empirical studies, and policy analysis regardingcivil war and civil conflict, one of the leading obstacles to human develop-ment and economic growth. The section examines what has been learnedabout consequences for people and for economic development, causes andprevention of violent conflict, and strategies for postconflict recovery, recon-struction, and sustained development.• Findings boxes. A new textbook feature reports empirical findings in boxesthat are wide-ranging in both methods and topics. They address bothspecific policy concerns—such as improving child health, education, andmicrofinance design—and a broader understanding of the sources of dis-parities in the world’s economies that can inform the strategy of economicdevelopment. And with these findings, they illustrate methods rangingfrom the use of instruments; randomized control trials; painstaking de-sign, implementation, and robust analysis of survey data; growth diagnos-tics; and systematically applied qualitative research. The Findings boxes inthis edition are listed on pages xvii–xviii. As economic development re-search findings are published and become influential, they will be re-ported on the textbook Web site between editions.• New comparative case studies. Two new full-length end-of-chapter compara-tive case studies are introduced to address current topics and findings andto broaden geographic coverage. An in-depth comparison of Ghana andCôte d’Ivoire appears at the end of Chapter 5, examining themes of theorigins of comparative development and of the analysis of poverty causesand remedies. (The updated Grameen case is moved to Chapter 15.) Anin-depth comparative study of Haiti and the Dominican Republic is intro-duced at the end of Chapter 10, demonstrating the influence of environ-ment on development and vice versa, but revealing how environmentaldegradation stems from deeper causes. All the other case studies havebeen updated to reflect current conditions and status.• New measures. Measurement is an ever-present issue in the field of eco-nomic development. The United Nations Development Program releasedits Multidimensional Poverty Index in August 2010 and its New HumanDevelopment Index in November 2010. The text examines the index for-mulas, explains how they differ from earlier indexes, reports on findings,and reviews issues surrounding the active debate on these measures.• Applications of contemporary models to new topics. Insights from multiple-equilibria models (explained in detail in Chapter 4) are used to help explainthe staying power of violent ethnic conflict and the persistence of harmfulcultural practices such as female genital mutilation. The way these insightshave helped inspire strategies for ending these practices are explained.• Expanded glossary, with definitions in margins where terms are first used. Eachkey term is defined in the text at the spot where it is first used. Each ofthese definitions are also collected alphabetically in the Glossary near theend of the book.xx Preface
• Updated statistics. Change continues to be very rapid in the developingworld. Throughout the text, data and statistics have been updated toreflect the most recent available information.• Additional updates. Other updates include an expanded section on microfi-nance, including new designs, potential benefits, successes to date, and somelimitations; Amartya Sen’s latest thinking on capability; new evidence on theextent and limits of convergence; expanded coverage of China and the stub-born chronic poverty among hundreds of millions of people despite other-wise impressive global progress; a streamlined Malthus trap model presenta-tion; development implications of new and proposed environmentalagreements for developing countries; and growing challenges of adaptationto climate change with examples of efforts that are already underway; aswell as topics such as trends in central banking in developing economies.The end-of-chapter case studies have been updated.• Convenient numbered subsections. The introduction of numbered subsectionsfacilitates a tailored course design and extended class focus on selectedtopics. The text features a 15-chapter structure, convenient for use in acomprehensive course. But the chapters are now subdivided, usually intosix to ten numbered subsections in each chapter. This makes it morestraightforward to assign topical areas for a class session. It also makes itconvenient to use the text for courses with different emphases.Audience and Suggested Ways to Use the Text• Flexibility. This book is designed for use in courses in economics and othersocial sciences that focus on the economies of Africa, Asia, and Latin America,as well as developing Europe and the Middle East. It is written for studentswho have had some basic training in economics and for those with little for-mal economics background. Essential concepts of economics that are rele-vant to understanding development problems are highlighted in boldfaceand explained at appropriate points throughout the text, with glossaryterms defined in the margins as well as collected together at the end of thebook in a detailed Glossary. Thus the book should be of special value in un-dergraduate development courses that attract students from a variety of dis-ciplines. Yet the material is sufficiently broad in scope and rigorous in cover-age to satisfy any undergraduate and some graduate economicsrequirements in the field of development. This text has been widely usedboth in courses taking relatively qualitative and more quantitative approachesto the study of economic development and emphasizing a variety ofthemes, including human development.• Courses with a qualitative focus. For qualitatively oriented courses, with aninstitutional focus and using fewer economic models, one or more chap-ters or subsections may be omitted, while placing primary emphasis onChapters 1, 2, 5, 6, 8, and 9, plus parts of Chapters 7 and 10, and other se-lected sections, according to topics covered. The text is structured so thatthe limited number of graphical models found in those chapters may beomitted without losing the thread, while the intuition behind the modelsis explained in detail.xxiPreface
• Courses with a more analytic focus. These courses would focus more on thegrowth and development theories in Chapter 3 (including appendixes suchas 3.3 on endogenous growth) and Chapter 4, and highlight and developsome of the core models of the text, including poverty and inequality meas-urement and analysis in Chapter 5, microeconomics of fertility and relation-ships between population growth and economic growth in Chapter 6, mi-gration models in Chapter 7, human capital theory including the child labormodel and empirics in Chapter 8, sharecropping models in Chapter 9, envi-ronmental economics models in Chapter 10, tools such as net present benefitanalysis and multisector models along with political economy analysis inChapter 11, and trade models in Chapter 12. It could also expand on mate-rial briefly touched on in some of the Findings boxes and subsections intotreatments of methods topics such as use of instrumental variables, random-ization, and growth empirics including origins of comparative develop-ment and analysis of convergence (which is examined in Chapter 2). End-notes and sources suggest possible directions to take. The text emphasizesin-depth institutional background reading accompanying the models thathelp students to appreciate their importance.• Courses emphasizing human development and poverty alleviation. The EleventhEdition can be used for a course with a human development focus. Thiswould typically include the sections on Amartya Sen’s capability ap-proach and Millennium Development Goals in Chapter 1, the new sectionon conflict in Chapter 14, the discussion of microfinance institutions inChapter 15, and a close and in-depth examination of Chapters 2 and 5.Sections on population in Chapter 6; diseases of poverty and problems ofilliteracy, low schooling, and child labor in Chapter 8; problems facingpeople in traditional agriculture in Chapter 9; relationships betweenpoverty and environmental degradation in Chapter 10; and roles of NGOsin Chapter 11 would be likely highlights of this course.• Courses emphasizing macro and international topics. International and macroaspects of economic development could emphasize section 2.7 on long-rungrowth and sources of comparative development; Chapter 3 on theories ofgrowth (including the three detailed appendixes to that chapter); Chapter 4on growth and multiple-equilibrium models; and Chapters 12 through 15on international trade, international finance, debt and financial crises, di-rect foreign investment, aid, central banking, and domestic finance. Thebook also covers other aspects of the international context for develop-ment, including the new section on financial crisis, implications of therapid pace of globalization and the rise of China, the continuing strugglefor more progress in sub-Saharan Africa, and controversies over debt reliefand foreign aid.• Broad two-semester course using supplemental readings. Many of the chapterscontain enough material for several class sessions, when their topics arecovered in an in-depth manner, making the text also suitable for a yearlongcourse or high-credit option. The endnotes and sources offer many startingpoints for such extensions.xxii Preface
Guiding Approaches and OrganizationThe text’s guiding approaches are the following:1. It teaches economic development within the context of a major set of prob-lems, such as poverty, inequality, population growth, the impact of veryrapid urbanization and expansion of megacities, persistent public healthchallenges, environmental decay, and regions experiencing rural stagnation,along with the twin challenges of government failure and market failure.Formal models and concepts are used to elucidate real-world developmentproblems rather than being presented in isolation from these problems.2. It adopts a problem- and policy-oriented approach because a central objectiveof the development economics course is to foster a student’s ability to un-derstand contemporary economic problems of developing countries andto reach independent and informed judgments and policy conclusionsabout their possible resolution.3. It simultaneously uses the best available data from Africa, Asia, Latin America,and developing Europe and the Middle East, as well as appropriate theoreticaltools to illuminate common developing-country problems. These problemsdiffer in incidence, scope, magnitude, and emphasis when we deal withsuch diverse countries as India, Pakistan, Bangladesh, China, the Philippines,Kenya, Botswana, Nigeria, Ghana, Côte d’Ivoire, Argentina, Brazil, Chile,Mexico, Haiti, and the Dominican Republic. Still, a majority face somesimilar development problems: persistent poverty and large income andasset inequalities, population pressures, low levels of education andhealth, inadequacies of financial markets, and recurrent challenges ininternational trade and instability, to name a few.4. It focuses on a wide range of developing countries not only as independentnation-states but also in their growing relationships to one another as well asin their interactions with rich nations in a globalizing economy.5. Relatedly, the text views development in both domestic and internationalcontexts, stressing the increasing interdependence of the world economy in ar-eas such as food, energy, natural resources, technology, information, andfinancial flows.6. It recognizes the necessity of treating the problems of development from aninstitutional and structural as well as a market perspective, with appropriatemodifications of received general economic principles, theories, and poli-cies. It thus attempts to combine relevant theory with realistic institutionalanalyses. Enormous strides have been made in the study of these aspects ofeconomic development in recent years, which are reflected in this edition.7. It considers the economic, social, and institutional problems of underde-velopment as closely interrelated and requiring coordinated approaches totheir solution at the local, national, and international levels.8. The book is organized into three parts. Part One focuses on the nature andmeaning of development and underdevelopment and its various manifes-tations in developing nations. After examining the historical growthxxiiiPreface
experience of the developed countries and the long-run experience of thedeveloping countries, we review four classic and contemporary theories ofeconomic development, while introducing basic theories of economicgrowth. Part Two focuses on major domestic development problems andpolicies, and Part Three on development problems and policies in interna-tional, macro, and financial spheres. Topics of analysis include economicgrowth, poverty and income distribution, population, migration, urban-ization, technology, agricultural and rural development, education, health,the environment, international trade and finance, debt, financial crises, do-mestic financial markets, direct foreign investment, foreign aid, violentconflict, and the roles of market, state, and nongovernmental organizationsin economic development. All three parts of the book raise fundamental ques-tions, including what kind of development is most desirable and how de-veloping nations can best achieve their economic and social objectives.9. As part of the text’s commitment to its comprehensive approach, it coverssome topics not found in other texts on economic development, includinggrowth diagnostics, industrialization strategy, innovative policies for povertyreduction, the capability approach to well-being, the central role of women,child labor, the crucial role of health, new thinking on the role of cities, theeconomic character and comparative advantage of nongovernmental organi-zations in economic development, emerging issues in environment and de-velopment, financial crises, violent conflict, and microfinance.10. A unique feature of this book is the in-depth case studies and comparativecase studies appearing at the end of each chapter. Each chapter’s case studyreflects and illustrates specific issues analyzed in that chapter. In-chapterboxes provide shorter case examples.Comments on the text are always welcome; these can be sent directly toStephen Smith at firstname.lastname@example.org.Supplementary MaterialsThe Eleventh Edition comes with a comprehensive Companion Website withcontent by Abbas Grammy of California State University, Bakersfield. Avail-able at www.pearsonhighered.com/todaro_smith, this site offers an online Stu-dent Study Guide for each chapter that includes multiple-choice quizzes andsets of graphing and quantitative exercises. In addition, Internet exercises al-low students to explore the countries highlighted in the end-of-chapter casestudies in more depth. A Recommended Readings section provides links to andquestions about additional development resources.The Web site also links to material for the instructor, including PowerPointslides for each chapter, which have been expanded and fully updated for thisedition by Professor Meenakshi Rishi of Seattle University.The text is further supplemented with an Instructor’s Manual by PareenaG. Lawrence of the University of Minnesota, Morris. It has been thoroughlyrevised and updated to reflect changes to the Eleventh Edition. Both thePowerPoint slides and the Instructor’s Manual can also be downloaded fromthe Instructor’s Resource Center at www.pearsonhighered.com/irc.xxiv Preface
