1. The Process of Economic DevelopmentThe third edition of The Process of Economic Development offers a thorough and up-to-datepresentation of development economics. This landmark text will continue to be an invaluableresource for students, teachers and researchers in the fields of development economics anddevelopment studies.Each subject area in this vast, inter-disciplinary field has been thoroughly re-analyzed inlight of current published material in specialized journals, books, and United Nations, WorldBank and International Monetary Fund publications. Much has happened in the developingworld since the appearance of the second edition in 2002. The period has seen remarkablegrowth rates in countries such as China and India, the accession of a number of post-communisteconomies to the European Union, the financial crisis in Argentina and continuing desperatepoverty in many African countries. This third edition reflects these developments and includesnew material on the following: national systems of innovation, including information technology in India the ongoing impact of globalization the continuing programs of foreign aid across all developing countries.Cypher and Dietzs text is the development economics text par excellence, as it takes amuch more practical, hands-on approach to the issues facing developing countries than itsoverly mathematical rivals. It will appeal to all those studying this important subject area.James M. Cypher is Research Professor, Doctoral Program in Development Studies,Universidad Autnoma de Zacatecas, Mexico.James L. Dietz is Professor in the Department of Economics at California State University,Fullerton, USA.

2. The Process of EconomicDevelopment3rd EditionJames M. Cypher and James L. Dietz 3. First edition published 1997Second edition published 2004Third edition published 2009 by Routledge2 Park Square, Milton Park, Abingdon, Oxon OX14 4RNSimultaneously published in the USA and Canadaby Routledge270 Madison Ave, New York, NY 10016Routledge is an imprint of the Taylor & Francis Group, an informa businessThis edition published in the Taylor & Francis e-Library, 2008.To purchase your own copy of this or any of Taylor & Francis or Routledgescollection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. 1997, 2004, 2009 James M. Cypher and James L. DietzAll rights reserved. No part of this book may be reprinted or reproducedor utilised in any form or by any electronic, mechanical, or other means,now known or hereafter invented, including photocopying and recording,or in any information storage or retrieval system, without permission inwriting from the publishers.British Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryLibrary of Congress Cataloging in Publication DataCypher, James M.The process of economic development / James M. Cypher andJames L. Dietz. 3rd ed.p. cm.Includes bibliographical references and index.1. Economic development. I. Dietz, James L., 1947 II. Title.HD82.C96 2008338.9dc22 2007051285ISBN 0-203-89506-1Master e-book ISBNISBN13: 978-0-415-77103-0 (hbk)ISBN13: 978-0-415-77104-7 (pbk)ISBN13: 978-0-203-89506-1 (ebk)ISBN10: 0-415-77103-X (hbk)ISBN10: 0-415-77104-8 (pbk)ISBN10: 0-203-89506-1 (ebk) 4. ContentsList of figures xiiiList of tables xivList of focuses xviPreface to the third edition xviiiAcknowledgements xxiPart 1An overview of economic development 11 The development imperative 3Why study economic development? 3Poverty in the less-developed world 6The development enigma 12Recent trends in economic growth 14Why development, and why now? 18Economic growth and development require structural change 19Barriers to development 22Resources for student use and suggestions for further reading 24Questions and exercises 25Notes 26References 282 Measuring economic growth and development 30Introduction 30The economic growth/income criterion of development 31Measuring economic growth 33Necessary adjustments to the GDP and GNI measures 36GNI or GDP: is one income measure better than the other? 46International comparisons of income: purchasing power parity(PPP) income 47The indicators criterion of development: the Human Development Index 50Adjustments to the HDI 54 5. vi ContentsComparing the income per capita and HDI measures 56Economic growth and equity: goals at odds? 57Summary and conclusions 63Questions and exercises 63Notes 66References 69Appendix 2A 69Appendix 2B 713 Development in historical perspective 73Introduction 73The origins of economic development 75Colonialism 76The lasting effects of colonialism and path dependency 78Forms of European colonialism 79Merchant capital: from old colonialism to new colonialism 80British rule in India: the transition from merchant capital toindustrial capital 81The functional role of colonialism 84The colonial elite: the enduring significance of collaboration 86De-industrialization in the colonies 87Colonial industrialization? 89Measuring the impact of colonialism 91The terms of trade and comparative advantage 91Credit and underdevelopment 93The new imperialism: 18701914 95Mature colonialism and progressive colonialism 96British and French colonialism in West Africa: 194565 96Progressive colonialism 97Decolonization 98Point Four Aid 98Economic dualism 100Summary and conclusions 102Questions for review 103Notes 103References 105Part 2Theories of development and underdevelopment 1074 Classical and neoclassical theories 109Introduction 109Adam Smith: a theory of competitive capitalism and growth 111 6. Contents viiMalthuss theory of population and economic growth 114Ricardos theories of diminishing returns and comparativeadvantage 118Marxs analysis of capitalist development: a brief digression 125Neoclassical growth models 127Summary and conclusions 131Questions and exercises 133Notes 136References 1395 Developmentalist theories of economic development 140Introduction 140The theory of the big push 142A theory of balanced growth 145Unbalanced growth 147Growth with unlimited supplies of labor 151Utilizing the economic surplus 157Stages of growth theory 159Questions and exercises 164Notes 164References 1666 Heterodox theories of economic development 168Introduction 168The Latin American structuralists 169The institutionalists 180Dependency analysis 185Classical Marxism 194Questions and exercises 196Notes 197References 199Part 3The structural transformation 2017 The state as a potential agent of transformation:from neoliberalisam to embedded autonomy 203Introduction 203Origins of the neoliberal paradigm 205Government in the process of development 210The neoliberalism of Deepak Lal 213The new political economy 216 7. viii ContentsAn assessment of the neoliberal theory of the state 217Embedded autonomy 220Depicting state forms 231Summary and conclusions 233Questions and exercises 234Notes 234References 2368 Endogenous growth theories and new strategies for development 239Introduction 239The income convergence controversy 240Income convergence/divergence, path dependence, andpoverty traps 243Endogenous growth models 246Measuring the impact of key inputs in endogenous growth models:growth accounting 254Technical efficiency change 259Conclusions 262Questions and exercises 262Notes 264References 2689 The initial structural transformation: initiating theindustrialization process 271Introduction: an industrialization imperative? 271Structural change and economic growth 273The Lewis dual-economy model of structural transformation:surplus labor 275Initiating the structural transformation process: industrialization 276Government and easy ISI 281Infant industry tariffs: overcoming transitional inefficiencies 284Static and dynamic welfare effects of an infant industry tariff:to do or not to do? 288The elimination of infant industry protection: when is enoughenough? 291The importance of embedded state autonomy to successful ISI 292Potential gains from the easy ISI stage of industrialization 295Para-state firms and social capital 297Measuring the success of easy ISI 298Summary and conclusions 298Questions and exercises 300Notes 303References 306 8. Contents ix10 Strategy switching and industrial transformation 308Continuing structural change 308Industrial sequencing: beyond easy ISI 309Foreign exchange shortages 310Easy export substitution industrialization: the optimal strategy switchafter easy ISI 312Difficult ISI: a sub-optimal strategy switch immediately aftereasy ISI 317Endowments and policies: explaining strategy switches 322Subsequent strategy switches 325Continuing strategy switches 331What can other less-developed nations learn? 332Where we are headed, where we have been 333Questions and exercises 334Notes 336References 34011 Agriculture and development 341Introduction 341Inadequate infrastructural investment 346Primary product mono-exporters 350Peasant agriculture and small-scale cultivators 355Are peasants efficient producers? 358High-yield varieties, biotechnology, genetically modified food crops,and rural productivity 362The developmental problems of cash crop farmers 367Large landholdings and agrarian backwardness 371The structuralist view 373Transnational agribusiness 374Government in agricultural development 376Land reform 379Land reform in Mexico 382Koreas Saemaul Undong 383Questions and exercises 385Notes 387References 38812 Population, education, and human capital 391Introduction 391A population problem? 392The natural and the actual rate of population growth 394The demographic transition 396 9. x ContentsDeterminants of the crude birth rate: understanding the dynamics ofpopulation growth 400The role of children in less-developed and developed economies 402Human capital accumulation: augmenting initial endowments 405Human capital accumulation and market failure: what is the role ofgovernment? 408Population growth and human capital accumulation 413Summary and conclusions 415Questions and exercises 415Notes 418References 42013 Technology and development 422Introduction 422What is technology? 423A technological strategy of development 425Total factor productivity and national technology 429Technology-centered development 434Industrial innovation: continuing technological progress 439Industrial policies to promote an ITLC 440Macropolicies and technological change 442Summary and conclusions 443Questions and exercises 444Notes 445References 447Part 4Problems and issues 44914 Transnational corporations and economic development 451Introduction 451Import substitution industrialization and the TNCs 452The globally integrated production system 455Foreign direct investment 459Who in the less-developed countries gains from FDI? 461Capital formation 464Potential costs of TNCs to a host country 469Weak linkages, thin globalization 471Export promotion and the fallacy of composition 474Long-term costs of TNCs: the potential for environmentaldegradation 475Export processing zones and the problems of small nations 475 10. Contents xiVertically integrated TNCs and development prospects 480Bargaining with the TNCs 482FDI in Asia and Latin America 484Summary and conclusions 487Questions and exercises 488Notes 488References 48915 Macroeconomic equilibrium: the external balance 491Introduction 491The balance of payments 492The current account: foreign exchange earnings and spending 493The capital and financial account: foreign exchange borrowingand lending 497Net errors and omissions 501What does it mean to say that a country has a balance ofpayments problem? 