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The Process of Economic Development




The third edition of The Process of Economic Development offers a thorough and up-to-date
presentation of development economics. This landmark text will continue to be an invaluable
resource for students, teachers and researchers in the fields of development economics and
development studies.
Each subject area in this vast, inter-disciplinary field has been thoroughly re-analyzed in
light of current published material in specialized journals, books, and United Nations, World
Bank and International Monetary Fund publications. Much has happened in the developing
world since the appearance of the second edition in 2002. The period has seen remarkable
growth rates in countries such as China and India, the accession of a number of post-communist
economies to the European Union, the financial crisis in Argentina and continuing desperate
poverty in many African countries. This third edition reflects these developments and includes
new 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 Dietz™s text is the development economics text par excellence, as it takes a
much more practical, hands-on approach to the issues facing developing countries than its
overly 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 Autónoma de Zacatecas, Mexico.

James L. Dietz is Professor in the Department of Economics at California State University,
Fullerton, USA.
The Process of Economic
Development
3rd Edition



James M. Cypher and James L. Dietz
First edition published 1997
Second edition published 2004
Third edition published 2009 by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Ave, New York, NY 10016
Routledge is an imprint of the Taylor & Francis Group, an informa business

This edition published in the Taylor & Francis e-Library, 2008.
“To purchase your own copy of this or any of Taylor & Francis or Routledge™s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”

© 1997, 2004, 2009 James M. Cypher and James L. Dietz
All rights reserved. No part of this book may be reprinted or reproduced
or 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 in
writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Cypher, James M.
The process of economic development / James M. Cypher and
James L. Dietz. “ 3rd ed.
p. cm.
Includes bibliographical references and index.
1. Economic development. I. Dietz, James L., 1947“ II. Title.
HD82.C96 2008
338.9“dc22 2007051285

ISBN 0-203-89506-1 Master e-book ISBN


ISBN13: 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)
Contents




List of figures xiii
List of tables xiv
List of focuses xvi
Preface to the third edition xviii
Acknowledgements xxi


ParT 1
1
an overview of economic development

3
1 The development imperative
Why study economic development? 3
Poverty in the less-developed world 6
The development enigma 12
Recent trends in economic growth 14
Why development, and why now? 18
Economic growth and development require structural change 19
Barriers to development 22
Resources for student use and suggestions for further reading 24
Questions and exercises 25
Notes 26
References 28

30
2 Measuring economic growth and development
Introduction 30
The economic growth/income criterion of development 31
Measuring economic growth 33
Necessary adjustments to the GDP and GNI measures 36
GNI or GDP: is one income measure better than the other? 46
International comparisons of income: purchasing power parity
(PPP) income 47
The indicators criterion of development: the Human Development Index 50
Adjustments to the HDI 54
vi Contents
Comparing the income per capita and HDI measures 56
Economic growth and equity: goals at odds? 57
Summary and conclusions 63
Questions and exercises 63
Notes 66
References 69
Appendix 2A 69
Appendix 2B 71

3 Development in historical perspective 73
Introduction 73
The origins of economic development 75
Colonialism 76
The lasting effects of colonialism and path dependency 78
Forms of European colonialism 79
Merchant capital: from old colonialism to new colonialism 80
British rule in India: the transition from merchant capital to
industrial capital 81
The functional role of colonialism 84
The colonial elite: the enduring significance of collaboration 86
De-industrialization in the colonies 87
Colonial industrialization? 89
Measuring the impact of colonialism 91
The terms of trade and comparative advantage 91
Credit and underdevelopment 93
The new imperialism: 1870“1914 95
Mature colonialism and progressive colonialism 96
British and French colonialism in West Africa: 1945“65 96
Progressive colonialism 97
Decolonization 98
Point Four Aid 98
Economic dualism 100
Summary and conclusions 102
Questions for review 103
Notes 103
References 105


ParT 2
107
Theories of development and underdevelopment

109
4 Classical and neoclassical theories
Introduction 109
Adam Smith: a theory of competitive capitalism and growth 111
Contents vii
Malthus™s theory of population and economic growth 114
Ricardo™s theories of diminishing returns and comparative
advantage 118
Marx™s analysis of capitalist development: a brief digression 125
Neoclassical growth models 127
Summary and conclusions 131
Questions and exercises 133
Notes 136
References 139

140
5 Developmentalist theories of economic development
Introduction 140
The theory of the big push 142
A theory of balanced growth 145
Unbalanced growth 147
Growth with unlimited supplies of labor 151
Utilizing the economic surplus 157
Stages of growth theory 159
Questions and exercises 164
Notes 164
References 166

168
6 Heterodox theories of economic development
Introduction 168
The Latin American structuralists 169
The institutionalists 180
Dependency analysis 185
Classical Marxism 194
Questions and exercises 196
Notes 197
References 199


ParT 3
The structural transformation 201

7 The state as a potential agent of transformation:
from neoliberalisam to embedded autonomy 203
Introduction 203
Origins of the neoliberal paradigm 205
Government in the process of development 210
The neoliberalism of Deepak Lal 213
The new political economy 216
viii Contents
An assessment of the neoliberal theory of the state 217
Embedded autonomy 220
Depicting state forms 231
Summary and conclusions 233
Questions and exercises 234
Notes 234
References 236