AcknowledgmentsOur gratitude to the many individuals who have helped shape this new editioncannot adequately be conveyed in a few sentences. However, we must recordour immense indebtedness to the hundreds of former students and contempo-rary colleagues who took the time and trouble during the past several years towrite or speak to us about the ways in which this text could be further im-proved. We are likewise indebted to a great number of friends (far too many tomention individually) in both the developing world and the developed worldwho have directly and indirectly helped shape our ideas about developmenteconomics and how an economic development text should be structured. Theauthors would like to thank colleagues and students in both developing anddeveloped countries for their probing and challenging questions.We are also very appreciative of the advice, criticisms, and suggestions of themany reviewers, both in the United States and abroad, who provided detailedand insightful comments for the Eighth, Ninth, Tenth, and Eleventh Editions:U.S. ReviewersWilliam A. Amponsah, GEORGIA SOUTHERN UNIVERSITYErol Balkan, HAMILTON COLLEGEKarna Basu, HUNTER COLLEGE, CITY UNIVERSITY OF NEW YORKValerie R. Bencivenga, UNIVERSITY OF TEXAS, AUSTINSylvain H. Boko, WAKE FOREST UNIVERSITYMichaël Bonnal, UNIVERISTY OF TENNESSEE AT CHATTANOOGAMilica Z. Bookman, ST. JOSEPH’S UNIVERSITYLisa Daniels, WASHINGTON COLLEGEFernando De Paolis, MONTEREY INSTITUTELuc D’Haese, UNIVERSITY OF GHENTQuentin Duroy, DENISON UNIVERSITYCan Erbil, BRANDEIS UNIVERSITYYilma Gebremariam, SOUTHERN CONNECTICUT STATE UNIVERSITYAbbas P. Grammy, CALIFORNIA STATE UNIVERSITY, BAKERSFIELDCaren Grown, AMERICAN UNIVERSITYKwabena Gyimah-Brempong, UNIVERSITY OF SOUTH FLORIDABradley Hansen, MARY WASHINGTON COLLEGEJohn R. Hanson II, TEXAS A&M UNIVERSITYSeid Hassan, MURRAY STATE UNIVERSITYJeffrey James, TILBURG UNIVERSITYBarbara John, UNIVERSITY OF DAYTONPareena G. Lawrence, UNIVERSITY OF MINNESOTA, MORRISTung Liu, BALL STATE UNIVERSITYJohn McPeak, SYRACUSE UNIVERSITYMichael A. McPherson, UNIVERSITY OF NORTH TEXASDaniel L. Millimet, SOUTHERN METHODIST UNIVERSITYCamille Soltau Nelson, TEXAS A&M UNIVERSITYThomas Osang, SOUTHERN METHODIST UNIVERSITYElliott Parker, UNIVERSITY OF NEVADA, RENOJulia Paxton, OHIO UNIVERSITYxxvPreface
Meenakshi Rishi, SEATTLE UNIVERSITYJames Robinson, UNIVERSITY OF CALIFORNIA, BERKELEYAndreas Savvides, OKLAHOMA STATE UNIVERSITYRodrigo R. Soares, UNIVERSITY OF MARYLANDMichael Twomey, UNIVERSITY OF MICHIGAN, DEARBORNWally Tyner, PURDUE UNIVERSITYNora Underwood, UNIVERSITY OF CALIFORNIA, DAVISJogindar Uppal, STATE UNIVERSITY OF NEW YORKEvert Van Der Heide, CALVIN COLLEGEAdel Varghese, ST. LOUIS UNIVERSITYSharmila Vishwasrao, FLORIDA ATLANTIC UNIVERSITYBill Watkins, CALIFORNIA LUTHERAN UNIVERSITYJonathan B. Wight, UNIVERSITY OF RICHMONDLester A. Zeager, EAST CAROLINA UNIVERSITYU.K. ReviewersArild Angelsen, AGRICULTURAL UNIVERSITY OF NORWAYDavid Barlow, NEWCASTLE UNIVERSITYSonia Bhalotra, UNIVERSITY OF BRISTOLBernard Carolan, UNIVERSITY OF STAFFORDSHIREMatthew Cole, UNIVERSITY OF BIRMINGHAMAlex Cunliffe, UNIVERSITY OF PLYMOUTHChris Dent, UNIVERSITY OF HULLSanjit Dhami, UNIVERSITY OF NEWCASTLESubrata Ghatak, KINGSTON UNIVERSITYGregg Huff, UNIVERSITY OF GLASGOWDiana Hunt, SUSSEX UNIVERSITYMichael King, TRINITY COLLEGE DUBLINDorothy Manning, UNIVERSITY OF NORTHUMBRIAMahmood Meeskoub, UNIVERSITY OF LEEDSPaul Mosley, UNIVERSITY OF SHEFFIELDBibhas Saha, UNIVERSITY OF EAST ANGLIAColin Simmons, UNIVERSITY OF SALFORDPritam Singh, OXFORD BROOKES UNIVERSITYShinder Thandi, UNIVERSITY OF COVENTRYPaul Vandenberg, UNIVERSITY OF BRISTOLTheir input has strengthened the book in many ways and has been muchappreciated.Our thanks also go to the staff at Addison-Wesley in both the United Statesand the United Kingdom, particularly David Alexander, Lindsey Sloan,Kathryn Dinovo, Alison Eusden, Kate Brewin, Denise Clinton, Mary Sanger,Bruce Emmer, and Pauline Gillett.Finally, to his lovely wife, Donna Renée, Michael Todaro wishes to expressgreat thanks for typing the entire First Edition manuscript and for providingthe spiritual and intellectual inspiration to persevere under difficult circum-stances. He reaffirms here his eternal devotion to her for always being there tohelp him maintain a proper perspective on life and living and, through herxxvi Preface
own creative and artistic talents, to inspire him to think in original and some-times unconventional ways about the global problems of human development.Stephen Smith would like to thank his wonderful wife, Renee, and his chil-dren, Martin and Helena, for putting up with the many working Saturdays thatwent into the revision of this text.Michael P. TodaroStephen C. SmithxxviiPreface
1.1 How the Other Half LiveAs people throughout the world awake each morning to face a new day, they do sounder very different circumstances. Some live in comfortable homes with manyrooms. They have more than enough to eat, are well clothed and healthy, and havea reasonable degree of financial security. Others, and these constitute a majority ofthe earth’s nearly 7 billion people, are much less fortunate. They may have inade-quate food and shelter, especially if they are among the poorest third. Their healthis often poor, they may not know how to read or write, they may be unemployed,and their prospects for a better life are uncertain at best. Over 40% of the world’spopulation lives on less than $2 per day, part of a condition of absolute poverty.An examination of these global differences in living standards is revealing.If, for example, we looked first at an average family in North America, wewould probably find a “nuclear” family of four with an annual income ofover $50,000. They would live in a comfortable suburban house with a small2Introducing EconomicDevelopment: A GlobalPerspective1We have a collective responsibility to uphold the principles of human dignity,equality and equity at the global level. As leaders we have a duty therefore toall the world’s people, especially the most vulnerable and, in particular, thechildren of the world, to whom the future belongs.—United Nations, Millennium Declaration, September 8, 2000Development can be seen . . . as a process of expanding the real freedoms thatpeople enjoy.—Amartya Sen, Nobel laureate in economicsGlobalization offers incredible opportunities. Yet exclusion, grinding poverty,and environmental damage create dangers. The ones that suffer most arethose who have the least to start with—indigenous peoples, women indeveloping countries, the rural poor, Africans, and their children.—Robert Zoellick, president, World Bank, 2007Under necessaries, therefore, I comprehend, not only those things whichnature, but those things which the established rules of decency, have renderednecessary to the lowest rank of people.—Adam Smith, The Wealth of NationsAbsolute poverty A situa-tion of being unable to meetthe minimum levels of income,food, clothing, healthcare,shelter, and other essentials.
garden and two cars. The dwelling would have many comfortable features,including a separate bedroom for each of the two children. It would be filledwith numerous consumer goods, electronics, and electrical appliances, manyof which were manufactured outside North America in countries as far awayas South Korea and China. Examples might include computer hard disksmade in Malaysia, DVD players manufactured in Thailand, garments assem-bled in Guatemala, and mountain bikes made in China. There would alwaysbe three meals a day and plenty of processed snack foods, and many of thefood products would also be imported from overseas: coffee from Brazil,Kenya, or Colombia; canned fish and fruit from Peru and Australia; and ba-nanas and other tropical fruits from Central America. Both children would behealthy and attending school. They could expect to complete their secondaryeducation and probably go to a university, choose from a variety of careers towhich they are attracted, and live to an average age of 78 years.This family, which is typical of families in many rich nations, appears tohave a reasonably good life. The parents have the opportunity and the neces-sary education or training to secure regular employment; to shelter, clothe,feed, and educate their children; and to save some money for later life.Against these “economic” benefits, there are always “noneconomic” costs. Thecompetitive pressures to “succeed” financially are very strong, and during in-flationary or recessionary times, the mental strain and physical pressure oftrying to provide for a family at levels that the community regards as desir-able can take its toll on the health of both parents. Their ability to relax, to en-joy the simple pleasures of a country stroll, to breathe clean air and drink purewater, and to see a crimson sunset is constantly at risk with the onslaught ofeconomic progress and environmental decay. But on the whole, theirs is aneconomic status and lifestyle toward which many millions of less fortunatepeople throughout the world seem to be aspiring.Now let us examine a typical “extended” family in a poor rural area ofSouth Asia. The household is likely to consist of eight or more people, includingparents, several children, two grandparents, and some aunts and uncles. Theyhave a combined real per capita annual income, in money and in “kind” (mean-ing that they consume a share of the food they grow), of $300. Together they livein a poorly constructed one- or two-room house as tenant farmers on a largeagricultural estate owned by an absentee landlord who lives in the nearby city.The father, mother, uncle, and older children must work all day on the land. Theadults cannot read or write; the younger children attend school irregularly andcannot expect to proceed beyond a basic primary education. All too often, whenthey do get to school, the teacher is absent. They often eat only one or two mealsa day; the food rarely changes, and the meals are rarely sufficient to alleviate thechildren’s persistent hunger pains. The house has no electricity, sanitation, orfresh water supply. Sickness occurs often, but qualified doctors and medicalpractitioners are far away in the cities, attending to the needs of wealthier fami-lies. The work is hard, the sun is hot, and aspirations for a better life are contin-ually being snuffed out. In this part of the world, the only relief from the dailystruggle for physical survival lies in the spiritual traditions of the people.Shifting to another part of the world, suppose we were to visit a large citysituated along the coast of South America. We would immediately be struckby the sharp contrasts in living conditions from one section of this sprawling3CHAPTER 1 Introducing Economic Development: A Global Perspective
metropolis to another. There is a modern stretch of tall buildings and wide,tree-lined boulevards along the edge of a gleaming white beach; just a fewhundred meters back and up the side of a steep hill, squalid shanties arepressed together in precarious balance.If we were to examine two representative families—one a wealthy andwell-connected family and the other of peasant background or born in theslums we would no doubt also be struck by the wide disparities in their indi-vidual living conditions. The wealthy family lives in a multiroom complex onthe top floor of a modern building overlooking the sea, while the peasant fam-ily is cramped tightly into a small makeshift dwelling in a shantytown, orfavela (squatters’ slum), on the hill behind that seafront building.For illustrative purposes, let us assume that it is a typical Saturday eveningat an hour when the families should be preparing for dinner. In the penthouseapartment of the wealthy family, a servant is setting the table with expensiveimported china, high-quality silverware, and fine linen. Russian caviar, Frenchhors d’œuvres, and Italian wine will constitute the first of several courses. Thefamily’s eldest son is home from his university in North America, and the othertwo children are on vacation from their boarding schools in France andSwitzerland. The father is a prominent surgeon trained in the United States.His clientele consists of wealthy local and foreign dignitaries and businesspeo-ple. In addition to his practice, he owns a considerable amount of land in thecountryside. Annual vacations abroad, imported luxury automobiles, and thefinest food and clothing are commonplace amenities for this fortunate family inthe penthouse apartment.And what about the poor family living in the dirt-floored shack on the sideof the hill? They too can view the sea, but somehow it seems neither scenic norrelaxing. The stench of open sewers makes such enjoyment rather remote.There is no dinner table being set; in fact, there is usually too little to eat. Mostof the four children spend their time out on the streets begging for money, shin-ing shoes, or occasionally even trying to steal purses from unsuspecting peoplewho stroll along the boulevard. The father migrated to the city from the ruralhinterland, and the rest of the family recently followed. He has had part-timejobs over the years, but nothing permanent. Government assistance has re-cently helped this family keep the children in school longer. But lessons learnedon the streets, where violent drug gangs hold sway, seem to be making adeeper impression.One could easily be disturbed by the sharp contrast between these twoways of life. However, had we looked at almost any other major city in LatinAmerica, Asia, and Africa, we would have seen much the same contrast (al-though the extent of inequality might have been less pronounced).Now imagine that you are in a remote rural area in the eastern part ofAfrica, where many small clusters of tiny huts dot a dry and barren land. Eachcluster contains a group of extended families, all participating in and sharingthe work. There is little money income here because most food, clothing, shel-ter, and worldly goods are made and consumed by the people themselves—theirs is a subsistence economy. There are few passable roads, few schools,and no hospitals, electric wires, or water supplies. In many respects, it is asstark and difficult an existence as that of the people in that Latin Americanfavela across the ocean. Yet perhaps it is not as psychologically troubling because4 PART ONE Principles and ConceptsSubsistence economy Aneconomy in which productionis mainly for personal con-sumption and the standard ofliving yields little more thanbasic necessities of life—food,shelter, and clothing.