502Exchange rates 503Types of exchange rate regimes 504Real versus nominal exchange rates 512Exchange rates and the balance of payments 515Currency overvaluation and the possible impact on the balance ofpayments 517Good external imbalances 520Summary and conclusions: monitoring the external balances 522Questions and exercises 524Notes 527References 52816 The debt problem and development 529Introduction 529Origins of the 1970s1980s external debt dilemma 530Petrodollar recycling 531Dimensions of the debt crisis 533External borrowing, adjustment policies, and savings 538The debt service obligation: the real cost of debt repayment 541The 1980s debt crisis 543Longer-term efforts to overcome the debt crisis 545Debt overhang and future economic growth 546Summary and conclusions 548Questions and exercises 549Notes 551References 553 11. xii Contents17 International institutional linkages: the International Monetary Fund,the World Bank, and foreign aid 555Introduction 555The IMF 556Objectives of the IMF 562Do IMF programs work? 567The World Bank 570Critiques of World Bank and IMF SALs 577Sustainable development, comprehensive development framework,and a knowledge bank? 578The Poverty Reduction Strategy approach 579Foreign aid 583Conclusion 589Questions and exercises 591Notes 592References 593Index 597 12. Figures2.1 The Kuznets curve 582.1A A Lorenz curve of income distribution 703.1 Historical growth trend of per capita income 754.1 A classical aggregate production function 1174.2 Production and consumption possibilities with and without trade 1224.3 A Solow-type production function 1285.1(a) Lewiss surplus labor model: agriculture 1545.1(b) Lewiss surplus labor model: industry 1546.1 Elasticity of supply and equilibrium price adjustment 1716.2 Declining real commodity prices: 19802001 1776.3 Characteristics of economic dependency 1867.1 The developmental state 2257.2(a) The Brazilian state: the intermediate state 2327.2(b) The South Korean state: the developmental state 2328.1 An endogenous growth production function 2528.2 Technological change versus technical efficiency change 2609.1 Average costs of production, new versus established firms 2839.2 Impact of an infant industry tariff 2879.3 Impact of easy ISI on the productive possibilities frontier 29910.1 Stages of structural and industrial transformation and strategy switches 33110.2 The transition to development 33311.1 Farm size and yields 38112.1 The demographic transition 39812.2 The private optimum and the social optimum level of education 41014.1 An EPZ circuit of capital 48115.1 Exchange rate determination: floating rates 50515.2 Exchange rate determination: fixed rates 50815.3 Floating exchange rates and the balance of payments 51615.4 An under-valued exchange rate 52117.1 Growth in membership of the IMF 55717.2 IMF lending 55817.3 A bilateral aid quality index, 2006 588 13. Tables1.1 Extent of world poverty and the poverty gap 61.2 Average income per capita and growth rates of per capita output 121.3 World income, world population, and their distribution, 2001 172.1 GDP and GNI comparisons, selected nations, 1990 and 2006 352.2 Real GNI per person versus nominal GNI per person, 1990 and 2006 392.3 Income distribution, selected economies 412.4 Purchasing power parity (PPP) measure of GNI per capita 492.5 Human development index (HDI) and GDI, selected countries,1990 and 2004 533.1 Peasant versus commercial export agriculture in India, 18911941(annual average growth) 893.2 Selected colonial systems in 1914 954.1 Number of hours required to produce one unit of cloth and wine inEngland and Portugal 1208.1 Comparative growth rates 2418.2 Saving and investment by region (as a percentage of GDP) 2428.3 Estimates of input contributions to per capita economic growth 2548.4 Estimates of technical efficiency change, 19601989 2619.1 Industrialization and economic growth (annual percentage growthof constant dollar GDP and industry) 2739.2 Labor force distribution, by sector 27410.1 Composition of imports (as a percentage of total imports) 31010.2 Export structure 31611.1 Declining growth rate in agricultural output in low-income countries 34311.2 Changes in per capita food production, cereal output, and irrigated land 35011.3 Degree of export dependency, Low Income Food Deficit nations(19992001) 35211.4 Land tenure relations 36111.5 Peasant production conditions versus cash-crop farming 36812.1 Actual population growth rates, by region and selected countries 39312.2 Crude birth rates, crude death rates, and the natural rate ofpopulation growth 39512.3 Fertility rates, income, and womens education 40112.4 Infant and child mortality rates 40312.5 Education and human capital accumulation 407 14. Tables xv12.6 Dependency ratios, population age profile, and public expenditureon education 41413.1 R&D scientists and technicians 42713.2 Technological capability and development capacity 42813.3 Total Factor Productivity (TFP) estimates, 19601987 (percentages) 43213.4 State policy, growth, and TFP 44214.1 Transnational control of global commodity trade, 1980 45314.2 Share of the stock of world FDI (percentage of world total) 45414.3 Net long-term resource flows into developing regions (billions of dollars) 46314.4 Developing nations exports: skill level, capital intensity (percentage share) 46514.5 Exports of manufactured products from developing nations (percentage) 47314.6 Relative share of TNCs among the largest firms (percentage of total in eachcategory, 1987) 48415.1 The current account of the balance of payments 49415.2 The capital and financial account of the balance of payments 49815.3 Bilateral exchange rates, selected countries 50316.1 Total external debt, 19702005 (millions of US$) 53416.2 Debt service ratios and the debt burden 54116.3 Gross capital formation (as percentage of GDP) 54717.1 New IMF loans, calendar year (billions of SDRs) 56217.2 The impact of IMF austerity programs: capitals share and labors share 56617.3 World Bank lending and co-financing (billions of US dollars, fiscal years) 57417.4 ODA flows of selected advanced nations 586 15. Focuses1.1 Saving lives: ort 51.2 The Millennium Development Goals 91.3 Mdg Goal 1: eradicate extreme poverty and hunger 101.4 Progress and regress, winners and losers 112.1 High-quality growth 322.2 Valuing womens work 432.3 Sustainable Development: balancing economic growth and the environment 442.4 Inequality as a constraint on growth 592.5 China: a new tiger? 612.6 An environmental Kuznets curve? 623.1 Path dependence and colonial structures 793.2 What difference independence? The United States versus Mexico 843.3 The colonial drain 853.4 Africas colonial infrastructure 903.5 Trends in the terms of trade 934.1 Was Malthus right? 1164.2 Marx on capitalism 1264.3 Robert Solow 1325.1 Virtuous circles 1425.2 Achievement orientation in the workplace 1505.3 Other dualist models of structural transformation 1575.4 Testing Rostows concept of reactive nationalism: the case of LatinAmerica after independence 1616.1 Are there adverse terms of trade for some manufactured goods? 1796.2 Celso Furtado: a giant of structural and dependency analysis 1876.3 Dependence and the semi-periphery 1957.1 Governmental inefficiency and growth 2127.2 Corruption and development: is there a relationship? 2267.3 Performance standards and state stimulus in thailand 2297.4 Advanced electronics and embeddedness in Korea 2308.1 China and India on the rise: income convergence? 2458.2 Inequality and growth 2589.1 The export structure 2789.2 Credit and market failure 2829.3 Development banks and isi 2869.4 Taiwans experience with isi in textiles 289 16. Focuses xvii9.5 Is india a free market miracle? 29310.1 Foreign capital and technology in korea 31510.2 Comparative incomes: east asia and latin america 32510.3 Creating dynamic comparative advantage 32610.4 Regional trade associations 33011.1 Gender bias: women in agriculture 34511.2 Agriculture and the environment: deforestation and soil erosion 34911.3 Indias agricultural sector 35111.4 An agricultural-led development strategy? 35311.5 Agriculture and the environment: pesticides and the circle of poison 36411.6 Agriculture and the environment: property rights and resource depletion 37812.1 A return to the past: the HIV/AIDS challenge in Sub-Saharan Africa 39912.2 Womens education, income, and health 40512.3 Primary education in bolivia and indonesia 41213.1 The salter effect: the importance of physical capital investment 43013.2 Transactions costs, the state, and technological acquisition 43513.3 Indigenous learning and koreas steel industry 43914.1 Subcontracting in Indonesia 45714.2 TNCs in the logging business 47614.3 Women workers in export processing zones 47714.4 Unions under integrated production systems 47814.5 Environmental problems in Mexicos EPZs 48314.6 Management of fdi: the case of Taiwan 48615.1 Exploring current account balances 49615.2 Parallel markets 51015.3 Trade in toxic waste: one way to encourage foreign exchange inflows 51915.4 Is Chinas currency under-valued? 52316.1 OPECs absorption problem 53216.2 The evolution of external debt accumulation and the debt burden 53516.3 The mexican dilemma 53716.4 Ineffective use of external debt 53916.5 The first debt-for-nature swap 54317.1 What is conditionality? 