239
8 Endogenous growth theories and new strategies for development
Introduction 239
The income convergence controversy 240
Income convergence/divergence, path dependence, and
poverty traps 243
Endogenous growth models 246
Measuring the impact of key inputs in endogenous growth models:
growth accounting 254
Technical efficiency change 259
Conclusions 262
Questions and exercises 262
Notes 264
References 268

9 The initial structural transformation: initiating the
industrialization process 271
Introduction: an industrialization imperative? 271
Structural change and economic growth 273
The Lewis dual-economy model of structural transformation:
surplus labor 275
Initiating the structural transformation process: industrialization 276
Government and easy ISI 281
Infant industry tariffs: overcoming transitional inefficiencies 284
Static and dynamic welfare effects of an infant industry tariff:
to do or not to do? 288
The elimination of infant industry protection: when is enough
enough? 291
The importance of embedded state autonomy to successful ISI 292
Potential gains from the easy ISI stage of industrialization 295
Para-state firms and social capital 297
Measuring the success of easy ISI 298
Summary and conclusions 298
Questions and exercises 300
Notes 303
References 306
Contents ix
308
10 Strategy switching and industrial transformation
Continuing structural change 308
Industrial sequencing: beyond easy ISI 309
Foreign exchange shortages 310
Easy export substitution industrialization: the optimal strategy switch
after easy ISI 312
Difficult ISI: a sub-optimal strategy switch immediately after
easy ISI 317
Endowments and policies: explaining strategy switches 322
Subsequent strategy switches 325
Continuing strategy switches 331
What can other less-developed nations learn? 332
Where we are headed, where we have been 333
Questions and exercises 334
Notes 336
References 340

341
11 agriculture and development
Introduction 341
Inadequate infrastructural investment 346
Primary product mono-exporters 350
Peasant agriculture and small-scale cultivators 355
Are peasants efficient producers? 358
High-yield varieties, biotechnology, genetically modified food crops,
and rural productivity 362
The developmental problems of cash crop farmers 367
Large landholdings and agrarian backwardness 371
The structuralist view 373
Transnational agribusiness 374
Government in agricultural development 376
Land reform 379
Land reform in Mexico 382
Korea™s Saemaul Undong 383
Questions and exercises 385
Notes 387
References 388

391
12 Population, education, and human capital
Introduction 391
A population problem? 392
The natural and the actual rate of population growth 394
The demographic transition 396
x Contents
Determinants of the crude birth rate: understanding the dynamics of
population growth 400
The role of children in less-developed and developed economies 402
Human capital accumulation: augmenting initial endowments 405
Human capital accumulation and market failure: what is the role of
government? 408
Population growth and human capital accumulation 413
Summary and conclusions 415
Questions and exercises 415
Notes 418
References 420

422
13 Technology and development
Introduction 422
What is technology? 423
A technological strategy of development 425
Total factor productivity and national technology 429
Technology-centered development 434
Industrial innovation: continuing technological progress 439
Industrial policies to promote an ITLC 440
Macropolicies and technological change 442
Summary and conclusions 443
Questions and exercises 444
Notes 445
References 447


ParT 4
449
Problems and issues

451
14 Transnational corporations and economic development
Introduction 451
Import substitution industrialization and the TNCs 452
The globally integrated production system 455
Foreign direct investment 459
Who in the less-developed countries gains from FDI? 461
Capital formation 464
Potential costs of TNCs to a host country 469
Weak linkages, thin globalization 471
Export promotion and the fallacy of composition 474
Long-term costs of TNCs: the potential for environmental
degradation 475
Export processing zones and the problems of small nations 475
Contents xi
Vertically integrated TNCs and development prospects 480
Bargaining with the TNCs 482
FDI in Asia and Latin America 484
Summary and conclusions 487
Questions and exercises 488
Notes 488
References 489

491
15 Macroeconomic equilibrium: the external balance
Introduction 491
The balance of payments 492
The current account: foreign exchange earnings and spending 493
The capital and financial account: foreign exchange borrowing
and lending 497
Net errors and omissions 501
What does it mean to say that a country has a balance of
payments problem? 502
Exchange rates 503
Types of exchange rate regimes 504
Real versus nominal exchange rates 512
Exchange rates and the balance of payments 515
Currency overvaluation and the possible impact on the balance of
payments 517
“Good” external imbalances 520
Summary and conclusions: monitoring the external balances 522
Questions and exercises 524
Notes 527
References 528

529
16 The debt problem and development
Introduction 529
Origins of the 1970s“1980s external debt dilemma 530
Petrodollar recycling 531
Dimensions of the debt crisis 533
External borrowing, adjustment policies, and savings 538
The debt service obligation: the real cost of debt repayment 541
The 1980s debt crisis 543
Longer-term efforts to overcome the debt crisis 545
Debt overhang and future economic growth 546
Summary and conclusions 548
Questions and exercises 549
Notes 551
References 553
xii Contents
17 International institutional linkages: the International Monetary Fund,
555
the World Bank, and foreign aid
Introduction 555
The IMF 556
Objectives of the IMF 562
Do IMF programs work? 567
The World Bank 570
Critiques of World Bank and IMF SALs 577
Sustainable development, comprehensive development framework,
and a knowledge bank? 578
The Poverty Reduction Strategy approach 579
Foreign aid 583
Conclusion 589
Questions and exercises 591
Notes 592
References 593