there is no luxurious penthouse by the sea to emphasize the relative deprivationof the very poor. With the exception of population growth and problems of theincreasingly fragile environment, life here seems to be almost eternal and un-changing—but not for much longer.A new road is being built that will pass near this village. No doubt it willbring with it the means for prolonging life through improved medical care. But itwill also bring more information about the world outside, along with the gadgetsof modern civilization. The possibilities of a “better” life will be promoted, andthe opportunities for such a life will become feasible. Aspirations will be raised,but so will frustrations as people understand the depth of some of their depriva-tions more clearly. In short, the development process has been set in motion.Before long, exportable fruits and vegetables will probably be grown in this re-gion. They may even end up on the dinner table of the rich South American fam-ily in the seaside penthouse. Meanwhile, transistor radios made in Southeast Asiaand playing music recorded in northern Europe have become prized possessionsin this African village. In villages not far away, mobile phone use has been intro-duced. Throughout the world, remote subsistence villages such as this one are be-ing linked up with modern civilization in an increasing number of ways. Theprocess, well under way, will become even more intensified in the coming years.Finally imagine you are in booming East Asia; to illustrate, a couple born inobscure zhuangs (rural areas) in populous central Sichuan Province grew up inthe 1960s, going to school for six years, and becoming rice farmers like their par-ents. The rice grew well, but memories of famine were still sharp in their com-mune, where life was also hard during the Cultural Revolution. Their onedaughter, call her Xiaoling, went to school for ten years. Much rice they andtheir commune grew went to the state at a price that never seemed high enough.After 1980, farmers were given rights to keep and sell more of their rice. Seeingthe opportunity, they grew enough to meet government quotas, and sold moreof it. Many also raised vegetables to sell in a booming city 100 kilometers up theriver and other towns. Living standards improved, and they moved a littleabove the poverty line—though then their incomes stagnated for many years.But they heard about peasants moving first to cities in the south and recently tocloser cities—making more money becoming factory workers. When theirdaughter was 17, farmers from the village where the mother grew up wereevicted from their land because it was close to lakes created by an immense damproject. Some were resettled, but others went to Shenzhen, Guangzhou, orChongqing. Xiaoling talked with her family, saying she too wanted to movethere for a while to earn more money. She found a city that had already grownto several million people, quickly finding a factory job. She lived in a dormitoryand conditions were often harsh, but she could send some money home andsave toward a better life. She watched the city grow at double digits, becomingone of the developing world’s new megacities, adding territories and people toreach over 15 million people. After a few years, she opened a humble business,selling cosmetics and costume jewelry to the thousands of women from thecountryside arriving every day. She had five proposals of marriage, with par-ents of single men near where she grew up offering gifts, even an enormoushouse. She knows many people still live in deep poverty and finds inequality inthe city startling. For now she plans to stay, where she sees opportunities for hergrowing business and a life she never imagined from her village.5CHAPTER 1 Introducing Economic Development: A Global PerspectiveDevelopment The processof improving the quality of allhuman lives and capabilitiesby raising people’s levelsof living, self-esteem, andfreedom.
Listening to the poor explain what poverty is like in their own words ismore vivid than reading descriptions of it. Listen to some of the voices of thepoor about the experience of poverty in Box 1.1.1From these, together withthe voices of the poor recorded in Box 5.1 and Box 8.1, it is clear that what peo-ple living in poverty need and want extend beyond increased income tohealth, education, and—especially for women—empowerment. These corre-spond to enhanced capabilities and to the achievement of the Millennium De-velopment Goals, both of which are introduced later in this chapter.This first fleeting glimpse at life in different parts of our planet is sufficientto raise various questions. Why does affluence coexist with dire poverty notonly on different continents but also within the same country or even the samecity? Can traditional, low-productivity, subsistence societies be transformedinto modern, high-productivity, high-income nations? To what extent are thedevelopment aspirations of poor nations helped or hindered by the economicactivities of rich nations? By what process and under what conditions do ruralsubsistence farmers in the remote regions of Nigeria, Brazil, or the Philippinesevolve into successful commercial farmers? These and many other questionsconcerning international and national differences in standards of living, in ar-eas including health and nutrition, education, employment, environmentalsustainability, population growth, and life expectancies, might be posed on thebasis of even this very superficial look at life around the world.This book is designed to help students obtain a better understanding of themajor problems and prospects for economic development by focusing specifically6 PART ONE Principles and ConceptsBOX 1.1 The Experience of Poverty: Voices of the PoorWhen one is poor, she has no say in public, shefeels inferior. She has no food, so there is faminein her house; no clothing, and no progress in herfamily.—A poor woman from UgandaFor a poor person, everything is terrible—illness,humiliation, shame. We are cripples; we areafraid of everything; we depend on everyone. Noone needs us. We are like garbage that everyonewants to get rid of.—A blind woman from Tiraspol, MoldovaLife in the area is so precarious that the youthand every able person have to migrate to thetowns or join the army at the war front in order toescape the hazards of hunger escalating over here.—Participant in a discussiongroup in rural EthiopiaWhen food was in abundance, relatives used toshare it. These days of hunger, however, not evenrelatives would help you by giving you some food.—Young man in Nichimishi, ZambiaWe have to line up for hours before it is our turnto draw water.—Participant in a discussion group fromMbwadzulu Village (Mangochi), Malawi[Poverty is] . . . low salaries and lack of jobs. Andit’s also not having medicine, food, and clothes.—Participant in a discussion group in BrazilDon’t ask me what poverty is because you havemet it outside my house. Look at the house andcount the number of holes. Look at the utensilsand the clothes I am wearing. Look at everythingand write what you see. What you see is poverty.—Poor man in Kenya
on the plight of the half or more of the world’s population for whom low levelsof living are a fact of life. However, as we shall soon discover, the process indeveloping countries cannot be analyzed realistically without also consideringthe role of economically developed nations in directly or indirectly promotingor retarding that development. Perhaps even more important to students in thedeveloped nations is that as our earth shrinks with the spread of modern trans-port and communications, the futures of all peoples on this small planet are be-coming increasingly interdependent. What happens to the health and eco-nomic welfare of the poor rural family and many others in the developingregions of Asia, Africa, the Middle East, or Latin America will in one way oranother, directly or indirectly, affect the health and economic welfare of fami-lies in Europe and North America, and vice versa. The steady loss of tropicalforests contributes to global warming; new diseases spread much more rapidlythanks to increased human mobility; economic interdependence steadilygrows. It is within this context of a common future for all humankind in therapidly shrinking world of the twenty-first century that we now commence ourstudy of economic development.1.2 Economics and Development StudiesThe study of economic development is one of the newest, most exciting, andmost challenging branches of the broader disciplines of economics and polit-ical economy. Although one could claim that Adam Smith was the first “de-velopment economist” and that his Wealth of Nations, published in 1776, wasthe first treatise on economic development, the systematic study of the prob-lems and processes of economic development in Africa, Asia, and LatinAmerica has emerged only over the past five decades or so. Although devel-opment economics often draws on relevant principles and concepts from otherbranches of economics in either a standard or modified form, for the most part itis a field of study that is rapidly evolving its own distinctive analytical andmethodological identity.2The Nature of Development EconomicsTraditional economics is concerned primarily with the efficient, least-cost allo-cation of scarce productive resources and with the optimal growth of theseresources over time so as to produce an ever-expanding range of goods andservices. Traditional neoclassical economics deals with an advanced capitalistworld of perfect markets; consumer sovereignty; automatic price adjustments;decisions made on the basis of marginal, private-profit, and utility calculations;and equilibrium outcomes in all product and resource markets. It assumes eco-nomic “rationality” and a purely materialistic, individualistic, self-interestedorientation toward economic decision making.Political economy goes beyond traditional economics to study, among otherthings, the social and institutional processes through which certain groupsof economic and political elites influence the allocation of scarce productiveresources now and in the future, either for their own benefit exclusively or forthat of the larger population as well. Political economy is therefore concerned7CHAPTER 1 Introducing Economic Development: A Global PerspectiveDeveloping countriesCountries of Asia, Africa, theMiddle East, Latin America,eastern Europe, and the for-mer Soviet Union, that arepresently characterized bylow levels of living and otherdevelopment deficits. Used inthe development literature asa synonym for less developedcountries.Traditional economics Anapproach to economics thatemphasizes utility, profit max-imization, market efficiency,and determination of equilib-rium.Political economy Theattempt to merge economicanalysis with practicalpolitics—to view economicactivity in its political context.
with the relationship between politics and economics, with a special emphasison the role of power in economic decision making.Development economics has an even greater scope. In addition to beingconcerned with the efficient allocation of existing scarce (or idle) productiveresources and with their sustained growth over time, it must also deal withthe economic, social, political, and institutional mechanisms, both public andprivate, necessary to bring about rapid (at least by historical standards) andlarge-scale improvements in levels of living for the peoples of Africa, Asia, LatinAmerica, and the formerly socialist transition economies. Unlike the moredeveloped countries (MDCs), in the less developed countries, most com-modity and resource markets are highly imperfect, consumers and producershave limited information, major structural changes are taking place in boththe society and the economy, the potential for multiple equilibria rather thana single equilibrium is more common, and disequilibrium situations oftenprevail (prices do not equate supply and demand). In many cases, economiccalculations are dominated by political and social priorities such as unifyingthe nation, replacing foreign advisers with local decision makers, resolvingtribal or ethnic conflicts, or preserving religious and cultural traditions. Atthe individual level, family, clan, religious, or tribal considerations maytake precedence over private, self-interested utility or profit-maximizingcalculations.Thus development economics, to a greater extent than traditional neo-classical economics or even political economy, must be concerned with theeconomic, cultural, and political requirements for effecting rapid structuraland institutional transformations of entire societies in a manner that willmost efficiently bring the fruits of economic progress to the broadest seg-ments of their populations. It must focus on the mechanisms that keep fami-lies, regions, and even entire nations in poverty traps, in which past povertycauses future poverty, and on the most effective strategies for breaking outof these traps. Consequently, a larger government role and some degree ofcoordinated economic decision making directed toward transforming theeconomy are usually viewed as essential components of development eco-nomics. Yet this must somehow be achieved despite the fact that both gov-ernments and markets typically function less well in the developing world.In recent years, activities of nongovernmental organizations, both nationaland international, have grown rapidly and are also receiving increasing at-tention (see Chapter 11).Because of the heterogeneity of the developing world and the complexityof the development process, development economics must be eclectic, at-tempting to combine relevant concepts and theories from traditional economicanalysis with new models and broader multidisciplinary approaches derivedfrom studying the historical and contemporary development experience ofAfrica, Asia, and Latin America. Development economics is a field on the crestof a breaking wave, with new theories and new data constantly emerging.These theories and statistics sometimes confirm and sometimes challenge tra-ditional ways of viewing the world. The ultimate purpose of developmenteconomics, however, remains unchanged: to help us understand developingeconomies in order to help improve the material lives of the majority of theglobal population.8 PART ONE Principles and ConceptsDevelopment economicsThe study of how economiesare transformed from stagna-tion to growth and from low-income to high-income status,and overcome problems ofabsolute poverty.More developed countries(MDCs) The now economi-cally advanced capitalistcountries of western Europe,North America, Australia,New Zealand, and Japan.Less developed countriesA synonym for developingcountries.