55917.2 The world Bank Group 57117.3 The world Bank and the environment 57317.4 Women and invisible adjustment 576 17. Preface to the third editionThis third edition of The Process of Economic Development offers an up-to-date and compre-hensivepresentation of development economics. Each subject area in this vast, inter-discipli-naryfield has been thoroughly re-analyzed in light of current published material in special-izedjournals, books, and United Nations, World Bank and International Monetary Fundpublications. Limitations of space have led us to condense material in many instances. Alldata presented are the most recent available. The revisions have been thorough, comprehen-sive,and painstaking, even as the basic format of the book has remained much the same.The current state of economic development is distinct in many ways from that in whichthe initial chapters of the first edition of this book were written in 1993. Practitionersand observers in the field were then growing acclimatized to the so-called WashingtonConsensus. Briefly put, this was the encapsulation of mainstream development thinking inthe early 1990s. What poor nations needed, it was argued, was not more capital or technologicalcapacity or infrastructure or land redistribution, all ideas that had played a prominent role indevelopment economics since the inception of the field in the aftermath of the Second WorldWar. Rather than resources, particularly physical capital, poor nations essentially neededbetter organization. Better organization was something of a code word that meant, primarily,shifting resources away from the state sector into areas assumed to be of much higher valuein the private sector.According to the Washington Consensus a set of ideas held in common by the powertriad in Washington D.C. composed of the International Monetary Fund, the World Bank,and the US Government, assisted by privately funded think tanks such as the AmericanEnterprise Institute developing nations should sell off their state-owned assets in mines,manufacturing plants, and most infrastructure. And they were urged to reduce all tariffs andquotas, and to minimize domestic content laws and restrictions on foreign ownership. Inother words, the more laissez-faire the better. An unfettered market system was capable oftaking less-developed nations from poverty to development. Too much government was theproblem in too many economies.Deregulation of prices and the elimination of subsidies would also help set developingnations on an upward path. In short, developing nations were told they would be better offif they dispensed with many of the policies that had been utilized in the past by the econo-miesthat are now considered to be developed. Of course, it was argued, developing nations,guided by market forces rather than ill-advised state direction, could benefit from someresource supplement in the form of foreign direct investment. Transnational corporations,the Washington Consensus argued, would bring not only needed capital, but also learningand technological capacity.This perspective shaped new policies in many economies around the world beginning 18. Preface to the third edition xixin the 1980s, especially in Latin America, but also in Eastern Europe and Asia. The result?Many developing nations experienced what came to be called a lost decade, with economicgrowth rates sagging and, far too often, per capita income levels falling.Not all economies suffered this fate, because not all economies followed the WashingtonConsensus recommendations. Some nations, at first concentrated in East Asia, but sincespreading to other economies, took another path. Much of this book is designed aroundunderstanding how that process of economic development took place and how other econ-omiesmight follow suit. Development does not take place in a vacuum. Both the state andthe private sector have essential, and complementary, roles to play. They always have, andthey always will.We never accepted the Washington Consensus as a valid approach to developmenteconomics, even though there might have been elements of truth to parts of the analysisoffered. Our original attempt to write a different development text beginning with the firstedition was not based simply on dissent from the prevailing policy orthodoxy. Rather, wewere more concerned about the great themes in development economics that were generallyabsent from or inadequately portrayed in the existing books on development economics.There was insufficient material on several matters that we have addressed here ascompletely as space would permit, such as: (1) endogenous growth theory; (2) technology;(3) income distribution; (4) agriculture; (5) the colonial legacy and its (mis)shaping ofinstitutions; (6) the underlying importance of heterodox economic ideas as expressed byHans Singer, Ral Prebisch, Gunnar Myrdal, and numerous others; (7) the often definingrole played by the IMF, the World Bank, and aid programs in poor nations; (8) the roleof multinational corporations; and (9) the centrality of fundamental structural change viaproperly orchestrated industrialization.We also felt that, particularly beginning in the early 1990s, when a polemic arose overthe interpretation of East Asias rapid economic ascent, the at times divisive issue of stateversus market needed to be recast. Too much ideology too often clouded the facts. The stateneeded to be brought back into the center of development economics as the facilitator ofprogress it has been in the past. The lessons of Asias development needed clearer contrastto development policies attempted in Latin America from the 1930s through the 1970s. Youwill see that these themes appear frequently throughout the text.Finally, we felt that many books on development economics failed to present a comprehen-sive,interlocking, understanding of the various issues, concepts, and theories that neededpresentation. As a consequence, not only are all of the above topics given a chapter-lengthtreatment in this book, they and other more standard topics are continually cross-referencedwith the objective of providing a comprehensive view on development economics that ismuch greater than the sum of the parts of this book. This text is different, too, from manydevelopment books in which the chapters seem to be different boxes on distinct themes.We think there is an integrated story of how development takes place that is comprehensibleand connected.Nearly two decades after first beginning this project, it is an encouraging sign that: (1) theWashington Consensus is crumbling (sometimes disguised now, but far from gone); (2) it iswidely accepted that the colonial legacy was crucial in terms of imposing lasting distortionson many nations; (3) endogenous growth theory has been given its due (if not more so); (4)agriculture is once again a major theme, including being the subject of the World DevelopmentReport 2007; (5) a renewed interest in Schumpeter has brought with it a focus on the crucialimportance of technology and innovation; (6) employing a broader-based institutional analysisbecame increasingly acceptable in the late 1990s; (7) questions of income distribution and 19. xx Preface to the third editionpoverty have again more directly found their way into development economics; and (8) theinternational community has committed, at least on paper in the Millennium Develop-mentGoals, to dramatically reduce the debilitating poverty that still afflicts one-third ofhumanity.More important for us, however, than seeing these themes we dealt with from the beginningbecome almost mainstream is the fact that the underlying conditions for developing nationshave dramatically changed for the better. And change has come from a totally unexpected, butwelcome, quarter, and that is from growing trade. From 2003 through 2007, according to theUNs data and projections in the World Economic Situation and Prospect, 2007, developingnations have enjoyed five years of rapid growth of output, as measured by gross domesticproduct (GDP). Less-developed economies have been growing, on average, at the rate of 6.2percent per year. Nothing like this has been experienced since the 1970s.Population growth rates also have been falling. This means that, on a per capita basis,income growth is all that much greater. This satisfying turn-around from the dismal 1980sand dragging 1990s has been due to a global commodities boom. Only a few countries havebeen left out: those that have historically specialized in the few primary commodities that aresinking, such as coffee, and those that have specialized in labor-intensive, low-technologymanufactured goods for export.When scanning the newspapers or watching the evening news or reading the headlines onYahoo, it is common to find wrenching photographic evidence of poverty and despair, oftenin Africa. It is, therefore, worth noting that Africa is in the midst of an economic revival, thefirst good news on economic growth the continent as a whole has had in more than twentyyears. From 2003 to 2007, the average rate of economic growth was 5.2 percent, and it wasslightly higher, 5.5 percent, in Sub-Saharan Africa, where growth has been nil or negativefor far too long.The potential for lasting transformation in the developing world is present, even in regionsthat have commonly been thought to be desperate. Economic progress is not only possible, itis happening. More needs to be done, of course, much more in some places, but the directionof change since 2000 has been promising. Perhaps, just perhaps, the Millennium DevelopmentGoals discussed in Chapter 1 will be met by their target date of 2015. There is hope, andbuilding on hope and moving forward is what this book is all about. 20. AcknowledgementsAs is always the case, this book could not have been written without the help of many individuals.As is also the case, none should be held responsible in any way for the result.To begin, we sincerely thank the reviewers of the first edition and the five anonymousreviewers who labored over the second edition and offered us detailed and well thought-outsuggestions for further revision.Next we thank our students. We have had the good fortune of teaching from this book atboth the undergraduate and graduate levels to students of economics and to those of otherfields in Mexico and the US. Nothing could be more immediate than the give-and-take ofthe classroom, along with the pleasant surprises and sometimes painful awareness that arisesfrom reading exams. These activities with quite varied students have given us new insightinto how we should best present the material in this book.Many colleagues played a role in the years of research that have gone into the preparationof various editions of this book. We thank the following individuals: M. Shahid Alam, PaulBowles, Paul Dale Bush, Jun Borras, Al Campbell, Juan Castaings Teillery, Ha-Joon Chang,Eugenia Correa, Willy Cortez, Ral Delgado Wise, Enrique Dussel Peters, David Fairris,Sasan Fayazmanesh, Ral Fernandez, Guillermo Foladori, Kevin Gallagher, Ross Gandy,Rodolfo Garcia Zamora, Alicia Gron, Arturo Guilln, Martin Hart-Landsberg, Peter Ho,Barney Hope, Marc Humbert, Noela Invernizzi, Cristbal Kay, Kathy Kopinak, Fred Lee,Yan Liang, Oscar Muoz, Gerardo Otero, Robert Pollin, Skye Stephenson, Carolina Stefoni,Miguel ngel Rivera, Cesar Ross, Howard Stein, Osvaldo Sunkel, Linda Shaffer, JanetTanski, Marc Tool, Mayo Toruo, Henry Veltmeyer, Gregorio Vidal, and Eduardo Zepeda.At Routledge we have experienced the best of all possible worlds. Editors Terry Clagueand Robert Langham ably facilitated the second edition. Alan Jarvis, who first accepted ouroutline and provisional chapters for the original manuscript, along with Alison Kirk andKate Stone, who edited the first edition, are not to be forgotten. For the third edition RobertLangham has pitched in at every turn, even editing several chapters with a careful eye andkind words. Sarah Hastings has shepherded the manuscript of the third edition throughthe intricate production process without a hitch. Unlike so many in the corporatized worldof publishing, Routledge has given us wide latitude to present our ideas, while providingsensible editing and clear, crisp communication. What else could be asked?For institutional support we thank the Doctoral Program in Development Studies at theUniversidad Autnoma de Zacatecas, Mexico, and California State University, Fullerton.In addition special thanks are due to the Latin America Studies Program at Simon FraserUniversity for electronic access to that universitys remarkable library.Finally, we thank our families for their steadfast support and understanding over the years.JMCJLD 21. Part 1An overview of economicdevelopment 22. 