597
Index
Figures




2.1 The Kuznets curve 58
2.1A A Lorenz curve of income distribution 70
3.1 Historical growth trend of per capita income 75
4.1 A classical aggregate production function 117
4.2 Production and consumption possibilities with and without trade 122
4.3 A Solow-type production function 128
5.1(a) Lewis™s surplus labor model: agriculture 154
5.1(b) Lewis™s surplus labor model: industry 154
6.1 Elasticity of supply and equilibrium price adjustment 171
6.2 Declining real commodity prices: 1980“2001 177
6.3 Characteristics of economic dependency 186
7.1 The developmental state 225
7.2(a) The Brazilian state: the intermediate state 232
7.2(b) The South Korean state: the developmental state 232
8.1 An endogenous growth production function 252
8.2 Technological change versus technical efficiency change 260
9.1 Average costs of production, new versus established firms 283
9.2 Impact of an infant industry tariff 287
9.3 Impact of easy ISI on the productive possibilities frontier 299
10.1 Stages of structural and industrial transformation and strategy switches 331
10.2 The transition to development 333
11.1 Farm size and yields 381
12.1 The demographic transition 398
12.2 The private optimum and the social optimum level of education 410
14.1 An EPZ circuit of capital 481
15.1 Exchange rate determination: floating rates 505
15.2 Exchange rate determination: fixed rates 508
15.3 Floating exchange rates and the balance of payments 516
15.4 An under-valued exchange rate 521
17.1 Growth in membership of the IMF 557
17.2 IMF lending 558
17.3 A bilateral aid quality index, 2006 588
Tables




1.1 Extent of world poverty and the poverty gap 6
1.2 Average income per capita and growth rates of per capita output 12
1.3 World income, world population, and their distribution, 2001 17
2.1 GDP and GNI comparisons, selected nations, 1990 and 2006 35
2.2 Real GNI per person versus nominal GNI per person, 1990 and 2006 39
2.3 Income distribution, selected economies 41
2.4 Purchasing power parity (PPP) measure of GNI per capita 49
2.5 Human development index (HDI) and GDI, selected countries,
1990 and 2004 53
3.1 Peasant versus commercial export agriculture in India, 1891“1941
(annual average growth) 89
3.2 Selected colonial systems in 1914 95
4.1 Number of hours required to produce one unit of cloth and wine in
England and Portugal 120
8.1 Comparative growth rates 241
8.2 Saving and investment by region (as a percentage of GDP) 242
8.3 Estimates of input contributions to per capita economic growth 254
8.4 Estimates of technical efficiency change, 1960“1989 261
9.1 Industrialization and economic growth (annual percentage growth
of constant dollar GDP and industry) 273
9.2 Labor force distribution, by sector 274
10.1 Composition of imports (as a percentage of total imports) 310
10.2 Export structure 316
11.1 Declining growth rate in agricultural output in low-income countries 343
11.2 Changes in per capita food production, cereal output, and irrigated land 350
11.3 Degree of export dependency, Low Income Food Deficit nations
(1999“2001) 352
11.4 Land tenure relations 361
11.5 Peasant production conditions versus cash-crop farming 368
12.1 Actual population growth rates, by region and selected countries 393
12.2 Crude birth rates, crude death rates, and the natural rate of
395
population growth
12.3 Fertility rates, income, and women™s education 401
12.4 Infant and child mortality rates 403
12.5 Education and human capital accumulation 407
Tables xv
12.6 Dependency ratios, population age profile, and public expenditure
on education 414
13.1 R&D scientists and technicians 427
13.2 Technological capability and development capacity 428
13.3 Total Factor Productivity (TFP) estimates, 1960“1987 (percentages) 432
13.4 State policy, growth, and TFP 442
14.1 Transnational control of global commodity trade, 1980 453
14.2 Share of the stock of world FDI (percentage of world total) 454
14.3 Net long-term resource flows into developing regions (billions of dollars) 463
14.4 Developing nations™ exports: skill level, capital intensity (percentage share) 465
14.5 Exports of manufactured products from developing nations (percentage) 473
14.6 Relative share of TNCs among the largest firms (percentage of total in each
category, 1987) 484
15.1 The current account of the balance of payments 494
15.2 The capital and financial account of the balance of payments 498
15.3 Bilateral exchange rates, selected countries 503
16.1 Total external debt, 1970“2005 (millions of US$) 534
16.2 Debt service ratios and the debt burden 541
16.3 Gross capital formation (as percentage of GDP) 547
17.1 New IMF loans, calendar year (billions of SDRs) 562
17.2 The impact of IMF austerity programs: capital™s share and labor™s share 566
17.3 World Bank lending and co-financing (billions of US dollars, fiscal years) 574
17.4 ODA flows of selected advanced nations 586
Focuses