Why Study Development Economics? Some Critical QuestionsAn introductory course in development economics should help students gain abetter understanding of a number of critical questions about the economies ofdeveloping nations. The following is a sample list of such questions followedby the chapters (in parentheses) in which they are discussed. They illustrate thekinds of issues faced by almost every developing nation and, indeed, every de-velopment economist.1. What is the real meaning of development? (Chapter 1)2. What can be learned from the historical record of economic progress in thenow developed world? Are the initial conditions similar or different forcontemporary developing countries from what the developed countriesfaced on the eve of their industrialization? (Chapter 2)3. What are economic institutions, and how do they shape problems of under-development and prospects for successful development? (Chapter 2)4. How can the extremes between rich and poor be so very great? Figure 1.1illustrates this disparity. (Chapters 2, 3, 4, and 5)5. What are the sources of national and international economic growth? Whobenefits from such growth and why? Why do some countries make rapidprogress toward development while many others remain poor? (Chapters2, 3, and 4)6. Which are the most influential theories of development, and are they com-patible? Is underdevelopment an internally (domestically) or externally(internationally) induced phenomenon? (Chapters 2, 3, and 4)7. What constraints most hold back accelerated growth, depending on localconditions? (Chapter 4)8. How can improvements in the role and status of women have an especiallybeneficial impact on development prospects? (Chapters 5, 6, 7, 8, 9, and 10)9. What are the causes of extreme poverty, and what policies have been mosteffective for improving the lives of the poorest of the poor? (Chapters 5, 6,7, 8, 9, 10, and 11)10. Is rapid population growth threatening the economic progress of develop-ing nations? Do large families make economic sense in an environment ofwidespread poverty and financial insecurity? (Chapter 6)11. Why is there so much unemployment and underemployment in the devel-oping world, especially in the cities, and why do people continue to mi-grate to the cities from rural areas even when their chances of finding aconventional job are very slim? (Chapter 7)12. Wealthier societies are also healthier ones because they have more re-sources for improving nutrition and health care. But does better healthalso help spur successful development? (Chapter 8)13. What is the impact of poor public health on the prospects for develop-ment, and what is needed to address these problems? (Chapter 8)9CHAPTER 1 Introducing Economic Development: A Global Perspective
14. Do educational systems in developing countries really promote economicdevelopment, or are they simply a mechanism to enable certain selectgroups or classes of people to maintain positions of wealth, power, and in-fluence? (Chapter 8)15. As more than half the people in developing countries still reside in ruralareas, how can agricultural and rural development best be promoted? Arehigher agricultural prices sufficient to stimulate food production, or are ru-ral institutional changes (land redistribution, roads, transport, education,credit, etc.) also needed? (Chapter 9)16. What do we mean by “environmentally sustainable development”? Are thereserious economic costs of pursuing sustainable development as opposed to10 PART ONE Principles and Concepts1 High-income OECD2 Eastern and central Europeand CIS3 Latin America and the Caribbean4 East Asia and the Pacific5 South Asia6 Sub-Saharan AfricaPer capitaincomePoorestRichestPoorestRichestRegional percentage of the populationfor each 20% of incomeWorld income distributed bypercentiles of the population, 2000(a)(b)1 2 3 4 5 6Part (a) shows world income distribution by percentile. The huge share controlled by the top percentilesgives the graph its “champagne glass shape.” Part (b) shows the regional shares of global income. Forexample, a large majority of people in the top 20% of the global income distribution live in the rich coun-tries. Most of those in the bottom 60% live in sub-Saharan Africa and Asia. OECD is the Organization forEconomic Cooperation and Development. CIS is the Commonwealth of Independent States.Source: From Human Development Report, 2005, p. 37. Reprinted with permission from the United NationsDevelopment Programme.FIGURE 1.1 World Income Distribution
simple output growth, and who bears the major responsibility for global en-vironmental damage—the rich North or the poor South? (Chapter 10)17. Are free markets and economic privatization the answer to developmentproblems, or do governments in developing countries still have major rolesto play in their economies? (Chapter 11)18. Why do so many developing countries select such poor development poli-cies, and what can be done to improve these choices? (Chapter 11)19. Is expanded international trade desirable from the point of view of the de-velopment of poor nations? Who gains from trade, and how are the advan-tages distributed among nations? (Chapter 12)20. When and under what conditions, if any, should governments in develop-ing countries adopt a policy of foreign-exchange control, raise tariffs, orset quotas on the importation of certain “nonessential” goods in order topromote their own industrialization or to ameliorate chronic balance ofpayments problems? What has been the impact of International MonetaryFund “stabilization programs” and World Bank “structural adjustment”lending on the balance of payments and growth prospects of heavily in-debted less developed countries? (Chapters 12 and 13)21. What is meant by globalization, and how is it affecting the developingcountries? (Chapters 12, 13, and 14)22. Should exports of primary products such as agricultural commodities bepromoted, or should all developing countries attempt to industrialize bydeveloping their own manufacturing industries as rapidly as possible?(Chapter 13)23. How did so many developing nations get into such serious foreign-debtproblems, and what are the implications of debt problems for economicdevelopment? How do financial crises affect development? (Chapter 13)24. What is the impact of foreign economic aid from rich countries? Should de-veloping countries continue to seek such aid, and if so, under what conditionsand for what purposes? Should developed countries continue to offer suchaid, and if so, under what conditions and for what purposes? (Chapter 14)25. Should multinational corporations be encouraged to invest in theeconomies of poor nations, and if so, under what conditions? How havethe emergence of the “global factory” and the globalization of trade andfinance influenced international economic relations? (Chapter 14)26. What is the role of financial and fiscal policy in promoting development?Do large military expenditures stimulate or retard economic growth?(Chapter 15)27. What is microfinance, and what are its potential and limitations for reduc-ing poverty and spurring grassroots development? (Chapter 15)The following chapters analyze and explore these and many related ques-tions. The answers are often more complex than one might think. Rememberthat the ultimate purpose of any course in economics, including development11CHAPTER 1 Introducing Economic Development: A Global PerspectiveGlobalization The increas-ing integration of nationaleconomies into expandinginternational markets.
economics, is to help students think systematically about economic problemsand issues and formulate judgments and conclusions on the basis of relevantanalytical principles and reliable statistical information. Because the prob-lems of development are in many cases unique in the modern world and notoften easily understood through the use of traditional economic theories, wemay often need unconventional approaches to what may appear to be con-ventional economic problems. Traditional economic principles can play auseful role in enabling us to improve our understanding of developmentproblems, but they should not blind us to the realities of local conditions inless developed countries.The Important Role of Values in Development EconomicsEconomics is a social science. It is concerned with human beings and the socialsystems by which they organize their activities to satisfy basic material needs(e.g., food, shelter, clothing) and nonmaterial wants (e.g., education, knowl-edge, spiritual fulfillment). It is necessary to recognize from the outset thatethical or normative value premises about what is or is not desirable are centralfeatures of the economic discipline in general and of development economicsin particular. The very concepts of economic development and modernizationrepresent implicit as well as explicit value premises about desirable goals forachieving what Mahatma Gandhi once called the “realization of the humanpotential.” Concepts or goals such as economic and social equality, the elimi-nation of poverty, universal education, rising levels of living, national inde-pendence, modernization of institutions, rule of law and due process, accessto opportunity, political and economic participation, grassroots democracy,self-reliance, and personal fulfillment all derive from subjective value judg-ments about what is good and desirable and what is not. So too, for that matter,do other values—for example, the sanctity of private property, however ac-quired, and the right of individuals to accumulate unlimited personal wealth;the preservation of traditional hierarchical social institutions and rigid, inegali-tarian class structures; the final authority of the male head of household; andthe supposed “natural right” of some to lead while others follow.When we deal in Part Two with such major issues of development aspoverty, inequality, population growth, rural stagnation, and environmentaldecay, the mere identification of these topics as problems conveys the valuejudgment that their improvement or elimination is desirable and thereforegood. That there is widespread agreement among many different groups ofpeople—politicians, academics, and ordinary citizens—that these are desir-able goals does not alter the fact that they arise not only out of a reaction to anobjective empirical or positive analysis of what is but also ultimately from asubjective or normative value judgment about what should be.It follows that value premises, however carefully disguised, are an inher-ent component of both economic analysis and economic policy. Economicscannot be value-free in the same sense as, say, physics or chemistry. Thus thevalidity of economic analysis and the correctness of economic prescriptionsshould always be evaluated in light of the underlying assumptions or valuepremises. Once these subjective values have been agreed on by a nation or,more specifically, by those who are responsible for national decision making,12 PART ONE Principles and Concepts
specific development goals (e.g., greater income equality) and correspondingpublic policies (e.g., taxing higher incomes at higher rates) based on “objec-tive” theoretical and quantitative analyses can be pursued. However, whereserious value conflicts and disagreements exist among decision makers, thepossibility of a consensus about desirable goals or appropriate policies is con-siderably diminished. In either case, it is essential, especially in the field of de-velopment economics, that one’s value premises always be made clear.3Economies as Social Systems: The Need to Go BeyondSimple EconomicsEconomics and economic systems, especially in the developing world, mustbe viewed in a broader perspective than that postulated by traditional eco-nomics. They must be analyzed within the context of the overall social systemof a country and, indeed, within an international, global context as well. By“social system,” we mean the interdependent relationships between economicand noneconomic factors. The latter include attitudes toward life, work, andauthority; public and private bureaucratic, legal, and administrative struc-tures; patterns of kinship and religion; cultural traditions; systems of landtenure; the authority and integrity of government agencies; the degree of pop-ular participation in development decisions and activities; and the flexibilityor rigidity of economic and social classes. Clearly, these factors vary widelyfrom one region of the world to another and from one culture and social set-ting to another. At the international level, we must also consider the organiza-tion and rules of conduct of the global economy—how they were formulated,who controls them, and who benefits most from them. This is especially truetoday with the spread of market economies and the rapid globalization oftrade, finance, corporate boundaries, technology, intellectual property, and la-bor migration.Resolving problems to achieve development is a complicated task. Increas-ing national production, raising levels of living, and promoting widespreademployment opportunities are all as much a function of the local history, ex-pectations, values, incentives, attitudes and beliefs, and institutional andpower structure of both the domestic and the global society as they are the di-rect outcomes of the manipulation of strategic economic variables such as sav-ings, investment, product and factor prices, and foreign-exchange rates. Asthe Indonesian intellectual Soedjatmoko, former rector of the United NationsUniversity in Tokyo, so aptly put it:Looking back over these years, it is now clear that, in their preoccupation withgrowth and its stages and with the provision of capital and skills, developmenttheorists have paid insufficient attention to institutional and structural problemsand to the power of historical, cultural, and religious forces in the developmentprocess.4Just as some social scientists occasionally make the mistake of confusing theirtheories with universal truths, they also sometimes mistakenly dismiss thesenoneconomic variables as “nonquantifiable” and therefore of dubious impor-tance. Yet these variables often play a critical role in the success or failure ofthe development effort.13CHAPTER 1 Introducing Economic Development: A Global PerspectiveSocial system The organiza-tional and institutional struc-ture of a society, including itsvalues, attitudes, power struc-ture, and traditions.