1 The development imperativeNo society can surely be flourishing and happy, of which the far greater part of the membersare poor and miserable.Adam Smith, The Wealth of NationsWorking for a World Free of PovertyHeading on the World Bank websiteAfter reading and studying this chapter, you should better understand: trends in poverty rates and some of its human and social costs; differences in income levels amongst regions; trends in economic growth in different regions; the extent of inequality in the distribution of income and in participation ineconomic and social life by the worlds poor; the obstacles to development, both internal and external, that tend to thwarteconomic, social, and human development; the significance of fundamental structural change and of technological and institu-tionalinnovation to more rapid progress in the future.Why study economic development?On September 11, 2001, the Twin Towers of the World Trade Center in New York City collapsedafter being struck by two commercial airliners commandeered by suicide terrorists. Anotheraircraft stuck the Pentagon in Washington, D.C., and a fourth crashed into an open field in Penn-sylvaniaafter the passengers overcame the hijackers, who may have had the White House, thehome of the US President, as their target. All told, nearly 3,000 perished in the attacks. The worldcommunity responded to this aggression with outrage and support, both material and moral.On December 26, 2004, the second-most powerful earthquake ever recorded struck in theIndian Ocean, setting off a series of tsunamis that struck coastal areas of Indonesia, Thailand,Sri Lanka, India, Somalia, and other countries on the east coast of Africa. Some 187,000 diedfrom these devastating walls of water and rising tides, with another 43,000 listed as missing.Again, the worlds nations and people reacted rapidly to this tragedy, seen over and over againon television and via the internet, with an outpouring of financial aid and direct assistance.What do these two events have to do with economic development? Wasnt 9/11 a tragicpolitical attack, while the tsunami was an unpredictable natural catastrophe? What does eitherhave to do with economics and the subject of this book? The answer, in both cases, is: a lot. 23. 4 The Process of Economic DevelopmentMany of those killed by the tsunamis were the very poor who lived in low-lying areasprone to flooding from the yearly monsoons. They lived on marginal lands that should nothave been occupied at all or, if they were to be occupied, should have been protected fromthe ravages of natural disasters that are common and expected occurrences. A tsunami ofthe size that stuck in 2004 is, thankfully, a very rare occurrence, but low-quality housingconstruction and the absence of man-made barriers to flooding contributed to the deadlyoutcome. With greater economic progress in the affected countries, human devastation fromfuture natural disasters could be reduced dramatically.What about the attack on the World Trade Center? Surely that cannot be linked to issues ofeconomic development? Read what economist Jeffrey Sachs (2005: 215) has to say:terrorism has complex and varying causes. To fight terrorism, we will need to fightpoverty and deprivation as well we need to address the underlying weaknesses ofthe societies in which terrorism lurks extreme poverty; mass unmet needs for jobs,incomes, and dignity; and the political and economic instability that results fromdegrading human conditions.So, economic development is about life-and-death issues. Literally. And consider this fact.As tragic and horrific as the 9/11 attack was, some 35,000 children under the age of five diedaily in the less-developed world the equivalent of more than ten 9/11s every single day,day after day, year after year! This adds up to more than 12 million children who perish everyyear from largely preventable illnesses (UNDP 2001: 9; World Bank 1993a: 1; WHO 1994).Let us repeat that: millions of young children die each year in the less-developed world fromtreatable illnesses, not natural disasters or political conflict that seem to attract the worldsattention.This works out to roughly 1,400 preventable deaths every hour of every day of every weekand of every month of the year, children whose lives end before they really have an oppor-tunityto begin. More than half of these deaths are due to respiratory illnesses or to diarrhoeaand the severe dehydration that can ensue, though of course the childrens weakened condi-tionis exacerbated by malnutrition that results in a vicious circle of hunger and disease (seeFocus 1.1 Saving lives: ORT).1 These are sobering numbers and may be difficult to grasp asaggregate abstractions. Think of this: in the roughly ten seconds it has taken you to read thisparagraph, five more children in the less-developed world will have died, and they will haveperished unnecessarily.2Adults also die in pointless numbers in the less-developed world: more than seven millioneach year from illnesses such as tuberculosis and malaria and other diseases that could beprevented or cured at a relatively small cost to society, illnesses that are almost unknown inmost developed nations. Most of these deaths are rooted in extreme poverty and depriva-tion,including famine and sometimes civil war. They are human losses that, in our modernand affluent times, are not the result of any lack of human knowledge about how to preventthem.3 The means to prevent this waste of human life is at hand; what is lacking seems to bethe will.If all this were not bad enough, since the 1980s the HIV/AIDS epidemic in many Africancountries has decimated and even reversed what limited progress there had been on thehealth and poverty fronts, with some nations, such as Botswana and Zimbabwe, especiallyhard hit. In confronting these and other problems, many of the barriers to progress in theless-developed countries seem to continue to be found in obstinate economic, political, andsocial structures that remain resistant to the changes that could make extreme poverty and 24. The development imperative 5FOCUS 1.1 SAVING LIVES: ORTImagine yourself for a moment as a rural villager in a less-developed nation with a youngchild in your care who develops diarrhoea. How did this child become sick? Was it fromdrinking water fetched from a river? From a well? An irrigation ditch? What would you doto prevent the illness from becoming life threatening, regardless of the cause?Heres the threat. Diarrhoea causes the body to throw off more water than can bereabsorbed. Death can result if more than 15 percent of the bodys fluid is lost. Whatdoes this child need? What can you do to prevent dehydration and death? Clinics,phone calls, medicine, and a visit to a pharmacy are not options! You must come up witha home remedy. And fast! Think carefully about what you would do to save this childs lifebefore reading on.Did you decide to give the child water? That seems to make sense to replace the waterbeing lost. If so, will that be sufficient to stop the diarrhoea and prevent the plunge intofatal dehydration?It is important to remember that along with the loss of water due to the diarrhoea, sodium(salt) is also washed away. There is a fairly precise concentration of sodium in the humanblood supply required for the body to function properly. With diarrhoea, this balance is upsetas the kidneys, which normally regulate the salt level in the blood supply, are unable tomaintain the proper balance. What the sick body needs is both sodium and more liquid, butthe illness disturbs this delicate equilibrium and threatens survival. If you thought more liquidalone was the solution, you may have contributed to the death of the child under your care!The necessary remedy is called oral rehydration therapy or ORT. Simply providing thesick child with water to drink which may have been the immediate cause of the diarrhoeain the first instance is not enough. Nor, interestingly, is water mixed with salt. Becauseof the diarrhoea, the body cannot absorb the salt properly, with the result that excess saltgets stored in the intestinal tract and causes more water to pass into the intestine, actu-allyworsening the diarrhoea. However, a mixture of water, salt and sugar (glucose) willwork, allowing the salt to be properly processed by the body and for water retention to beincreased and the dehydration process halted.A mixture of glucose (20 grams), sodium chloride (salt, 3.5 grams), sodium citrate (citricsalt, 2.5 grams) and potassium chloride (1.5 grams) in one litre of clean water provides theideal mixture for ORT. However, mixing salt and sugar in water in roughly the right propor-tionswill also work fine. ORT must be initiated quickly, before the dehydration becomestoo severe. If it is not, intravenous rehydration may be the only alternative.Why do so many children die each year if the means to halt the dehydration is seemingly sosimple? Lack of knowledge about what must be done, and that for children that action mustbe swift, is part of the problem. Simple hands-on exercises in primary school classes couldhelp to spread the knowledge at a very low cost. Instead of abstract adding and subtractionin mathematics lessons, the measuring and combining of clean water, salt, and sugar in therecommended proportions could transmit information to millions of children who could theneducate their families about how to respond when someone falls ill with diarrhoea.Source: Foster 1992: 1978privation and millions of deaths from poverty-related illnesses each year the relics ofhistory they deserve to be (World Bank 1993a: 116; 2000: 45).Not all of the blame for this on-going tragedy of death and poverty can be placed on theaffected countries. The developed nations have failed to carry through on their oft-professedpromises and responsibilities to assist the poorest of the poor nations in escaping from thetrap of deprivation in which so many millions continue to live. On this, we shall have moreto say later in this chapter. 25. 