1.1 Saving lives: ORT 5
1.2 The Millennium Development Goals 9
1.3 MDG Goal 1: eradicate extreme poverty and hunger 10
1.4 Progress and regress, winners and losers 11
2.1 High-quality growth 32
2.2 Valuing women™s work 43
2.3 Sustainable Development: balancing economic growth and the environment 44
2.4 Inequality as a constraint on growth 59
2.5 China: a new tiger? 61
2.6 An environmental Kuznets curve? 62
3.1 Path dependence and colonial structures 79
3.2 What difference independence? The United States versus Mexico 84
3.3 The colonial drain 85
3.4 Africa™s colonial infrastructure 90
3.5 Trends in the terms of trade 93
4.1 Was Malthus right? 116
4.2 Marx on capitalism 126
4.3 Robert Solow 132
5.1 Virtuous circles 142
5.2 Achievement orientation in the workplace 150
5.3 Other dualist models of structural transformation 157
5.4 Testing Rostow™s concept of reactive nationalism: the case of Latin
America after independence 161
6.1 Are there adverse terms of trade for some manufactured goods? 179
6.2 Celso Furtado: a giant of structural and dependency analysis 187
6.3 Dependence and the semi-periphery 195
7.1 Governmental inefficiency and growth 212
7.2 Corruption and development: is there a relationship? 226
7.3 Performance standards and state stimulus in Thailand 229
7.4 Advanced electronics and embeddedness in Korea 230
8.1 China and India on the rise: income convergence? 245
8.2 Inequality and growth 258
9.1 The export structure 278
9.2 Credit and market failure 282
9.3 Development banks and ISI 286
9.4 Taiwan™s experience with ISI in textiles 289
Focuses xvii
9.5 Is India a free market miracle? 293
10.1 Foreign capital and technology in Korea 315
10.2 Comparative incomes: east Asia and Latin America 325
10.3 Creating dynamic comparative advantage 326
10.4 Regional trade associations 330
11.1 Gender bias: women in agriculture 345
11.2 Agriculture and the environment: deforestation and soil erosion 349
11.3 India™s agricultural sector 351
11.4 An agricultural-led development strategy? 353
11.5 Agriculture and the environment: pesticides and the circle of poison 364
11.6 Agriculture and the environment: property rights and resource depletion 378
12.1 A return to the past: the HIV/AIDS challenge in Sub-Saharan Africa 399
12.2 Women™s education, income, and health 405
12.3 Primary education in Bolivia and Indonesia 412
13.1 The Salter effect: the importance of physical capital investment 430
13.2 Transactions costs, the state, and technological acquisition 435
13.3 Indigenous learning and Korea™s steel industry 439
14.1 Subcontracting in Indonesia 457
14.2 TNCs in the logging business 476
14.3 Women workers in export processing zones 477
14.4 Unions under integrated production systems 478
14.5 Environmental problems in Mexico™s EPZs 483
14.6 Management of FDI: the case of Taiwan 486
15.1 Exploring current account balances 496
15.2 Parallel markets 510
15.3 Trade in toxic waste: one way to encourage foreign exchange inflows 519
15.4 Is China™s currency under-valued? 523
16.1 OPEC™s absorption problem 532
16.2 The evolution of external debt accumulation and the debt burden 535
16.3 The Mexican dilemma 537
16.4 Ineffective use of external debt 539
16.5 The first debt-for-nature swap 543
17.1 What is conditionality? 559
17.2 The World Bank Group 571
17.3 The World Bank and the environment 573
17.4 Women and “invisible adjustment” 576
Preface to the third edition