As you will see in Parts Two and Three, many of the failures of developmentpolicies have occurred precisely because these noneconomic variables (e.g., therole of traditional property rights in allocating resources and distributing in-come or the influence of religion on attitudes toward modernization and familyplanning) were excluded from the analysis. Although the main focus of thisbook is on development economics and its usefulness in understanding prob-lems of economic and social progress in poor nations, we will try always to bemindful of the crucial roles that values, attitudes, and institutions, both domes-tic and international, play in the overall development process.1.3 What Do We Mean by Development?Because the term development may mean different things to different people, itis important that we have some working definition or core perspective on itsmeaning. Without such a perspective and some agreed measurement criteria,we would be unable to determine which country was actually developing andwhich was not. This will be our task for the remainder of the chapter and forour first country case study, Brazil, at the end of the chapter.Traditional Economic MeasuresIn strictly economic terms, development has traditionally meant achieving sus-tained rates of growth of income per capita to enable a nation to expand itsoutput at a rate faster than the growth rate of its population. Levels and ratesof growth of “real” per capita gross national income (GNI) (monetary growthof GNI per capita minus the rate of inflation) are then used to measure theoverall economic well-being of a population—how much of real goods andservices is available to the average citizen for consumption and investment.Economic development in the past has also been typically seen in terms of theplanned alteration of the structure of production and employment so that agri-culture’s share of both declines and that of the manufacturing and service indus-tries increases. Development strategies have therefore usually focused on rapidindustrialization, often at the expense of agriculture and rural development.With few exceptions, such as in development policy circles in the 1970s,development was until recently nearly always seen as an economic phenome-non in which rapid gains in overall and per capita GNI growth would either“trickle down” to the masses in the form of jobs and other economic opportu-nities or create the necessary conditions for the wider distribution of theeconomic and social benefits of growth. Problems of poverty, discrimination,unemployment, and income distribution were of secondary importance to “get-ting the growth job done.” Indeed, the emphasis is often on increased output,measured by gross domestic product (GDP).The New Economic View of DevelopmentThe experience of the 1950s and 1960s, when many developing nations didreach their economic growth targets but the levels of living of the masses ofpeople remained for the most part unchanged, signaled that something was14 PART ONE Principles and ConceptsValues Principles, stan-dards, or qualities that asociety or groups within itconsiders worthwhile ordesirable.Attitudes The states ofmind or feelings of an indi-vidual, group, or societyregarding issues such as ma-terial gain, hard work, savingfor the future, and sharingwealth.Institutions Norms, rules ofconduct, and generally ac-cepted ways of doing things.Economic institutions are hu-manly devised constraintsthat shape human interac-tions including both informaland formal “rules of thegame” of economic life in thewidely used framework ofDouglass North.Income per capita Totalgross national income of acountry divided by totalpopulation.Gross national income (GNI)The total domestic and foreignoutput claimed by residentsof a country. It comprisesgross domestic product (GDP)plus factor incomes accruingto residents from abroad, lessthe income earned in the do-mestic economy accruing topersons abroad.Gross domestic product (GDP)The total final output of goodsand services produced by thecountry’s economy, within thecountry’s territory, by residentsand nonresidents, regardlessof its allocation between do-mestic and foreign claims.
very wrong with this narrow definition of development. An increasing num-ber of economists and policymakers clamored for more direct attacks on wide-spread absolute poverty, increasingly inequitable income distributions, andrising unemployment. In short, during the 1970s, economic development cameto be redefined in terms of the reduction or elimination of poverty, inequality,and unemployment within the context of a growing economy. “Redistributionfrom growth” became a common slogan. Dudley Seers posed the basic ques-tion about the meaning of development succinctly when he asserted:The questions to ask about a country’s development are therefore: What has beenhappening to poverty? What has been happening to unemployment? What hasbeen happening to inequality? If all three of these have declined from high levels,then beyond doubt this has been a period of development for the country con-cerned. If one or two of these central problems have been growing worse, espe-cially if all three have, it would be strange to call the result “development” even ifper capita income doubled.5This assertion was neither idle speculation nor the description of a hypo-thetical situation. A number of developing countries experienced relativelyhigh rates of growth of per capita income during the 1960s and 1970s butshowed little or no improvement or even an actual decline in employment,equality, and the real incomes of the bottom 40% of their populations. By theearlier growth definition, these countries were developing; by the newerpoverty, equality, and employment criteria, they were not. The situation in the1980s and 1990s worsened further as GNI growth rates turned negative formany developing countries, and governments, facing mounting foreign-debtproblems, were forced to cut back on their already limited social and economicprograms. Nor can we count on high rates of growth in the developed world totrickle down to the poor in developing countries. Growth was rapid in muchof the developing world in the 2000s, while many wondered if it was fueledby the bubbles in the West and could be derailed by the financial crisis andlater aftershocks.But the phenomenon of development or the existence of a chronic state ofunderdevelopment is not merely a question of economics or even one of quan-titative measurement of incomes, employment, and inequality. Underdevelop-ment is a real fact of life for more than 3 billion people in the world—a state ofmind as much as a state of national poverty. As Denis Goulet has forcefullyportrayed it:Underdevelopment is shocking: the squalor, disease, unnecessary deaths, andhopelessness of it all! . . . The most empathetic observer can speak objectivelyabout underdevelopment only after undergoing, personally or vicariously, the“shock of underdevelopment.” This unique culture shock comes to one as he is ini-tiated to the emotions which prevail in the “culture of poverty.” The reverse shockis felt by those living in destitution when a new self-understanding reveals tothem that their life is neither human nor inevitable. . . . The prevalent emotion ofunderdevelopment is a sense of personal and societal impotence in the face of dis-ease and death, of confusion and ignorance as one gropes to understand change,of servility toward men whose decisions govern the course of events, of hopeless-ness before hunger and natural catastrophe. Chronic poverty is a cruel kind ofhell, and one cannot understand how cruel that hell is merely by gazing uponpoverty as an object.615CHAPTER 1 Introducing Economic Development: A Global Perspective
Development must therefore be conceived of as a multidimensionalprocess involving major changes in social structures, popular attitudes, andnational institutions, as well as the acceleration of economic growth, the re-duction of inequality, and the eradication of poverty. Development, in itsessence, must represent the whole gamut of change by which an entire socialsystem, tuned to the diverse basic needs and evolving aspirations of individu-als and social groups within that system, moves away from a condition of lifewidely perceived as unsatisfactory toward a situation or condition of life re-garded as materially and spiritually better. No one has identified the humangoals of economic development as well as Amartya Sen, perhaps the leadingthinker on the meaning of development.Amartya Sen’s “Capability” ApproachThe view that income and wealth are not ends in themselves but instrumentsfor other purposes goes back at least as far as Aristotle. Amartya Sen, the 1998Nobel laureate in economics, argues that the “capability to function” is whatreally matters for status as a poor or nonpoor person. As Sen put it, “Economicgrowth cannot be sensibly treated as an end in itself. Development has to bemore concerned with enhancing the lives we lead and the freedoms weenjoy.”7In effect, Sen argues that poverty cannot be properly measured by incomeor even by utility as conventionally understood; what matters fundamentally isnot the things a person has—or the feelings these provide—but what a personis, or can be, and does, or can do. What matters for well-being is not just thecharacteristics of commodities consumed, as in the utility approach, but whatuse the consumer can and does make of commodities. For example, a book isof little value to an illiterate person (except perhaps as cooking fuel or as a sta-tus symbol). Or as Sen noted, a person with parasitic diseases will be less ableto extract nourishment from a given quantity of food than someone withoutparasites.To make any sense of the concept of human well-being in general, andpoverty in particular, we need to think beyond the availability of commoditiesand consider their use: to address what Sen calls functionings, that is, what aperson does (or can do) with the commodities of given characteristics that theycome to possess or control. Freedom of choice, or control of one’s own life, is it-self a central aspect of most understandings of well-being. As Sen explains:The concept of “functionings” . . . reflects the various things a person may valuedoing or being. The valued functionings may vary from elementary ones, such asbeing adequately nourished and being free from avoidable disease, to very com-plex activities or personal states, such as being able to take part in the life of thecommunity and having self-respect.8Sen identifies five sources of disparity between (measured) real incomesand actual advantages:9first, personal heterogeneities, such as those connectedwith disability, illness, age, or gender; second, environmental diversities, suchas heating and clothing requirements in the cold, infectious diseases in thetropics, or the impact of pollution; third, variations in social climate, such asthe prevalence of crime and violence, and “social capital”; fourth, distribution16 PART ONE Principles and ConceptsFunctionings What peopledo or can do with the com-modities of given characteris-tics that they come to possessor control.
within the family: Economic statistics measure incomes received in a family be-cause it is the basic unit of shared consumption, but family resources may bedistributed unevenly, as when girls get less medical attention or education thanboys do. Fifth, differences in relational perspectives, meaning thatthe commodity requirements of established patterns of behavior may vary be-tween communities, depending on conventions and customs. For example, beingrelatively poor in a rich community can prevent a person from achieving some ele-mentary “functionings” (such as taking part in the life of the community) eventhough her income, in absolute terms, may be much higher than the level of in-come at which members of poorer communities can function with great ease andsuccess. For example, to be able to “appear in public without shame” may requirehigher standards of clothing and other visible consumption in a richer society thanin a poorer one.In a richer society, the ability to partake in community life would be extremelydifficult without certain commodities, such as a telephone, a television, or anautomobile; it is difficult to function socially in Singapore or South Koreawithout an e-mail address.Thus looking at real income levels or even the levels of consumption ofspecific commodities cannot suffice as a measure of well-being. One may havea lot of commodities, but these are of little value if they are not what con-sumers desire (as in the former Soviet Union). One may have income, but cer-tain commodities essential for well-being, such as nutritious foods, may beunavailable. Even when providing an equal number of calories, the availablestaple foods in one country (cassava, bread, rice, cornmeal, potatoes, etc.) willdiffer in nutritional content from staple foods in other countries. Moreover,even some subvarieties of, for example, rice, are much more nutritious thanothers. Finally, even when comparing absolutely identical commodities, onehas to frame their consumption in a personal and social context. Sen providesan excellent example:Consider a commodity such as bread. It has many characteristics, of which yieldingnutrition is one. This can—often with advantage—be split into different types of nu-trition, related to calories, protein, etc. In addition to nutrition-giving characteris-tics, bread possesses other characteristics as well, e.g., helping get-togethers overfood and drinks, meeting the demands of social conventions or festivities. . . . Butin comparing the functionings of two different persons, we do not get enough in-formation by looking merely at the amounts of bread (and similar goods) enjoyedby the two persons respectively. The conversion of commodity-characteristics intopersonal achievements of functionings depends on a variety of factors—personaland social. In the case of nutritional achievements it depends on such factors as (1)metabolic rates, (2) body size, (3) age, (4) sex (and, if a woman, whether pregnant orlactating), (5) activity levels, (6) medical conditions (including the absence or pres-ence of parasites), (7) access to medical services and the ability to use them, (8) nu-tritional knowledge and education, and (9) climactic conditions.10In part because such factors, even on so basic a matter as nutrition, canvary so widely among individuals, measuring individual well-being by levels ofconsumption of goods and services obtained confuses the role of commoditiesby regarding them as ends in themselves rather than as means to an end. Inthe case of nutrition, the end is health and what one can do with good health,17CHAPTER 1 Introducing Economic Development: A Global Perspective
as well as personal enjoyment and social functioning. Indeed, the capacity tomaintain valued social relationships and to network leads to what JamesFoster and Christopher Handy have termed external capabilities, which are“abilities to function that are conferred by direct connection or relationshipwith another person.” But measuring well-being using the concept of utility,in any of its standard definitions, does not offer enough of an improvementover measuring consumption to capture the meaning of development.11As Sen stresses, a person’s own valuation of what kind of life would beworthwhile is not necessarily the same as what gives pleasure to that person.If we identify utility with happiness in a particular way, then very poor peoplecan have very high utility. Sometimes even malnourished people either have adisposition that keeps them feeling rather blissful or have learned to appreci-ate greatly any small comforts they can find in life, such as a breeze on a veryhot day, and to avoid disappointment by striving only for what seems attain-able. (Indeed, it is only too human to tell yourself that you do not want thethings you cannot have.) If there is really nothing to be done about a person’sdeprivation, this attitude of subjective bliss would have undoubted advan-tages in a spiritual sense, but it does not change the objective reality of depri-vation. In particular, such an attitude would not prevent the contented buthomeless poor person from greatly valuing an opportunity to become freed ofparasites or provided with basic shelter. The functioning of a person is anachievement; it iswhat the person succeeds in doing with the commodities and characteristics at hisor her command. . . . For example, bicycling has to be distinguished from possess-ing a bike. It has to be distinguished also from the happiness generated by [bicy-cling]. . . . A functioning is thus different both from (1) having goods (and thecorresponding characteristics), to which it is posterior, and (2) having utility (inthe form of happiness resulting from that functioning), to which it is, in an im-portant way, prior.12To clarify this point, in his acclaimed 2009 book The Idea of Justice Sen suggeststhat subjective well-being is a kind of psychological state of being—a function-ing—that could be pursued alongside other functionings such as health anddignity. In the next section we return to the meaning of happiness as a develop-ment outcome, in a sense that can be distinguished from conventional utility.Sen then defines capabilities as “the freedom that a person has in terms ofthe choice of functionings, given his personal features (conversion of charac-teristics into functionings) and his command over commodities.” Sen’s per-spective helps explain why development economists have placed so muchemphasis on health and education and more recently on social inclusion andempowerment, and have referred to countries with high levels of income butpoor health and education standards as cases of “growth without develop-ment.”13Real income is essential, but to convert the characteristics of com-modities into functionings, in most important cases, surely requires healthand education as well as income. The role of health and education rangesfrom something so basic as the nutritional advantages and greater personalenergy that are possible when one lives free of certain parasites to the ex-panded ability to appreciate the richness of human life that comes with abroad and deep education. People living in poverty are often deprived—at18 PART ONE Principles and ConceptsCapabilities The freedomsthat people have, given theirpersonal features and theircommand over commodities.