6 The Process of Economic DevelopmentPoverty in the less-developed worldTable 1.1 provides an overview of the extent of poverty facing the less-developed nations.In 1985, one out of every three persons, some 1,116 million men, women, and children,were extremely poor by the World Banks classification of having less than the equivalentof about $1 a day per person to meet their needs. By 2002, this number had fallen slightlyto 1,015 million persons in poverty. Former World Bank president Robert McNamaracalled these people the absolute poor, human beings who suffer a condition of life sodegraded by disease, illiteracy, malnutrition, and squalor as to deny its victims basic humanTable 1.1 Extent of world poverty and the poverty gapPart I. 1985Region Extremelypoor (%)Poor (%) Millions ofpoorPoverty gapaEast Asia 9 20 280 1China 8 20 210 3Latin America12 19 70 1and CaribbeanMiddle East andNorth Africa21 31 60 2South Asia 29 51 520 10India 33 55 420 12Sub-Saharan30 47 180 11AfricaAll less-developedcountries18 33 1,116 3Part II. 19812004 Percentage of population living on less than $1 per day1981 1984 1987 1990 1993 1996 1999 2004 Poverty gap(2004)East Asia andPacific57.7 38.9 28.0 29.6 24.9 16.6 15.7 9.0China 63.8 41.0 28.5 33.0 28.4 17.4 17.8 12.5 2.1Latin America9.7 11.8 10.9 11.3 11.3 10.7 10.5 8.6and CaribbeanMiddle East andNorth Africa5.1 3.8 3.2 2.3 1.6 2.0 2.6 1.5South Asia 51.5 46.8 45.0 41.3 40.1 36.6 32.2 30.8India 7.9Sub-Saharan41.6 46.3 46.8 44.6 44.0 45.6 45.7 41.1AfricaTotal 40.4 32.8 28.4 27.9 26.3 22.8 21.8 18.1Source: World Bank 1990: Table 2.1, p. 29; 2000: Table A.1, p. 13; data from World Bank website. The $1 a day(actually now $1.08) standard is based on a fixed, real 1993 price base, that is, it is adjusted for inflation.Notea The poverty gap is the percentage by which the aggregate income of the poor falls short of the poverty line. 26. The development imperative 7necessities. [It] is life at the very margin of physical existence. As McNamara suggested,the wretched condition of life of the absolute poor is almost beyond the power of under-standingof those who live in developed countries (McNamara 1976: 5).If the cut-off line for poverty is extended to $2 a day, some 2.6 billion individuals fellbelow that standard in 2002, just a bit less than half the worlds population. This is a largernumber of poor than in 1985 (World Bank data).Part II of Table 1.1 shows the evolution of extreme poverty (< $1 a day) for all the less-developedregions. Overall, the incidence of extreme poverty by 2004 had fallen by morethan half compared to 1981. That is good news. Of course, world population has grown too,so the number of persons in extreme poverty had declined by less than 50 percent, from 1.5billion in 1981 to about 968 million in 2004.What is disheartening is the relatively small decrease in poverty in some of the regionsshown in Part II of Table 1.1, not to mention the increase in the incidence of poverty in Africain the early 1990s. The decline in the share of the population in poverty in East Asia from 20percent of the regions population in 1985 (Part I of Table 1.1) to 9.0 percent in 2004 (andeven lower when China is excluded) is one of the success stories of the past two decades,one that will be highlighted throughout this text. Still, poverty levels remain agonizinglyhigh, reducing opportunities for the poor and their children over the future in a vicious circle.Quoting the World Bank from more than a decade ago: more than 1 billion people, one-fifthof the worlds population, live on less than one dollar a day a standard that Western Europeand the United States attained two hundred years ago (World Bank 1991: 1). This is still truetoday. It is also important to recognize that the incidence of poverty is not gender-neutral,something the aggregate figures in the table obscure: Poverty has a womans face of 1.3billion people in poverty 70% are women [female] (UNDP 1995: 4).With the exception of the last column of both Part I and Part II, the numbers in Table 1.1provide what is called a headcount of the numbers of poor falling below the poverty line.Such a measure does not distinguish between those whose incomes are far below the povertyline and who hence need more assistance to reach the poverty threshold and those whoseincomes already have brought them closer to the income level needed to escape officialpoverty. The headcount measure of poverty simply counts all persons below some incomelevel as poor. The headcount measure is thus not at all sensitive to the severity of the povertysituation of those counted as poor; it treats all poor as if they were somehow the same simplybecause all have income less than $1 or $2 per day.The condition of being poor, however, is not the same for all those who are so classified.Imagine, for example, one country with half its population below the poverty line, but eachis only 10 percent per day away from the poverty level of income. That is poverty of quitea different magnitude from another country which also has half its population below thepoverty line, but each is 25 percent per day away from escaping poverty. The headcountmeasure of poverty, by simply adding up how many people fall below the poverty line, failsto capture this distinction and both countries will be counted as having 50 percent of theircitizens in poverty by the headcount measure. Obviously, however, the severity of povertyin the first country is substantially less than in the second. There is another way to measurepoverty that considers this issue.The last columns of Table 1.1 provide this alternative perspective on measuring poverty.The concept of the poverty gap captures the severity of the poors plight. It is the additionalamount of consumption (or income) that must be generated by a country to bring all thepoor above the poverty line. The poverty gap is measured as a percentage of a regions (ora countrys) total current consumption (or it could be measured as a percentage of income) 27. 8 The Process of Economic Developmentthat must be created and received by the poor in the right amounts to bring each familysincome above the poverty line. For some regions of the world and for some countries thepoverty gap was as low as 12 percent of current consumption in 1985; in other regions, thepoverty gap was as high as 1012 percent of total consumption. Part II of Table 1.1 showsthe poverty gap for China and India in 2004. More recent data is available on the povertygap for individual economies, not regions, as the note to this paragraph shows, but it is notuniform by years and thus is not so easily displayed for comparison.4For all the less-developed nations, an increase in income equivalent to about 34 percentof current consumption received in the right amounts by each family or individual in povertywould have been sufficient to shift all the poor above the World Banks $2 per day povertyline in 1985. Though we do not have access to regional data in 2004, both Chinas and Indiaspoverty gaps were smaller than they were in 1985. Thus it might be reasonable to assume thatthere has been some decrease in the aggregate poverty gap between 1985 and 2004, so thatit perhaps is in the 23 percent range.Obviously, to accomplish the long-term goal of a world without poverty, a simple transferof income from better-off citizens to the poor is not the ultimate means or goal. Reducingpoverty is not about transfers of income, except in the short run to alleviate the worst kindsof suffering. Rather, a permanent reduction in poverty requires a sufficient increase inproduction, jobs, and incomes for the now poor such that they are no longer poverty-strickenand remain non-poor through their own efforts, not handouts.This objective of a permanent increase in income and output that reaches the poor in themagnitudes shown in Table 1.1 would not seem to be an overwhelmingly large technicalbarrier. For example, India could resolve to generate sufficient extra income and output inthe economy over a generation to contribute to an increase in the income of the poor in theamount equal to 8 percent of total consumption. Over ten or fifteen or certainly twenty-fiveyears, this does not seem to be a technically unattainable goal, amounting to an increase intotal consumption on the order of less than 1 percent per year.The possibility of fully eradicating poverty would seem to be within reach. It is not animpossible aspiration requiring super-human efforts beyond current resource capabilities.Greater productivity of labor and a better distribution of the worlds productive resources,both human and physical, are what are needed to effect a long-term decrease in the povertyprofile. It is a reasonable and humane objective for all the less-developed nations to target theelimination of absolute poverty from within their borders. It is a goal that the World Bank hasembraced, with the target of cutting poverty in half by 2015 (World Bank 2000: 56; also seeUNDP 2001: 225). Even for the poorest nations, the magnitude of the increase in output andincome required to reduce poverty is within their grasp over a medium-range period of timewith the right policies, the right decisions, and the requisite political will (see Focus 1.2).The relatively modest size of the poverty gap compared to current incomes in the less-developedworld strongly suggests that poverty is a problem of distribution, and not onlyof income, but especially of access to societys productive resources, particularly humancapital-enhancing assets like education and other training. The existence of world povertydoes not appear to be the consequence of a fundamental shortfall in aggregate productivecapacity given the fairly small size of the poverty gap in most regions. Eradication of abso-lutepoverty is a politicaleconomic problem, not a technical matter. Ending absolute povertyis a challenge of political will and to existing political and economic power structures.Poverty is not just measured by a shortfall in income, of course. Low incomes have realconsequences. For example, of the approximately 4.6 billion people in the less-developedcountries 968 million persons lacked access to improved water sources; 2.4 million were 28. The development imperative 9FOCUS 1.2 THE MILLENNIUM DEVELOPMENT GOALSOn September 8, 2000, the United Nations General Assembly adopted the MillenniumDeclaration. The Millennium Development Goals (MDGs) emerged as a means to meetsome of the aspirations of the Millennium Declaration. The Secretary-General of the UNissues an annual report on progress toward meeting these goals (see the World Bankwebsite for more details: http://www.worldbank.org, Topics). Throughout this andfollowing chapters, we will look at how specific MDGs are being met.The MDGs comprise eight broad goals and fifteen more specific target policies toreach those goals. The success of reaching these targets is measured by fifty-three indi-vidualquantitative indicators.The MDGs represent concrete objectives of the entire international community forreducing the ravages of poverty by 2015. Yes, 2015. The approval of these goals byall the members of the UN demonstrates the importance the international commu-nity,including the World Bank, places upon reducing poverty, improving health care,expanding educational opportunities, and promoting sustainability for hundreds ofmillions of poor people around the world. This unified effort of the world communityrecognizes that all economies are connected and that severe poverty affects us all,directly or indirectly.Goal 1 Eradicate extreme poverty and hungerTarget 1: Halve, between 1990 and 2015, the proportion of people whose income is lessthan $1 a dayTarget 2: Halve, between 1990 and 2015, the proportion of people who suffer fromhungerGoal 2 Achieve universal primary educationTarget 3: Ensure that, by 2015, children everywhere, boys and girls alike, will be able tocomplete a full course of primary schoolingGoal 3 Promote gender equality and empower womenTarget 4: Eliminate gender disparity in primary and secondary education preferably by2005 and in all levels of education no later than 2015Goal 4 Reduce child mortalityTarget 5: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rateGoal 5 Improve maternal healthTarget 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortalityratioGoal 6 Combat HIV/AIDS, malaria, and other diseasesTarget 7: Have halted by 2015 and begun to reverse the spread of HIV/AIDSTarget 8: Have halted by 2015 and begun to reverse the incidence of malaria and othermajor diseasesGoal 7 Ensure environmental sustainabilityTarget 9: Integrate the principles of sustainable development into country policies andprograms and reverse the loss of environmental resourcesTarget 10: Halve, by 2015, the proportion of people without sustainable access to safedrinking water and basic sanitationTarget 11: Have achieved, by 2020, a significant improvement in the lives of at least 100million slum dwellersContinued 29. 