This third edition of The Process of Economic Development offers an up-to-date and compre-
hensive presentation of development economics. each subject area in this vast, inter-discipli-
nary field has been thoroughly re-analyzed in light of current published material in special-
ized journals, books, and United Nations, World Bank and International Monetary Fund
publications. Limitations of space have led us to condense material in many instances. All
data 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 which
the initial chapters of the first edition of this book were written in 1993. Practitioners
and observers in the field were then growing acclimatized to the so-called “Washington
Consensus”. Briefly put, this was the encapsulation of mainstream development thinking in
the early 1990s. What poor nations needed, it was argued, was not more capital or technological
capacity or infrastructure or land redistribution, all ideas that had played a prominent role in
development economics since the inception of the field in the aftermath of the Second World
War. Rather than resources, particularly physical capital, poor nations essentially needed
better 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 value
in the private sector.
According to the Washington Consensus “ a set of ideas held in common by the power
triad 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 American
Enterprise 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 and
quotas, and to minimize domestic content laws and restrictions on foreign ownership. In
other words, the more laissez-faire the better. An unfettered market system was capable of
taking less-developed nations from poverty to development. Too much government was the
problem in too many economies.
Deregulation of prices and the elimination of subsidies would also help set developing
nations on an upward path. In short, developing nations were told they would be better off
if they dispensed with many of the policies that had been utilized in the past by the econo-
mies that 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 some
resource supplement in the form of foreign direct investment. Transnational corporations,
the Washington Consensus argued, would bring not only needed capital, but also learning
and technological capacity.
This perspective shaped new policies in many economies around the world beginning
Preface to the third edition xix
in 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 economic
growth rates sagging and, far too often, per capita income levels falling.
Not all economies suffered this fate, because not all economies followed the Washington
Consensus recommendations. Some nations, at first concentrated in East Asia, but since
spreading to other economies, took another path. Much of this book is designed around
understanding how that “process” of economic development took place and how other econ-
omies might follow suit. Development does not take place in a vacuum. Both the state and
the private sector have essential, and complementary, roles to play. They always have, and
they always will.
We never accepted the Washington Consensus as a valid approach to development
economics, even though there might have been elements of truth to parts of the analysis
offered. Our original attempt to write a different development text beginning with the first
edition was not based simply on dissent from the prevailing policy orthodoxy. Rather, we
were more concerned about the great themes in development economics that were generally
absent from or inadequately portrayed in the existing books on development economics.
There was insufficient material on several matters that we have addressed here as
completely 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 of
institutions; (6) the underlying importance of heterodox economic ideas as expressed by
Hans Singer, Raúl Prebisch, Gunnar Myrdal, and numerous others; (7) the often defining
role played by the IMF, the World Bank, and aid programs in poor nations; (8) the role
of multinational corporations; and (9) the centrality of fundamental structural change via
properly orchestrated industrialization.
We also felt that, particularly beginning in the early 1990s, when a polemic arose over
the interpretation of East Asia™s rapid economic ascent, the at times divisive issue of “state
versus market” needed to be recast. Too much ideology too often clouded the facts. The state
needed to be brought back into the center of development economics as the facilitator of
progress it has been in the past. The lessons of Asia™s development needed clearer contrast
to development policies attempted in Latin America from the 1930s through the 1970s. You
will 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 needed
presentation. As a consequence, not only are all of the above topics given a chapter-length
treatment in this book, they and other more standard topics are continually cross-referenced
with the objective of providing a comprehensive view on development economics that is
much greater than the sum of the parts of this book. This text is different, too, from many
development 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 comprehensible
and connected.
Nearly two decades after first beginning this project, it is an encouraging sign that: (1) the
Washington Consensus is crumbling (sometimes disguised now, but far from gone); (2) it is
widely accepted that the colonial legacy was crucial in terms of imposing lasting distortions
on 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 Development
Report 2007; (5) a renewed interest in Schumpeter has brought with it a focus on the crucial
importance of technology and innovation; (6) employing a broader-based institutional analysis
became increasingly acceptable in the late 1990s; (7) questions of income distribution and
xx Preface to the third edition
poverty have again more directly found their way into development economics; and (8) the
international community has committed, at least on paper in the Millennium Develop-
ment Goals, to dramatically reduce the debilitating poverty that still afflicts one-third of
humanity.
More important for us, however, than seeing these themes we dealt with from the beginning
become almost mainstream is the fact that the underlying conditions for developing nations
have dramatically changed for the better. And change has come from a totally unexpected, but
welcome, quarter, and that is from growing trade. From 2003 through 2007, according to the
UN™s data and projections in the World Economic Situation and Prospect, 2007, developing
nations have enjoyed five years of rapid growth of output, as measured by gross domestic
product (GDP). Less-developed economies have been growing, on average, at the rate of 6.2
percent 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 1980s
and dragging 1990s has been due to a global commodities boom. Only a few countries have
been left out: those that have historically specialized in the few primary commodities that are
sinking, such as coffee, and those that have specialized in labor-intensive, low-technology
manufactured goods for export.
When scanning the newspapers or watching the evening news or reading the headlines on
Yahoo, it is common to find wrenching photographic evidence of poverty and despair, often
in Africa. It is, therefore, worth noting that Africa is in the midst of an economic revival, the
first good news on economic growth the continent as a whole has had in more than twenty
years. From 2003 to 2007, the average rate of economic growth was 5.2 percent, and it was
slightly higher, 5.5 percent, in Sub-Saharan Africa, where growth has been nil or negative
for far too long.
The potential for lasting transformation in the developing world is present, even in regions
that have commonly been thought to be desperate. economic progress is not only possible, it
is happening. More needs to be done, of course, much more in some places, but the direction
of change since 2000 has been promising. Perhaps, just perhaps, the Millennium Development
Goals discussed in Chapter 1 will be met by their target date of 2015. There is hope, and
building on hope and moving forward is what this book is all about.
acknowledgements




As 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 anonymous
reviewers who labored over the second edition and offered us detailed and well thought-out
suggestions for further revision.
Next we thank our students. We have had the good fortune of teaching from this book at
both the undergraduate and graduate levels to students of economics and to those of other
fields in Mexico and the US. Nothing could be more immediate than the give-and-take of
the classroom, along with the pleasant surprises and sometimes painful awareness that arises
from reading exams. These activities with quite varied students have given us new insight
into 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 preparation
of various editions of this book. We thank the following individuals: M. Shahid Alam, Paul
Bowles, Paul Dale Bush, Jun Borras, Al Campbell, Juan Castaings Teillery, Ha-Joon Chang,
Eugenia Correa, Willy Cortez, Raúl Delgado Wise, Enrique Dussel Peters, David Fairris,
Sasan Fayazmanesh, Raúl Fernandez, Guillermo Foladori, Kevin Gallagher, Ross Gandy,
Rodolfo Garcia Zamora, Alicia Gíron, Arturo Guill©n, Martin Hart-Landsberg, Peter Ho,
Barney Hope, Marc Humbert, Noela Invernizzi, Cristóbal Kay, Kathy Kopinak, Fred Lee,
Yan Liang, Oscar Mu±oz, Gerardo Otero, Robert Pollin, Skye Stephenson, Carolina Stefoni,
Miguel Ángel Rivera, Cesar Ross, Howard Stein, Osvaldo Sunkel, Linda Shaffer, Janet
Tanski, Marc Tool, Mayo Toru±o, Henry Veltmeyer, Gregorio Vidal, and Eduardo Zepeda.
At Routledge we have experienced the best of all possible worlds. Editors Terry Clague
and Robert Langham ably facilitated the second edition. Alan Jarvis, who first accepted our
outline and provisional chapters for the original manuscript, along with Alison Kirk and
Kate Stone, who edited the first edition, are not to be forgotten. For the third edition Robert
Langham has pitched in at every turn, even editing several chapters with a careful eye and
kind words. Sarah Hastings has shepherded the manuscript of the third edition through
the intricate production process without a hitch. Unlike so many in the corporatized world
of publishing, Routledge has given us wide latitude to present our ideas, while providing
sensible editing and clear, crisp communication. What else could be asked?
For institutional support we thank the Doctoral Program in Development Studies at the
Universidad Autónoma de Zacatecas, Mexico, and California State University, Fullerton.
In addition special thanks are due to the Latin America Studies Program at Simon Fraser
University for electronic access to that university™s remarkable library.
Finally, we thank our families for their steadfast support and understanding over the years.
JMC
JLD
Part 1