times deliberately—of capabilities to make substantive choices and to takevaluable actions, and often the behavior of the poor can be understood in thatlight.For Sen, human “well-being” means being well, in the basic sense of beinghealthy, well nourished, well clothed, literate, and long-lived and morebroadly, being able to take part in the life of the community, being mobile, andhaving freedom of choice in what one can become and can do.Development and HappinessClearly, happiness is part of human well-being, and greater happiness may initself expand an individual’s capability to function. As Amartya Sen argued,“Utility in the sense of happiness may well be included in the list of some im-portant functionings relevant to a person’s well-being.”14In recent years,economists have explored the empirical relationship across countries and overtime between subjectively reported satisfaction and happiness and factorssuch as income. One of the findings is that the average level of happiness orsatisfaction increases with a country’s average income. For example, roughlyfour times the percentage of people report that they are not happy or satisfiedin Tanzania, Bangladesh, India, and Azerbaijan as in the United States andSweden. But the relationship is seen only up to an average income of roughly$10,000 to $20,000 per capita, as shown in Figure 1.2.15Once incomes grow tothis point, most citizens have usually escaped extreme poverty. At these levels,despite substantial variations across countries, if inequality is not extreme, a ma-jority of citizens are usually relatively well nourished, healthy, and educated. The“happiness science” findings call into question the centrality of economicgrowth as an objective for high-income countries. But they also reaffirm theimportance of economic development in the developing world, whether theobjective is solely happiness or, more inclusively and persuasively, expandedhuman capabilities.Not surprisingly, studies show that financial security is only one factor af-fecting happiness. Richard Layard identifies seven factors that surveys showaffect average national happiness: family relationships, financial situation,work, community and friends, health, personal freedom, and personal values.In particular, aside from not being poor, the evidence says people are happierwhen they are not unemployed, not divorced or separated, and have hightrust of others in society, as well as enjoy high government quality with demo-cratic freedoms and have religious faith. The importance of these factors mayshed light on why the percentage of people reporting that they are not happyor satisfied varies so widely among developing countries with similar in-comes. For example, the fraction not happy and satisfied on average is 41/2times as great in Zimbabwe as in Indonesia, despite somewhat higher incomesin Zimbabwe, and over 3 times as great in Turkey as in Colombia, despitesomewhat higher incomes in Turkey at the time of the study. Many opinionleaders in developing nations hope that their societies can gain the benefits ofdevelopment without losing traditional strengths such as moral values, andtrust in others—sometimes called social capital.The government of Bhutan’s attempt to make “gross national happiness”rather than gross national income its measure of development progress—and19CHAPTER 1 Introducing Economic Development: A Global Perspective
good life is a question as old as philosophy, one that must be periodicallyreevaluated and answered afresh in the changing environment of world soci-ety. The appropriate answer for developing nations today is not necessarilythe same as it would have been in previous decades. But at least three basiccomponents or core values serve as a conceptual basis and practical guidelinefor understanding the inner meaning of development. These core values—sustenance, self-esteem, and freedom—represent common goals sought byall individuals and societies.18They relate to fundamental human needs thatfind their expression in almost all societies and cultures at all times. Let ustherefore examine each in turn.Sustenance: The Ability to Meet Basic Needs All people have certain basicneeds without which life would be impossible. These life-sustaining basic hu-man needs include food, shelter, health, and protection.19When any of these isabsent or in critically short supply, a condition of “absolute underdevelop-ment” exists. A basic function of all economic activity, therefore, is to provideas many people as possible with the means of overcoming the helplessnessand misery arising from a lack of food, shelter, health, and protection. To thisextent, we may claim that economic development is a necessary condition forthe improvement in the quality of life that is development. Without sustainedand continuous economic progress at the individual as well as the societallevel, the realization of the human potential would not be possible. Oneclearly has to “have enough in order to be more.”20Rising per capita incomes,the elimination of absolute poverty, greater employment opportunities, andlessening income inequalities therefore constitute the necessary but not thesufficient conditions for development.21Self-Esteem: To Be a Person A second universal component of the good lifeis self-esteem—a sense of worth and self-respect, of not being used as a tool byothers for their own ends. All peoples and societies seek some basic form ofself-esteem, although they may call it authenticity, identity, dignity, respect,honor, or recognition. The nature and form of this self-esteem may vary fromsociety to society and from culture to culture. However, with the proliferationof the “modernizing values” of developed nations, many societies in develop-ing countries that have had a profound sense of their own worth suffer fromserious cultural confusion when they come in contact with economically andtechnologically advanced societies. This is because national prosperity has be-come an almost universal measure of worth. Due to the significance attachedto material values in developed nations, worthiness and esteem are nowadaysincreasingly conferred only on countries that possess economic wealth andtechnological power—those that have “developed.”As Denis Goulet put it, “Development is legitimized as a goal because it isan important, perhaps even an indispensable, way of gaining esteem.”22Freedom from Servitude: To Be Able to Choose A third and final universalvalue that we suggest should constitute the meaning of development is the con-cept of human freedom. Freedom here is to be understood in the sense of eman-cipation from alienating material conditions of life and from social servitudeto nature, other people, misery, oppressive institutions, and dogmatic beliefs,21CHAPTER 1 Introducing Economic Development: A Global PerspectiveSustenance The basic goodsand services, such as food,clothing, and shelter, that arenecessary to sustain an aver-age human being at the bareminimum level of living.Self-esteem The feeling ofworthiness that a society en-joys when its social, political,and economic systems andinstitutions promote humanvalues such as respect, dig-nity, integrity, and self-determination.Freedom A situation inwhich a society has at its dis-posal a variety of alternativesfrom which to satisfy itswants and individuals enjoyreal choices according to theirpreferences.
especially that poverty is predestination. Freedom involves an expandedrange of choices for societies and their members together with a minimizationof external constraints in the pursuit of some social goal we call development.Amartya Sen writes of “development as freedom.” W. Arthur Lewis stressedthe relationship between economic growth and freedom from servitude whenhe concluded that “the advantage of economic growth is not that wealth in-creases happiness, but that it increases the range of human choice.”23Wealthcan enable people to gain greater control over nature and the physical envi-ronment (e.g., through the production of food, clothing, and shelter) than theywould have if they remained poor. It also gives them the freedom to choosegreater leisure, to have more goods and services, or to deny the importance ofthese material wants and choose to live a life of spiritual contemplation. Theconcept of human freedom also encompasses various components of politicalfreedom, including personal security, the rule of law, freedom of expression,political participation, and equality of opportunity.24Although attempts torank countries with freedom indexes have proved highly controversial,25studies do reveal that some countries that have achieved high economicgrowth rates or high incomes, such as China, Malaysia, Saudi Arabia, and Sin-gapore, have not achieved as much on human freedom criteria.The Central Role of WomenIn light of the information presented so far, it should come as no surprise thatdevelopment scholars generally view women as playing the central role in thedevelopment drama. Globally, women tend to be poorer than men. They arealso more deprived in health and education and in freedoms in all its forms.Moreover, women have primary responsibility for child rearing, and the re-sources that they are able to bring to this task will determine whether the cycleof transmission of poverty from generation to generation will be broken. Chil-dren need better health and education, and studies from around the develop-ing world confirm that mothers tend to spend a significantly higher fraction ofincome under their control for the benefit of their children than fathers do.Women also transmit values to the next generation. To make the biggest im-pact on development, then, a society must empower and invest in its women.We will return to this topic in more depth in Chapters 5 through 9 and 15.The Three Objectives of DevelopmentWe may conclude that development is both a physical reality and a state ofmind in which society has, through some combination of social, economic,and institutional processes, secured the means for obtaining a better life.Whatever the specific components of this better life, development in all soci-eties must have at least the following three objectives:1. To increase the availability and widen the distribution of basic life-sustaininggoods such as food, shelter, health, and protection2. To raise levels of living, including, in addition to higher incomes, the provi-sion of more jobs, better education, and greater attention to cultural and22 PART ONE Principles and Concepts
human values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem3. To expand the range of economic and social choices available to individuals andnations by freeing them from servitude and dependence not only in rela-tion to other people and nation-states but also to the forces of ignoranceand human misery1.4 The Millennium Development GoalsIn September 2000, the 189 member countries of the United Nations at thattime adopted eight Millennium Development Goals (MDGs), committingthemselves to making substantial progress toward the eradication of povertyand achieving other human development goals by 2015. The MDGs are thestrongest statement yet of the international commitment to ending globalpoverty. They acknowledge the multidimensional nature of development andpoverty alleviation; an end to poverty requires more than just increasing in-comes of the poor. The MDGs have provided a unified focus in the develop-ment community unlike anything that preceded them.26The eight goals are ambitious: to eradicate extreme poverty and hunger;achieve universal primary education; promote gender equality and empowerwomen; reduce child mortality; improve maternal health; combat HIV/AIDS,malaria, and other diseases; ensure environmental sustainability; and developa global partnership for development. The goals are then assigned specific tar-gets deemed achievable by 2015 based on the pace of past international devel-opment achievements. The goals and targets are found in Table 1.1.Appropriately, the first MDG addresses the problem of extreme povertyand hunger. The two targets for this goal are more modest: to reduce by halfthe proportion of people living on less than $1 a day and to reduce by half theproportion of people who suffer from hunger. “Halving poverty” has come toserve as a touchstone for the MDGs as a whole. To achieve this target requiresthat progress be made on the other goals as well.As reported by the United Nations Development Program (UNDP), if cur-rent trends continue, not all of the targets will be achieved, and great regionaldisparity is obscured when global averages are reported, as East Asia hasdone far better than sub-Saharan Africa.27Shockingly, in a world of plenty, thetarget of cutting the proportion of people who are chronically hungry in halfby 2015 is very unlikely to be achieved. Some conditions even worsened aftera food price spike in 2008 and thereafter as a result of the global economic cri-sis. And the UNDP highlights that if global trends continue through 2015, thereduction in under-5 mortality will reach roughly one-quarter, far below thetarget reduction of two-thirds. This means that the target will be missed by 4.4million avoidable deaths in 2015. Universal primary enrollment will not beachieved unless faster progress can be made in sub-Saharan Africa. Projectingcurrent trends, there will still be 47 million children out of school in 2015. Andthe UNDP reports that the gap between the current trends and the target ofhalving poverty represents an additional 380 million people still living on lessthan $1 a day in 2015.23CHAPTER 1 Introducing Economic Development: A Global PerspectiveMillennium DevelopmentGoals (MDGs) A set ofeight goals adopted by theUnited Nations in 2000: toeradicate extreme povertyand hunger; achieve universalprimary education; promotegender equality and empowerwomen; reduce child mortal-ity; improve maternal health;combat HIV/AIDS, malaria,and other diseases; ensure en-vironmental sustainability;and develop a global partner-ship for development. Thegoals are assigned specific tar-gets to be achieved by 2015.