10 The Process of Economic DevelopmentGoal 8 Develop a global partnership for developmentTarget 12: Develop further an open, rule-based, predictable, non-discriminatory tradingand financial system (includes a commitment to good governance, development, andpoverty reduction both nationally and internationally)Target 13: Address the special needs of the least developed countries (includes tariff- andquota-free access for exports, enhanced program of debt relief for HIPCs and cancel-lationof official bilateral debt, and more generous ODA for countries committed topoverty reduction)Target 14: Address the special needs of landlocked countries and small island developingstatesTarget 15: Deal comprehensively with the debt problems of developing countries throughnational and international measures in order to make debt sustainable in the long termTarget 16: In cooperation with developing countries, develop and implement strategies fordecent and productive work for youthTarget 17: In cooperation with pharmaceutical companies, provide access to affordableessential drugs in developing countriesTarget 18: In cooperation with the private sector, make available the benefits of new tech-nologies,especially information and communicationsFOCUS 1.3 MDG GOAL 1: ERADICATE EXTREME POVERTY ANDHUNGERMeeting MDG Targets 1 and 2 would reduce by half the share of the population with incomesof less than $1 per day and of those suffering from hunger. A glance back at Table 1.1 showsthat there has been substantial progress toward achieving Target 1. In 1990, 27.9 percent ofthe less-developed worlds population received less than $1 per day; by 2004, the propor-tionof the population in the LDCs with incomes below the $1 per day standard had droppedto 18.1 percent. This represents substantial progress in the incidence of extreme poverty,though more obviously remains to be done if the 50 percent reduction by 2015 is to bereached.One region (East Asia and the Pacific) has already met MDG Target 1; Chinas progressin reducing poverty in that region has been extraordinary. The Middle East and North Africaare close to meeting Target 1. There was an increase in the incidence of poverty after 1990in Europe and Central Asia, primarily due to the collapse of the former Soviet bloc; thetrend now seems to be downward. Progress in South Asia (with India and its large popula-tion)has been below average, with the share of the population receiving less than $1 aday falling by less than 25 percent. Clearly, to reach the goal of a 50 percent reduction,progress needs to be more rapid in this region.Sub-Saharan Africa, unfortunately, has seen almost no movement toward reducingextreme poverty. If the MDG goals are going to be reached in any meaningful way, theinternational community needs to find ways to kick-start development in Sub-SaharanAfrica. In future chapters we shall see that it is this region where progress toward develop-menthas been the weakest, with tragic consequences.In 2002, despite the more than 30 percent decline in the incidence of overall povertysince the MDGs were announced, 1,015 million persons still fell below the $1 per daypoverty line, compared to 1,218 million in 1990, a decrease in the absolute number ofpoor of only 16.7 percent. The number of extremely poor in Sub-Saharan Africa actuallyincreased by more than a third (from 227 million to 303 million) because of the lack ofprogress in reducing the incidence of poverty. 30. The development imperative 11without proper sanitation; 854 million adults were illiterate (64 percent of whom werewomen); 34 million were infected with HIV/AIDS, the great majority of these in Africa;and 2.2 million persons were dying annually from indoor air pollution from, particularly,exposure to toxic fumes from wood-burning cooking (the data is for the late 1990s and 2000;UNDP 2001: 9, 13).The good news, despite these sobering statistics on poverty, is that there have been undeni-ableimprovements in living standards in the less-developed world since 1970. Life expect-ancyat birth rose absolutely and relatively compared to the developed world, from forty-sixyears in 1960, when it was equal to 67 percent of life expectancy in the developed nations, tosixty-five years in 2005, which is equal to 82 percent of the level achieved in the developedcountries. Infant mortality between birth and age one fell from 149 per 1,000 live births in1960 to 56 in 2005. Adult literacy rose from 46 percent to nearly 80 percent over the sameperiod to 2005, though in the least-developed nations 70 percent of all adults and only halfFOCUS 1.4 PROGRESS AND REGRESS, WINNERS AND LOSERSWe have relied above on some statistical data to get a snap-shot of the situation ofpoverty in the less-developed world. It is important and instructive to collect and try tounderstand some of this data yourself.To get you started in that direction, and if you have access to the internet, go to thewebsite of the World Bank, http://www.worldbank.org (alternatively, look for a recent issueof the World Banks World Development Report, which will have similar data, though whatis now available is substantially less in the print edition than was available in the past).Click on Data & Research in the Key Statistics column and then Data by Country.You are going to use the Country Profiles drop-down menu in the middle of that page tofind the following information.Find data for Brazil, China, Costa Rica, Kenya, Korea (Rep.), Mexico, Pakistan, Sri Lanka,and Zimbabwe for the following social and economic variables for the most recent yearavailable: mortality rate, infant; malnutrition prevalence; life expectancy at birth; improvedwater source; school enrolment, primary; and the population growth rate.What picture does this data give you about each of these countries? What generalconclusions can you draw about these countries just using this data as your source ofinformation? Which country do you think is best off? Which is worst off? Rank thesecountries from best to worst using these indicators alone as your guide. You will have todecide which indicators are more important to your ranking and which are less important.Now, record the income per person (GNI per capita) for each of the countries from thesame tables. Rank the countries again from best to worst using only the GNI per capitadata. Is this ranking of countries substantially different from the first ranking you did usingthe social and economic variables? If there is a difference in your ranking of countries,what is the significance of that?What about poverty levels in these countries? Does the country you rank first have thelowest level of poverty? Does the country you rank last have the highest rate of poverty?Lets see.Go back to the main World Bank website link above. Click again on Data & Research.In the Key Statistics column, choose Data by Topic from the drop-down menu. Choosethe Poverty link and then record the data for each of the above countries for povertygap at $1 a day and the poverty headcount ratio. Does the incidence of poverty in thecountries match what you thought it would be, given your previous rankings of the coun-tries?Did the poorest country have the highest incidence of poverty? The richest havethe lowest incidence of poverty? If there are discrepancies, can you explain them? 31. 12 The Process of Economic Developmentof adult females could be classified as literate (see Focus 1.4 Progress and Regress, Winnersand Losers).Except for the last figures, all of the above are average values. In general, women donot fare as well as men on these social indicators. Rural areas suffer relative to urbanareas, and ethnic groups and different social classes often have widely diverging outcomesas well. One can find nations that have made, at best, only modest progress on the pathtoward fuller economic and social development. But there are reasons to be hopeful inmany nations.There remains much to be done to bring as many persons as possible out of poverty andthe deprivation it produces and that is one reason why understanding how economic develop-menttakes place is so important.The development enigmaIt was the disturbing reality of world poverty, of a sharp division between rich nations and poornations and within nations, and of so much human suffering in far too many countries that firstbrought us, in the late 1960s and early 1970s, to be keenly interested in development economicsand the problems of what was then called the Third World.5 Why, we asked ourselves, whencrossing the international border between the United States and Mexico from San Diego toTijuana, did we witness such a dramatic and obvious change in incomes, living standards, andlevels of human development? After all, the boundary between these two nations is an artificialpolitical division. The geography on one side of the frontier is much like that on the other; infact, until the mid-1800s, these lands still were all part of one nation, Mexico.Why, then, does one enter after only a few steps or a short drive across the boundary intoMexico, not only a different world culturally and linguistically, but also one so unquestion-ablypoorer and with fewer possibilities for individuals to realize their full potential whencompared to the United States?Other similar enigmas come easily to mind. Why is so much of Africa substantiallyless developed and poorer than Latin America (see Table 1.2 below), though both regionsTable 1.2 Average income per capita and growth rates of per capita outputIncome per capitaa Annual % change in real outputb1970 1980 2000 2005 19801990 19902000 20002005Less-developed economies 222 702 1,155 1,742 1.03 2.14 3.89East Asia and Pacific 122 294 907 1,628 5.38 7.08 7.32Latin America and579 2,053 3,770 4,157 0.87 1.62 1.13CaribbeanMiddle East andNorth Africa256 1,266 1,662 2,223 0.05 1.76 2.07South Asia 117 264 444 693 3.37 3.21 4.71Sub-Saharan Africa 207 662 485 743 1.04 0.34 2.05Developed economies 2,918 10,456 26,305 34,962 2.62 1.87 1.40Source: World Bank, World Development Indicators Online.Notesa Gross National Income (GNI) per capita, in US dollarsb Of per capita Gross Domestic Product (GDP) in 2000 dollars 32. The development imperative 13are considered part of the less-developed world? What accounts for the recent economicsuccess of some East Asian countries, like South Korea and Taiwan, or, taking a slightlylonger time span, of Japan, such that they seem to have passed over the threshold fromunderdevelopment to development? Why does India, with its large number of highlyeducated citizens and its immense potential market, remain one of the most impoverishednations, while other countries