an overview of economic
development
1 The development imperative




No society can surely be flourishing and happy, of which the far greater part of the members
are poor and miserable.
Adam Smith, The Wealth of Nations

Working for a World Free of Poverty
Heading on the World Bank website


after 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 in
economic and social life by the world™s poor;
• the obstacles to development, both internal and external, that tend to thwart
economic, social, and human development;
• the significance of fundamental structural change and of technological and institu-
tional innovation 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 collapsed
after being struck by two commercial airliners commandeered by suicide terrorists. Another
aircraft stuck the Pentagon in Washington, D.C., and a fourth crashed into an open field in Penn-
sylvania after the passengers overcame the hijackers, who may have had the White House, the
home of the US President, as their target. All told, nearly 3,000 perished in the attacks. The world
community 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 the
Indian 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 died
from these devastating walls of water and rising tides, with another 43,000 listed as missing.
Again, the world™s nations and people reacted rapidly to this tragedy, seen over and over again
on 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? Wasn™t 9/11 a tragic
political attack, while the tsunami was an unpredictable natural catastrophe? What does either
have to do with economics and the subject of this book? The answer, in both cases, is: a lot.
4 The Process of Economic Development
Many of those killed by the tsunamis were the very poor who lived in low-lying areas
prone to flooding from the yearly monsoons. They lived on marginal lands that should not
have been occupied at all or, if they were to be occupied, should have been protected from
the ravages of natural disasters that are common and expected occurrences. A tsunami of
the size that stuck in 2004 is, thankfully, a very rare occurrence, but low-quality housing
construction and the absence of man-made barriers to flooding contributed to the deadly
outcome. With greater economic progress in the affected countries, human devastation from
future natural disasters could be reduced dramatically.
What about the attack on the World Trade Center? Surely that cannot be linked to issues of
economic development? Read what economist Jeffrey Sachs (2005: 215) has to say:

terrorism has complex and varying causes. ¦ To fight terrorism, we will need to fight
poverty and deprivation as well ¦ we need to address the underlying weaknesses of
the societies in which terrorism lurks “ extreme poverty; mass unmet needs for jobs,
incomes, and dignity; and the political and economic instability that results from
degrading 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 die
daily 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 every
year 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 from
treatable illnesses, not natural disasters or political conflict that seem to attract the world™s
attention.
This works out to roughly 1,400 preventable deaths every hour of every day of every week
and of every month of the year, children whose lives end before they really have an oppor-
tunity to begin. More than half of these deaths are due to respiratory illnesses or to diarrhoea
and the severe dehydration that can ensue, though of course the children™s weakened condi-
tion is exacerbated by malnutrition that results in a vicious circle of hunger and disease (see
Focus 1.1 Saving lives: ORT).1 These are sobering numbers and may be difficult to grasp as
aggregate abstractions. Think of this: in the roughly ten seconds it has taken you to read this
paragraph, five more children in the less-developed world will have died, and they will have
perished unnecessarily.2
Adults also die in pointless numbers in the less-developed world: more than seven million
each year from illnesses such as tuberculosis and malaria and other diseases that could be
prevented or cured at a relatively small cost to society, illnesses that are almost unknown in
most 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 modern
and affluent times, are not the result of any lack of human knowledge about how to prevent
them.3 The means to prevent this waste of human life is at hand; what is lacking seems to be
the will.
If all this were not bad enough, since the 1980s the HIV/AIDS epidemic in many African
countries has decimated and even reversed what limited progress there had been on the
health and poverty fronts, with some nations, such as Botswana and Zimbabwe, especially
hard hit. In confronting these and other problems, many of the barriers to progress in the
less-developed countries seem to continue to be found in obstinate economic, political, and
social structures that remain resistant to the changes that could make extreme poverty and
The development imperative 5