24 PART ONE Principles and ConceptsERADICATEEXTREME POVERTYAND HUNGERGLOBALPARTNERSHIP FORDEVELOPMENTENSUREENVIRONMENTALSUSTAINABILITYCOMBAT HIV/AIDS.MALARIA AND OTHERDISEASESIMPROVE MATERNALHEALTHREDUCECHILD MORTALITYPROMOTE GENDEREQUALITY ANDEMPOWER WOMENACHIEVE UNIVERSALPRIMARY EDUCATIONThe goal of ensuring environmental sustainability is essential for securingan escape from poverty. This is immediately seen by looking at two of the tar-gets: reduce by half the proportion of people without access to safe drinkingTABLE 1.1 Millennium Development Goals and Targets for 2015Goals TargetsSource: From “Millennium Development Goals” (accessed via www.undp.org). Reprinted with permission from the United Nations Development Programme.1. Eradicate extreme poverty and hunger • Reduce by half the proportion of peopleliving on less than $1 a day• Reduce by half the proportion of people who suffer from hunger2. Achieve universal primary education • Ensure that all boys and girls complete a full course ofprimary schooling3. Promote gender equality and empower • Eliminate gender disparity in primary and secondary education,women preferably by 2005, and at all levels by 20154. Reduce child mortality • Reduce by two-thirds the mortality rate among children under 55. Improve maternal health • Reduce by three-quarters the maternal mortality ratio6. Combat HIV/AIDS, malaria, and other diseases • Halt and begin to reverse the spread of HIV/AIDS• Halt and begin to reverse the incidence of malaria and other majordiseases7. Ensure environmental sustainability • Integrate the principles of sustainable development into countrypolicies and programs; reverse loss of environmental resources• Reduce by half the proportion of people without sustainableaccess to safe drinking water• Achieve significant improvement in lives of at least 100 millionslum dwellers by 20208. Develop a global partnership for development • Develop further an open, rule-based, predictable, nondiscrimina-tory trading and financial system; includes a commitment to goodgovernance, development, and poverty reduction—both nation-ally and internationally• Address the special needs of the least developed countries; in-cludes tariff and quota free access for least developed countries’exports; enhanced program of debt relief for heavily indebted poorcountries (HIPCs) and cancellation of official bilateral debt; andmore generous official development assistance (ODA) for countriescommitted to poverty reduction• Address the special needs of landlocked countries and small islanddeveloping states• Deal comprehensively with the debt problems of developing coun-tries through national and international measures in order tomake debt sustainable in the long term• In cooperation with developing countries, develop and implementstrategies for decent and productive work for youth• In cooperation with pharmaceutical companies, provide access toaffordable essential drugs in developing countries• In cooperation with the private sector, make available the benefitsof new technologies, especially information and communications
water and achieve significant improvement in the lives of at least 100 millionslum dwellers. But more generally, without protecting the environment of thepoor, there is little chance that their escape from poverty can be permanent. Fi-nally, the governments and citizens of the rich countries need to play theirpart in pursuit of the goal of “global partnership for development.”The MDGs were developed in consultation with the developing countries,to ensure that they addressed their most pressing problems. In addition, keyinternational agencies, including the United Nations, the World Bank, the In-ternational Monetary Fund (IMF), the Organization for Economic Cooperationand Development (OECD), and the World Trade Organization (WTO), allhelped develop the Millennium Declaration and so have a collective policycommitment to attacking poverty directly. The MDGs assign specific responsi-bilities to rich countries, including increased aid, removal of trade and invest-ment barriers, and eliminating unsustainable debts of the poorest nations.28However, the MDGs have also come in for some criticism.29For example,some observers believe that the MDG targets were not ambitious enough, go-ing little beyond projecting past rates of improvement 15 years into the future.Moreover, the goals were not prioritized; for example, reducing hunger mayleverage the achievement of many of the other health and education targets. Atthe same time, although the interrelatedness of development objectives wasimplicit in the MDGs formulation, goals are presented and treated in reports asstand-alone objectives; in reality, the goals are not substitutes for each other butcomplements such as the close relationship between health and education. Fur-ther, the setting of 2015 as an end date for the targets could discourage ratherthan encourage further development assistance if it is not met. Moreover, whenthe MDGs measure poverty as the fraction of the population below the $1-a-day line, this is arbitrary and fails to account for the intensity of poverty—thata given amount of extra income to a family with a per capita income of, say, 70cents a day makes a bigger impact on poverty than to a family earning 90 centsper day (see Chapter 5). Other critics have complained that $1 a day is too lowa poverty line and about the lack of goals on reducing rich-country agriculturalsubsidies, improving legal and human rights of the poor, slowing global warm-ing (which is projected to harm Africa and South Asia the most), expandinggender equity, and leveraging the contribution of the private sector. While thereasonableness of some of these criticisms may be questioned, it should be ac-knowledged that the MDGs do have some inherent limitations.1.5 ConclusionsDevelopment economics is a distinct yet very important extension of both tra-ditional economics and political economy. While necessarily also concernedwith efficient resource allocation and the steady growth of aggregate outputover time, development economics focuses primarily on the economic, social,and institutional mechanisms needed to bring about rapid and large-scale im-provements in standards of living for the masses of poor people in developingnations. Consequently, development economics must be concerned with theformulation of appropriate public policies designed to effect major economic,institutional, and social transformations of entire societies in a very short time.25CHAPTER 1 Introducing Economic Development: A Global PerspectiveSector A subset (part) of aneconomy, with four usages ineconomic development:technology (modern andtraditional sectors); activity(industry or product sectors);trade (export sector); andsphere (private and publicsectors).
Otherwise, the gap between aspiration and reality will continue to widen witheach passing year. It is for this reason that the public sector has assumed amuch broader and more determining role in development economics than ithas in traditional neoclassical economic analysis.As a social science, economics is concerned with people and how best toprovide them with the material means to help them realize their full humanpotential. But what constitutes the good life is a perennial question, and henceeconomics necessarily involves values and value judgments. Our very con-cern with promoting development represents an implicit value judgmentabout good (development) and evil (underdevelopment). But developmentmay mean different things to different people. Therefore, the nature and char-acter of development and the meaning we attach to it must be carefullyspelled out. We did this in section 1.3 and will continue to explore these defi-nitions throughout the book.The central economic problems of all societies include traditional ques-tions such as what, where, how, how much, and for whom goods and servicesshould be produced. But they should also include the fundamental question atthe national level about who actually makes or influences economic decisionsand for whose principal benefit these decisions are made. Finally, at the inter-national level, it is necessary to consider the question of which nations andwhich powerful groups within nations exert the most influence with regard tothe control, transmission, and use of technology, information, and finance.Moreover, for whom do they exercise this power?Any realistic analysis of development problems necessitates the supplemen-tation of strictly economic variables such as incomes, prices, and savings rateswith equally relevant noneconomic institutional factors, including the nature ofland tenure arrangements; the influence of social and class stratifications; thestructure of credit, education, and health systems; the organization and motiva-tion of government bureaucracies; the machinery of public administrations; thenature of popular attitudes toward work, leisure, and self-improvement; andthe values, roles, and attitudes of political and economic elites. Economic de-velopment strategies that seek to raise agricultural output, create employ-ment, and eradicate poverty have often failed in the past because economistsand other policy advisers neglected to view the economy as an interdepend-ent social system in which economic and noneconomic forces are continuallyinteracting in ways that are at times self-reinforcing and at other times contra-dictory. As you will discover, underdevelopment reflects many individualmarket failures, but these failures often add up to more than the sum of theirparts, combining to keep a country in a poverty trap. Government can play akey role in moving the economy to a better equilibrium, and in many coun-tries, notably in East Asia, government has done so; but all too often govern-ment itself is part and parcel of the bad equilibrium.Achieving the Millennium Development Goals will be an important mile-stone on the long journey to sustainable and just development. Unfortunately,many of the interim targets are unlikely to be achieved on schedule, nor dothey include all of the critical objectives of development.Despite the great diversity of developing nations—some large, others small;some resource-rich, others resource-barren; some subsistence economies, othersmodern manufactured-good exporters; some private-sector-oriented, others to26 PART ONE Principles and Concepts
a large degree run by the government—most share common problems thatdefine their underdevelopment. We will discuss these diverse structures andcommon characteristics of developing countries in Chapter 2.The oil price shocks of the 1970s, the foreign-debt crisis of the 1980s, andthe twenty-first-century concerns with economic globalization, economic im-balances and financial crises, global warming, and international terrorismhave underlined the growing interdependence of all nations and peoples inthe international social system. What happens to life in Caracas, Karachi,Cairo, and Kolkata will in one way or another have important implications forlife in New York, London, and Tokyo. It was once said that “when the UnitedStates sneezes, the world catches pneumonia.” A more fitting expression forthe twenty-first century would perhaps be that “the world is like the humanbody: If one part aches, the rest will feel it; if many parts hurt, the whole willsuffer.”Developing nations constitute these “many parts” of the global organism.The nature and character of their future development should therefore be amajor concern of all nations irrespective of political, ideological, or economicorientation. There can no longer be two futures, one for the few rich and theother for the very many poor. In the words of a poet, “There will be only onefuture—or none at all.”27CHAPTER 1 Introducing Economic Development: A Global Perspective
2828Case Study 1Progress in the Strugglefor More MeaningfulDevelopment: BrazilThere are two faces of development in Brazil.World-competitive industry coexists with stag-nant, protected sectors. Modern agriculture coexistswith low-productivity traditional practices. ButBrazil is in the midst of a spurt of economic devel-opment that might herald a lasting transformationfor a country often considered synonymous with in-equality and unmet potential. Economic growth hasreturned, health and education have improvedmarkedly, the country’s democratization has proveddurable, and inequality—among the highest in theworld—has at long last started to fall. But there isstill a long way to go to achieve genuine develop-ment in Brazil.Many Brazilians have been frustrated with the un-even pace of development and are known for tellingself-deprecating jokes such as “Brazil is the countryof the future—and always will be.” Brazil has evenbeen cited as an example of a country that has experi-enced “growth without development.” But despitehuge inequities, Brazil has made economic and socialprogress and should not be tarred with the samebrush as countries such as Pakistan, Saudi Arabia, orGabon that have had less social development fortheir levels of growth and investment. Extremelyhigh economic inequality and social divisions dopose a serious threat to further progress in Brazil. Butthere are growing reasons to hope that Brazil mayovercome its legacy of inequality so that the countrymay yet join the ranks of the developed countries.Brazil is of special interest in part because itsgrowth performance from the 1960s through theearly 1980s was the best in Latin America, with atleast some parallels with East Asian export policyand performance, although Brazil had a larger rolefor state-owned enterprises, much lower educationand other social expenditures, and much higherinflation.Brazil’s performance is followed widely in thedeveloping world, as it is the largest and most pop-ulous country in Latin America; with some 193 mil-lion people, it is the world’s fifth-largest country inboth area and population. Brazil is consolidating itsrole as the lead country in the Latin America andCaribbean region; it is a key member of the G20leading economies addressing the aftermath of thefinancial crisis; and one of a group of developingcountries pushing for fairer international traderules. It is one of four influential countries referredto by financial analysts of emerging markets as the“BRICs” (Brazil, Russia, India, and China).Although over two decades of military ruleended in Brazil in 1985, an ongoing debt crisis,years of stagnant incomes, and extremely high in-flation followed. It took drastic policies to reduceinflation, and incomes continued to stagnate in theaftermath. The 1980s and the 1990s have been de-scribed as “lost decades” for development. So therecent signs of palpable progress, especially sinceabout 2004, have been welcomed with relief andgrowing enthusiasm among many Brazilians.Although the country remains politically dividedbetween the center-left and the center-right, astriking convergence has been achieved on policiesagreed to be necessary for equitable and sustainedgrowth, ranging from active poverty reductionprograms to relatively orthodox monetary poli-cies. The economy has been booming, in part dueto commodity exports to China, including soy-beans and steel. One persistent worry is whetherthe economy could continue to grow rapidly ifcommodity prices, which have been much higher