again, South Korea is an illustration with a skilled andeducated labor force have been able to make the transition toward higher and more equitablelevels of economic development? How has China, the most populated nation on earth, beenable to make such remarkable progress that it went from being poorer than India to havingnearly three times the income per person?These are the sorts of incongruities and conundrums and the list could be extended quiteeasily that both vex and excite those interested in the problems of economic development.Trying to formulate reasonable explanations for such observed disparities, and, by extension,suggesting what might be done to overcome the barriers that retard economic, social, andhuman development is what development economics is all about.It is on this adventure into theory and reality that we are about to embark. There are noeasy answers that apply always and everywhere. There is no magic, one-stop, cure-all solu-tionthat can be offered that applies to every country in all parts of the world. Becoming moredeveloped is a challenge that requires vision and hard work from both the leaders of nationsand their citizens. Nonetheless, there are patterns and lessons to be learned from successfulas well as unsuccessful development experiences that can help those with the power and thewill to move their economies and nations forward.It is to these patterns and regularities based upon the concrete historical experiences ofsuccessful and failed development episodes that we shall turn repeatedly. We are looking forthe critical signposts that mark the process of development, such that it will be possible todetermine what, broadly speaking, needs to be done and what should be avoided if progressis to be made.Many abstract theories about how to develop have been advanced by economists, andsome of these will be considered in later chapters. Such theories are an integral part of devel-opmenteconomics and provide an important historical window on how economists havethought and continue to think about development.Also of importance for less-developed nations are the concrete, positive, historical experi-encesof successful developers. We shall be looking to the lessons that can be gleaned fromthe rapid growth of Japan, South Korea, Taiwan, and Hong Kong, as well as other nationsof that region that the World Bank calls the High-Performing Asian Economies (HPAEs).6Chinas amazing rates of growth over more than two decades provide lessons too, though inmany ways what is happening there affirms what others have done before them. The analysisand recommendations for action in subsequent chapters often are based upon the lessons ofthe HPAEs and the now-developed nations, as well as contrasts with less productive casesof transformation, such as the Latin American economies, where the growth process sloweddramatically after initial successes.Underlying our interest in development there exists a definite moral dimension. For us,development is about realizing very fundamental human values and finding the means toextend the fruits of these values to the greatest majority of the worlds population. Thesehuman values include, but are not limited to: the opportunity for meaningful employment and the possibility to provide for ones selfand family; 33. 14 The Process of Economic Development sufficient food, shelter, and other amenities for a decent and meaningful life above thepoverty line; the opportunity to pursue education and the increased quality of life it promises; a reasonable level of health care; social security for old age; democracy and political participation in the life of the community and society; equal treatment under the law and in the economy, regardless of race, gender, class,ethnicity, religion, nationality, or other differences; and respect for individual dignity.This listing of development goals is not meant to be all-inclusive. It is intended simply totouch upon at least some of the primary ingredients toward which development, and not justeconomic development, is directed. We will have more to say on this in the following chapter.For us, and we hope for you too, economic development is of the utmost interest and ofthe gravest consequence. It touches our shared humanity. The great economists of the eight-eenth,nineteenth, and early twentieth centuries Adam Smith, David Ricardo, John StuartMill, Karl Marx, Alfred Marshall were inspired by a profound concern for understandingthe roots of economic wealth and the reasons for poverty, as well as for discovering themechanisms through which economic and social gains might best be increased and sharedamongst the members of society. These matters have captured the attention and hearts as wellas the minds of many brilliant thinkers. They are noble questions that often lead students towish to study economics in the first instance.This book is an inquiry into what those in the less-developed nations must do if theyare to improve their economic and social lot. As well, there is reflection on how the devel-opedworld, including concerned citizens of those countries, might understand their roleand responsibilities in our increasingly interdependent world of rich and poor. The MDGsare an important recognition of the global obligation of all nations to end extreme poverty,wherever it is found. Everyones economic interests are joined in a global economic system,sometimes positively, other times negatively, no matter how remotely connected we at timesmay seem to be. It is one world, albeit unequal, but our destinies are increasingly intertwinedvia markets, communication networks, the environment, and politics. Achieving the MDGsand making progress toward fundamental structural reforms of the sorts discussed throughoutthis book is a winwin outcome for all nations.Recent trends in economic growthThe 1980s and early 1990s were not particularly propitious for either economic growth ordevelopment (the differences between the growth and development are spelled out ingreater detail in Chapter 2). Even the developed world suffered a slowdown in its rate ofeconomic expansion from the 3 percent per person growth rates of the 1960s and 1970s to theslower growth of GDP per person shown in Table 1.2. Some developed countries experienceda sharp decline in living standards after years of prosperity following the Second World War.Unemployment rose in the European Union (EU) to levels that proved difficult to reduce.The greatest number of jobs being created in the developed nations were concentratedheavily in segments of relatively lower-paying, lower-productivity service sectors thatoffered meagre benefits and other perquisites from sick leave to health care to retirementpackages that had become integral to the rising living standards of the developed economiesafter the Great Depression of the 1930s. 34. The development imperative 15In the United States, real wages have decreased for a broad spectrum of the workforcesince 1973. Family incomes barely have edged upward, and when they did it was due prima-rilyto the fact that more family members, particularly women, entered the labor force inrecord numbers in an effort to maintain a family standard of living. For increasing numberswho do find work, it is often irregular and part-time, as permanent workforces were replacedby contingent workers with fewer rights, lower incomes, and futures that have become evermore precarious. So even the already-developed economies can experience problems oflong-term progress during some periods, and these problems are often more complex todaygiven the impact of global competition amongst nations and firms.7The less-developed world, on average, fared even worse than the developed economiesduring the 1980s. However, average growth rates of output for the less-developed economieshave exceeded those of the developed world since 1990. But, as can be seen from Table 1.2,much of this success is due to rapid growth of production in South Asia and in East Asia andthe Pacific. Not all regions have done as well as the average might suggest.Table 1.2 provides summary data on the levels of income since 1970 and growth rates ofoutput per person since 1980 in different regions. Although, as we shall learn in Chapter 2,output and income growth are not the whole of what development is about, these numbers,along with the data on poverty in Table 1.1 above, do shed some initial light on the wide dispar-itiesin living standards which continue to plague many regions and peoples of the world.South Asia ranks as the poorest region by income per person in the world, but if the trendsshown in the table continue that will soon change.8 Annual income per capita in South Asia in2005 averaged less than 2 percent of what was received in the developed world. Comparingregions within the less-developed world, South Asia received 42.6 percent of the averageincome received in East Asia and the Pacific and just 16.7 percent of what was received inLatin America and the Caribbean, the region in the less-developed world with the highestincome per person.Sub-Saharan Africa fared only slightly better than South Asia; it is the second-poorestregion in the world.9 Income per person was actually lower in 2000 than in 1980, and thegrowth rate of real output per capita over the same period was nil.Among the less-developed regions of the world, the Middle East and North Africa andLatin America and the Caribbean are, on average, relatively better-off. Still, compared to thedeveloped world, their average incomes were, respectively, only 6.4 percent and 11.9 percentof what was received in the developed economies in 2005.Clearly there remains a substantial gap in average incomes between the less-developedand the developed worlds, a gap that has widened on average from 1970, when income inthe less-developed world was 7.6 percent of that in the developed, to 2000, when averageincome in the less-developed economies had fallen to but 4.4 percent of the average in devel-opedeconomies. By 2005, there had been a change in direction, but average income in theless-developed economies in 2005 as a share of that in the developed world was still belowwhat it had been in 1970.Of course, as can be confirmed from the data in Table 1.2, East Asias average income gapcompared to the developed economies has shrunk over time, but even there, much remainsto be done in terms of absolute income levels.Low- and middle-income less-developed nationsIn our study of economic development, we shall be mostly concerned with the so-called low-andmiddle-income economies. By the World Banks categorization, 149 economies fell into 35. 