FOCUS 1.1 SAVING LIVES: ORT
Imagine yourself for a moment as a rural villager in a less-developed nation with a young
child in your care who develops diarrhoea. How did this child become sick? Was it from
drinking water fetched from a river? From a well? An irrigation ditch? What would you do
to prevent the illness from becoming life threatening, regardless of the cause?
Here™s the threat. Diarrhoea causes the body to throw off more water than can be
reabsorbed. Death can result if more than 15 percent of the body™s fluid is lost. What
does 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 with
a home remedy. And fast! Think carefully about what you would do to save this child™s life
before reading on.
Did you decide to give the child water? That seems to make sense to replace the water
being lost. If so, will that be sufficient to stop the diarrhoea and prevent the plunge into
fatal 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 human
blood supply required for the body to function properly. With diarrhoea, this balance is upset
as the kidneys, which normally regulate the salt level in the blood supply, are unable to
maintain the proper balance. What the sick body needs is both sodium and more liquid, but
the illness disturbs this delicate equilibrium and threatens survival. If you thought more liquid
alone 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 the
sick child with water to drink “ which may have been the immediate cause of the diarrhoea
in the first instance “ is not enough. Nor, interestingly, is water mixed with salt. Because
of the diarrhoea, the body cannot absorb the salt properly, with the result that excess salt
gets stored in the intestinal tract and causes more water to pass into the intestine, actu-
ally worsening the diarrhoea. However, a mixture of water, salt and sugar (glucose) will
work, allowing the salt to be properly processed by the body and for water retention to be
increased and the dehydration process halted.
A mixture of glucose (20 grams), sodium chloride (salt, 3.5 grams), sodium citrate (citric
salt, 2.5 grams) and potassium chloride (1.5 grams) in one litre of clean water provides the
ideal mixture for ORT. However, mixing salt and sugar in water in roughly the right propor-
tions will also work fine. ORT must be initiated quickly, before the dehydration becomes
too 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 so
simple? Lack of knowledge about what must be done, and that for children that action must
be swift, is part of the problem. Simple hands-on exercises in primary school classes could
help to spread the knowledge at a very low cost. Instead of abstract adding and subtraction
in mathematics lessons, the measuring and combining of clean water, salt, and sugar in the
recommended proportions could transmit information to millions of children who could then
educate their families about how to respond when someone falls ill with diarrhoea.
Source: Foster 1992: 197“8

privation “ and millions of deaths from poverty-related illnesses each year “ the relics of
history they deserve to be (World Bank 1993a: 116; 2000: 4“5).
Not all of the blame for this on-going tragedy of death and poverty can be placed on the
affected countries. The developed nations have failed to carry through on their oft-professed
promises and responsibilities to assist the poorest of the poor nations in escaping from the
trap of deprivation in which so many millions continue to live. On this, we shall have more
to say later in this chapter.
6 The Process of Economic Development
Poverty in the less-developed world
Table 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 Bank™s classification of having less than the equivalent
of about $1 a day per person to meet their needs. By 2002, this number had fallen slightly
to 1,015 million persons in poverty. Former World Bank president Robert McNamara
called these people the “absolute poor,” human beings who suffer “a condition of life so
degraded by disease, illiteracy, malnutrition, and squalor as to deny its victims basic human


Table 1.1 extent of world poverty and the poverty gap
Part I. 1985
Poverty gapa
Region Extremely Poor (%) Millions of
poor (%) poor

East Asia 9 1
20 280
210 3
China 8 20
Latin America 12 19 1
70
and Caribbean
21 31 60 2
Middle east and
North Africa
South Asia 29 51 520 10
33 55 420 12
India
30 47 180 11
Sub-Saharan
Africa

All less-developed 18 33 1,116 3
countries

Part II. 1981“2004 Percentage of population living on less than $1 per day
1981 1984 1987 1990 1993 1996 1999 2004 Poverty gap
(2004)
East Asia and 57.7 38.9 29.6 24.9 16.6 15.7 9.0
28.0
Pacific
63.8 41.0 28.5 33.0 28.4 17.4 17.8 12.5 2.1
China
Latin America 9.7 11.8 10.9 11.3 11.3 10.7 10.5 8.6
and Caribbean
5.1 3.8 3.2 2.3 1.6 2.6 1.5
Middle east and 2.0
North Africa
South Asia 51.5 46.8 45.0 41.3 40.1 36.6 32.2 30.8
7.9
India
41.6 46.3 46.8 44.6 44.0 45.6 45.7 41.1
Sub-Saharan
Africa