in recent years, revert to their very long term trendsfor decline (see Chapter 12).But despite the nation’s early and now resumedgrowth, other indicators of development in Brazillagged, eventually undermining growth prospects.Benefiting from much higher incomes than CentralAmerican countries and spared the destructivenessof civil war, Brazil, it would seem, should havebeen in a much better position to fight extremepoverty and improve economic equity and socialindicators. Instead, the country has continued tosee a higher percentage of its population in povertythan would be expected for an upper-middle-incomecountry, and despite some recent improvement,Brazil remains one of the countries with the highestlevels of inequality in the world. So how shouldBrazil’s development performance be evaluatedand future priorities chosen?Income and GrowthGrowth is generally necessary, though not sufficient,for achieving development. In 2007, Brazil’s percapita income was $5,860. Using purchasing powerparity (see Chapter 2), its average income was $9,270,about one-fifth of that of the United States but morethan eight times that of Haiti (World Bank data).Growth has been erratic, with substantial swingsover time. Data for growth of gross domestic prod-uct (GDP) per capita are sometimes presented forthe periods 1965–1990, when for Brazil it was 1.4%,and for 1990–2000, when it was 1.5%. This appearsto suggest a remarkable stability. But the former fig-ures combine the booming years from 1967 to 1980and Brazil’s “lost decade of development” of the1980s. Nevertheless, performance through this pe-riod was still better than most other countries ofLatin America. And in 2000–2008, annual per capitagrowth rose to 2.6% (World Bank data).Brazil has had an export policy stressing incen-tives for manufacturing exports, as well as protec-tions for domestic industry, with numerous paral-lels with Taiwan and South Korea in their earlierformative stages (see Chapter 12). Its percentageshare of manufactured exports in total exports grewdramatically, reaching 57% in 1980, although itdropped dramatically during the lost decade of the1980s. Although the share of exports increasedagain to reach 54% by 2000, these still largely repre-sented processed foods and ores. By 2007, this fig-ure had fallen to 47%, reflecting in part an increasein commodity prices; manufactured exports alsocontinued to rise. Brazil’s prolonged status as ahighly indebted country (see Chapter 13) was asubstantial drag on growth performance, as werecontinued problems with infrastructure. Today,however, the Industrial, Technological and ForeignTrade Policy (PITCE) program is actively workingto upgrade the quality and competitiveness ofBrazilian industry.High and growing taxes may have also slowedformal-sector employment growth. The overall taxburden increased from about 25% of gross nationalincome to nearly 40% in the decade from 1993 to2004. Payroll taxes are high and as many as half ofBrazil’s labor force now works in the informal sec-tor, where taxes may be avoided (and labor rightsand regulation circumvented).However, Ricardo Hausmann, Dani Rodrik, andAndrés Velasco argue that Brazil does not lack forproductive investment ideas, nor is concern aboutgovernment behavior the factor holding back in-vestment. Using their decision tree framework toidentify the most binding constraints on economicgrowth (see Chapter 4), Hausmann, Rodrik, andVelasco argue that Brazil has high returns to invest-ment and is most constrained by a lack of savings tofinance its productive opportunities at reasonableinterest rates. In raising domestic savings, Hausmannhas emphasized the importance of “creating a finan-cially viable state that does not over-borrow, over-taxor under-invest.”Technology transfer is critical to more rapidgrowth, competing internationally, and beginningto catch up with advanced countries. Brazil hasmade notable progress. The country is viewed asbeing at the cutting edge of agricultural researchand extension in commercially successful exportcrops such as citrus and soybeans. After a disas-trous attempt to protect the computer industry inthe 1980s was abandoned, Brazil has begun to seethe expansion of a software industry, as also seen inIndia. But Brazil has not absorbed technology to thedegree that East Asian countries have.Social IndicatorsBrazil’s human development statistics compare un-favorably with many other middle-income coun-tries such as Costa Rica and quite a few low-income29
countries, let alone with the advanced industrial-ized countries. As of 2007, Brazil ranked 75th on theUnited Nations Development Program’s 2010 Hu-man Development Index (explained in Chapter 2),four positions lower than would be predicted by itsincome.In Brazil, life expectancy at birth in 2007 was 72years, compared with 79 in South Korea. Brazil’sunder-5 mortality rate is 22 per 1,000 live births,compared with 11 in similar-income Costa Rica andjust 6 in Korea (World Bank data). Although thechild mortality rate is quite poor by the standardsof comparable countries today, Brazil, like most de-veloping countries, has made great progress from1960, when its rate was 159 per 1,000. But about 7percent of all children under the age of 5 still sufferfrom malnutrition in Brazil (World Bank data).Brazil suffers from a high incidence of child la-bor for its income level, as a World Bank studyand reports by the International Labor Office haveunderlined. As many as 7 million children still workin Brazil, despite the country’s having officiallymade the eradication of child labor a priority.(For an analysis of the problems of child labor andappropriate child labor policies, see Chapter 8.) Inthe education sphere, Brazil’s officially reportedadult literacy rate has now risen to 90% (inde-pendent observers have concluded that Brazil’seffective literacy is under 50%), while that of simi-lar-income Costa Rica is 96%. Helping explainthis difference, in Costa Rica, six years of schoolattendance are mandatory, and 99% attendance isreported.The UNDP concluded thatthe unequal distribution of social spending is nodoubt a major factor in maintaining inequality andthus poverty. . . . The bulk of the benefits go to themiddle classes and the rich. Close to a third of thepoorest fifth of the population does not attend pri-mary school. But the sharpest differences show upin secondary and tertiary education. More than90% of the poorest four-fifths of the population donot attend secondary school, and practically nonemake it to universities. Only primary schools endup being relatively targeted to the poor, not be-cause the government succeeds in targeting re-sources, but because richer households send theirchildren to private schools. Public expenditures onsecondary and tertiary education are very badlytargeted to the poor. For scholarships—chiefly tograduate students—four-fifths of the money goesto the richest fifth of the population.In fact, with public universities offering free tuitionto mostly high-income undergrads as well as gradstudents, the distortion is even greater. Moreover,corruption and waste limit the effectiveness of gov-ernment expenditures. And the quality of primaryschools in poor areas remains low.So while the persistence of poverty in Brazil isundoubtedly due in part to mediocre growth rela-tive to East Asia or to Brazil’s potential, the mostimportant explanation is the highly concentrateddistribution of income, worsened by inequitable so-cial spending.Development depends on a healthy, skilled, andsecure workforce. Ultimately, a slower improve-ment in health, education, and community devel-opment can feed back to a slower rate of growth, aprocess that has plagued Brazilian development. Ahopeful sign is the role played now in Brazil by afree press, strengthened basic rights, and a very ac-tive but peaceful political competition. These ele-ments can be a precursor of expanded capabilitiesin Amartya Sen’s analysis.PovertyPerhaps the most important social indicator is theextent of extreme poverty among a country’s peo-ple. Poverty has been high in Brazil for an upper-middle-income country. There has been progress; aWorld Bank study found that Brazil’s average percapita income grew by 220% in the high-growthyears from 1960 to 1980, with a 34% decline in theshare of the poor in the population. On the otherhand, similarly sized Indonesia grew 108% from1971 to 1987, with a 42% decline in poverty inci-dence. And some of the ground gained on povertywas subsequently lost in Brazil in the 1980s and1990s. According to World Bank estimates, in 2005,some 18.3% of the population of Brazil lived on lessthan $2 per day. And 7.8% actually lived in extremepoverty, with incomes below $1 per day (WorldBank, 2007 Global Monitoring Report), worse thansome low-income countries such as Sri Lanka. Butthis may actually be an underestimate. According toa Brazilian government research institute cited bythe United Nations Development Program, an evenmore shocking 15% of Brazilians have incomes of30
less than $1 a day. However, poverty is now falling,and the recent Bolsa Familia (family stipend) gov-ernment program has received high marks foraddressing poverty through its “conditional cashtransfers” of resources to poor families providedthat they keep children vaccinated and in school; itis similar to the Mexican Progresa/Oportunidadasprogram that is the subject of the case study forChapter 8. It must also be mentioned that physicalsecurity remains a pressing problem in Brazil,with violent gangs having extensive sway. Thisproblem can have the greatest negative impact onpeople living in poverty.InequalityFor decades, Brazil’s inequality in income (as wellas in land and other assets) has ranked among theworst in the world. High inequality not only pro-duces social strains but can also ultimately retardgrowth, as examined in detail in Chapter 5. Thedegree of income inequality in Brazil is reflectedin the low share of income going to the bottom60% and the high share to the top 10% of the pop-ulation, as seen in the following income distribu-tion data for Brazil (2007 survey data, reported inWorld Development Indicators, 2010):31Fraction of Population Share Received (%)Lowest 10% 1.1Lowest 20% 3.0Second 20% 6.9Third 20% 11.8Fourth 20% 19.6Highest 20% 58.7Highest 10% 43.0government, the Gini index of inequality (ex-plained in detail in Chapter 5) declined from 56 in2001 to 57 in 2005, showing that inequality can fall,often partly as a result of well-designed policies—such as Bolsa Familia.Land ReformLand is very unequally distributed in Brazil, andthere is both an efficiency and a social equity casefor land reform (a subject discussed in Chapter 9).But land reform has been repeatedly blocked inBrazil by the political power of large plantationowners (fazenderos). In response, impoverishedfarmers in the “landless movement,” or MST, haveincreasingly seized land, often arable but unusedland within large plantations. Thousands of fami-lies have taken part. Farmers have also settled infragile rain forest areas, finding themselves unableto acquire land in areas that are more agricultur-ally suitable and less ecologically sensitive. In re-sponse, the government has initiated a land reformprogram, but the results to date have been modestin relation to the scope of the problem.Sustainability of DevelopmentAs described in Chapter 10, growth that relies onrunning down the natural environment is con-trasted with sustainable development, which pre-serves the ecology on which future income andpeople’s health vitally depend. But Braziliansacross the political spectrum appear determinednot to acknowledge destruction of forests as a gen-uine or pressing problem. Deforestation of theBrazilian Amazon rain forest displays conflicts be-tween short- and long-term development goalsand the consequences of huge inequality and stateintervention on behalf of the rich. Despite theirdestructiveness, economic activities in the Ama-zon often benefited in the past from ill-conceivedsubsidies, now curtailed. Grandiose showcase de-velopment projects and schemes, such as subsi-dized ore mining, charcoal-consuming industries,and cattle ranching, were carried out on a largescale.The encouragement of rain forest settlementseemed to be a politically inexpensive alternativeto land reform. In the end, the best lands becameco