16 The Process of Economic Developmentthese two groupings in 2007 out of a total of 209 nations and territories. Of these, fifty-threenations were included in the World Banks low-income subgroup, eleven fewer than in1999; another fifty-five fell into the lower-middle income range, the same number as hadbeen in this grouping in 1999.Incomes ranged from the poorest nation in the world, Burundi, with a meagre $100 percapita yearly income in 2006, to Argentina, with $5,150 per person, to $17,690 for SouthKorea (which has graduated from its former upper-middle-income status in the less-developedworld to now being including among the high income economies of the devel-opedworld). The worlds two most populous economies, India ($820 per capita income)and China ($2,010) now share different fates. India remains in 2006 classified among thelow-income economies, while China, as a result of two decades of unprecedented economicexpansion, has been promoted to lower-middle-income status among the less-devel-opedeconomies.The average annual income of the low-income subgrouping of the less-developed nationsin 2005 was $584 per person. For the middle-income less-developed economies, the averageincome was $2,636, with the upper-middle-income group averaging $5,053 (morecomplete data for other nations and analysis of the meaning of these data are presented inthe next chapter).The last columns of Table 1.2 show what was happening to the growth of real, inflation-ad-justedoutput (= income) per person since the 1980s. For all regions except East Asia and thePacific and South Asia, income per person declined over the 1980s, as output contracted or asoutput growth relative to population growth was inadequate to prevent declines in income perperson. For these regions, the income gap with the high-income nations, which experiencedpositive economic growth, widened in both absolute and relative terms over that decade.10Over the 1990s, all the regions of the less-developed world returned to positive per capitaincome growth rates, with the exception of Sub-Saharan Africa, which suffered two consecu-tivedecades of declining income per person. Since 2000, growth rates have improved every-whereexcept in Latin America; what is critical is to keep this momentum of positive growthrates going, as it must, if the MDGs have any hope of being reached.While Table 1.2 highlights the enormous divergence in incomes separating the less-devel-opednations from the developed, and among the less-developed regions of the world them-selves,even that data fails to fully convey the magnitude of this disparity. Table 1.3 providesa more global and yet extraordinarily dramatic portrayal of the distance that continues toseparate the developed have nations from the less-developed have-not economies.The less-developed world, with more than four-fifths of the worlds population, receivedslightly more than one-fifth of total world income in 2005. In a cruel symmetry, the devel-opedworld nations, with well less than one-fifth of the worlds population, received nearlyfour-fifths of total world income in 2005, precisely the same share as in 1985, though witha smaller proportion of total world population in 2005. Looked at slightly differently, thedeveloped world received about five times its equality share of total world income (78.1percent of world income divided by 15.9 percent of world population).11 The less-developedworld received 26 percent of what its equality share of world income would have been.Or consider this fact: in the mid-1990s, the richest 1 percent of the worlds populationreceived as much total income as the poorest 57 percent of the worlds population (UNDP2001: 19).Examining particular regions within the less-developed world, inequality was even moreextreme and income more meagre. South Asia, with nearly 23 percent of total world popu-lation,received but slightly more than 2 percent of world income in 2005. This meant that 36. The development imperative 17Table 1.3 World income, world population, and their distribution, 2001Share of worldsincome (%)South Asia received only 10.1 percent of its equality share of income (2.3 percent of totalincome/22.8 percent of total population).The relatively better-off Latin America and the Caribbean region, by comparison,received about 65 percent of what its hypothetical equality share of world income wouldhave provided in 2005 (5.5 percent of total income/8.5 percent of total population). From1985 to 1995, Sub-Saharan Africas share of total world income fell slightly, even as itsshare of the worlds population rose, which is why average income fell in the region overthat period. Since 1995, Sub-Saharan Africas share of world income has recovered slightly,but the regions share of total world population has grown. As a consequence, Sub-SaharanAfricas average income declined from 17.2 percent of its equality share in 1985 to slightlymore than 11 percent in 2005.East Asia and the Pacific increased its share of total world income since 1985. At the sametime, the regions share of total population declined. This meant rising average income levels.The disparities between the less-developed nations vis--vis the developed nations shownin Tables 1.2 and 1.3 are not of recent origin. Worse, differences within the less-developedworld itself have been growing, both between regions and within countries themselves.Many of the poorest countries have suffered a relative decline, and in some instances, anabsolute deterioration in their position on many significant measures of productivity and intheir contribution to world output.Between 1960 and 1990, for example, the share of total world output received by thepoorest 20 percent of the worlds population fell from 2.3 percent to 1.3 percent. Their shareof world trade decreased from 1.3 percent to 0.9 percent, and their contribution to globaldomestic investment fell from 3.5 percent to 1.1 percent (UNDP 1993: 27, Table 2.1). Thecontributions of the poorest to production, to trade, and their share of world income declinedrelative to those of other groups in society, including better-off nations within the less-devel-opedworld.It is a clich, perhaps, to say that the rich get rich and the poor get poorer. But in the1980s and 1990s, clich or not, that is what took place in some regions of the world, particu-larlyin South Asia and Sub-Saharan Africa. Since 1995 or so, some improvement in incomescan be noted from the tables. But not enough.Share of worldspopulation (%)1985 1995 2005 1985 1995 2005Less-developed economies 22.0 17.5 22.0 81.7 83.2 84.1East Asia and Pacific 4.1 4.4 6.8 30.5 30.2 29.2Latin America and Caribbean 5.8 5.8 5.5 8.2 8.4 8.5Middle East and North Africa 2.5 1.2 1.6 4.1 4.5 4.7South Asia 2.4 1.6 2.3 20.8 21.8 22.8Sub-Saharan Africa 1.6 1.0 1.3 9.3 10.4 11.7Developed economies 78.1 82.5 78.1 18.3 16.8 15.9Source: World Bank, World Development Indicators Online.NoteMissing data for the Europe and Central Asia mean that subtotals do not add to totals for the less-developed econo-mies.The income shares are computed as a percentage of total world Gross Domestic Income. 37. 18 The Process of Economic DevelopmentNonetheless, there are gains that have been made in the less-developed world despite asometimes weak and uneven record of economic growth and production since the 1980s thatprovide reason for continued hope that positive and reasonably equitable progress remainspossible if societies make the right choices. Advances in the human condition continue tobe made, often in the direst circumstances. Continued progress toward the amelioration ofpoverty and further improvements in the standard of living of a greater part of the worldspopulation must be one of the highest goals, and the Millennium Development Goals are aconstant reminder of what remains to be done.Why development, and why now?Nations like Great Britain, the United States, Germany, Japan, Australia, France, and theScandinavian countries that today can be considered developed did not attain that status over-night.12 In fact, development in all its economic, political, and social dimensions took placequite slowly and proceeded unevenly over a very long period of time, centuries in fact.The great majority of the countries now considered to be less developed have hadsignificantly less time to become developed, at least as independent political entities. It isimportant to recall how many of the nations of Africa, Asia, and the Caribbean achievedpolitical independence only since the end of the Second World War in 1945, when thedrive to de-colonize as a result of pressure from the newly created United Nations began inearnest. Since then, well over 120 newly independent countries have been established fromthe former colonial empires and later the collapse of the former Soviet bloc. It is in thesenew nations that the problematic of becoming developed and of making progress towardauthentic human well-being and of achieving the MDGs is most pressing.It is essential to keep this time dimension in mind, without finding in it an ultimate excusefor slow progress in some economies. Most of the less-developed nations have had, at best,only a few decades to work on the fundamental twin goals of post-colonial construction:nation-building and progress on the path toward higher levels of economic and socialdevelopment. One can argue that it takes time to undo the ingrained patterns of production,social class, and power inherited from the past. What we will call adverse path dependencein Chapter 3 often weighs heavily on the present in many poor nations.On the other hand, the means to realize development goals are closer to hand than at anytime in history.13 The range of available and potentially applicable knowledge would seemto make the diffusion of technological progress, of advances in medicine, of techniques ofefficient business and government administration, and so on easier to attain for todays less-developednations than it was for earlier developers who had to painstakingly create thatknowledge. If only this vast array of knowledge could be effectively transferred, harnessed,and applied in the less-developed nations, the current state of poverty in most parts of theworld could be overcome.It is thus necessary to try to balance the short time-frame that most countries have had inwhich to try to become more developed with the fact that the know-how for achieving devel-opmentis available now as never before. Does that then mean that the less-developed nationsare on the brink of becoming developed? Not necessarily. Whether the knowledge about howto increase economic growth and about how to become more developed can be applied inways that succeed in taking the less-developed nations across the threshold to developed-worldstatus depends upon how stubborn the barriers to development continue to be in eachof those nations. Possibility still needs to be transformed into actuality, and the means toeffect that transformation is central to the subject matter of development economics. 38. The development imperative 19Economic growth and development require structural changeEconomics is often defined as the study of how societies can best allocate scarce resourcesamong alternative uses so as to maximize something usually the level of each individualsor households satisfaction or utility the presumption being that maximizing individualsatisfaction also will maximize societys total well-being simultaneously. The allocation ofsocietys resources is assumed to take place within a given institutional and organizationalsetting that is taken to be exogenous to the analysis done by the economist.This operating framework of orthodox, or neoclassical, economics in which the allocationof exi