40.4 32.8 28.4 27.9 26.3 21.8 18.1
Total 22.8

Source: 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.
Note
a The “poverty gap” is the percentage by which the aggregate income of the poor falls short of the poverty line.
The development imperative 7
necessities. ¦ [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-
standing of 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 fell
below that standard in 2002, just a bit less than half the world™s population. This is a larger
number 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-
developed regions. Overall, the incidence of extreme poverty by 2004 had fallen by more
than 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 1.5
billion in 1981 to about 968 million in 2004.
What is disheartening is the relatively small decrease in poverty in some of the regions
shown in Part II of Table 1.1, not to mention the increase in the incidence of poverty in Africa
in the early 1990s. The decline in the share of the population in poverty in East Asia from 20
percent of the region™s population in 1985 (Part I of Table 1.1) to 9.0 percent in 2004 (and
even 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 agonizingly
high, 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-fifth
of the world™s population, live on less than one dollar a day “ a standard that Western Europe
and the United States attained two hundred years ago” (World Bank 1991: 1). This is still true
today. 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 woman™s face “ of 1.3
billion 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 1.1
provide 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 poverty
line and who hence need more assistance to reach the poverty threshold and those whose
incomes already have brought them closer to the income level needed to escape official
poverty. The headcount measure of poverty simply counts all persons below some income
level as poor. The headcount measure is thus not at all sensitive to the severity of the poverty
situation of those counted as poor; it treats all poor as if they were somehow the same simply
because 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 each
is only 10 percent per day away from the poverty level of income. That is poverty of quite
a different magnitude from another country which also has half its population below the
poverty line, but each is 25 percent per day away from escaping poverty. The headcount
measure of poverty, by simply adding up how many people fall below the poverty line, fails
to capture this distinction and both countries will be counted as having 50 percent of their
citizens in poverty by the headcount measure. Obviously, however, the severity of poverty
in the first country is substantially less than in the second. There is another way to measure
poverty 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 poor™s plight. It is the additional
amount of consumption (or income) that must be generated by a country to bring all the
poor above the poverty line. The poverty gap is measured as a percentage of a region™s (or
a country™s) total current consumption (or it could be measured as a percentage of income)
8 The Process of Economic Development
that must be created and received by the poor in the right amounts to bring each family™s
income above the poverty line. For some regions of the world and for some countries the
poverty gap was as low as 1“2 percent of current consumption in 1985; in other regions, the
poverty gap was as high as 10“12 percent of total consumption. Part II of Table 1.1 shows
the poverty gap for China and India in 2004. More recent data is available on the poverty
gap for individual economies, not regions, as the note to this paragraph shows, but it is not
uniform by years and thus is not so easily displayed for comparison.4
For all the less-developed nations, an increase in income equivalent to about 3“4 percent
of current consumption received in the right amounts by each family or individual in poverty
would have been sufficient to shift all the poor above the World Bank™s $2 per day poverty
line in 1985. Though we do not have access to regional data in 2004, both China™s and India™s
poverty gaps were smaller than they were in 1985. Thus it might be reasonable to assume that
there has been some decrease in the aggregate poverty gap between 1985 and 2004, so that
it perhaps is in the 2“3 percent range.
Obviously, to accomplish the long-term goal of a world without poverty, a simple transfer
of income from better-off citizens to the poor is not the ultimate means or goal. Reducing
poverty is not about transfers of income, except in the short run to alleviate the worst kinds
of suffering. Rather, a permanent reduction in poverty requires a sufficient increase in
production, jobs, and incomes for the now poor such that they are no longer poverty-stricken
and remain non-poor through their own efforts, not handouts.
This objective of a permanent increase in income and output that reaches the poor in the
magnitudes shown in Table 1.1 would not seem to be an overwhelmingly large technical
barrier. For example, India could resolve to generate sufficient extra income and output in
the economy over a generation to contribute to an increase in the income of the poor in the
amount equal to 8 percent of total consumption. Over ten or fifteen or certainly twenty-five
years, this does not seem to be a technically unattainable goal, amounting to an increase in
total 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 an
impossible aspiration requiring super-human efforts beyond current resource capabilities.
Greater productivity of labor and a better distribution of the world™s productive resources,
both human and physical, are what are needed to effect a long-term decrease in the poverty
profile. It is a reasonable and humane objective for all the less-developed nations to target the
elimination of absolute poverty from within their borders. It is a goal that the World Bank has
embraced, with the target of cutting poverty in half by 2015 (World Bank 2000: 5“6; also see
UNDP 2001: 22“5). Even for the poorest nations, the magnitude of the increase in output and
income required to reduce poverty is within their grasp over a medium-range period of time
with 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-
developed world strongly suggests that poverty is a problem of distribution, and not only
of income, but especially of access to society™s productive resources, particularly human
capital-enhancing assets like education and other training. The existence of world poverty
does not appear to be the consequence of a fundamental shortfall in aggregate productive
capacity given the fairly small size of the poverty gap in most regions. Eradication of abso-
lute poverty is a political“economic problem, not a technical matter. Ending absolute poverty
is 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 real
consequences. For example, of the approximately 4.6 billion people in the less-developed
countries 968 million persons lacked access to “improved water sources”; 2.4 million were
The development imperative 9

FOCUS 1.2 THE MILLENNIUM DEVELOPMENT GOALS
On September 8, 2000, the United Nations General Assembly adopted the Millennium
Declaration. The Millennium Development Goals (MDGs) emerged as a means to meet
some of the aspirations of the Millennium Declaration. The Secretary-General of the UN
issues an annual report on progress toward meeting these goals (see the World Bank
website for more details: http://www.worldbank.org, “Topics”). Throughout this and
following chapters, we will look at how specific MDGs are being met.
The MDGs comprise eight broad goals and fifteen more specific “target” policies to
reach those goals. The success of reaching these targets is measured by fifty-three indi-
vidual quantitative indicators.
The MDGs represent concrete objectives of the entire international community for
reducing the ravages of poverty by 2015. Yes, 2015. The approval of these goals by
all 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 of
millions of poor people around the world. This unified effort of the world community
recognizes that all economies are connected and that severe poverty affects us all,
directly or indirectly.
Goal 1 Eradicate extreme poverty and hunger
Target 1: Halve, between 1990 and 2015, the proportion of people whose income is less
than $1 a day
Target 2: Halve, between 1990 and 2015, the proportion of people who suffer from
hunger
Goal 2 Achieve universal primary education
Target 3: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to
complete a full course of primary schooling
Goal 3 Promote gender equality and empower women
Target 4: Eliminate gender disparity in primary and secondary education preferably by
2005 and in all levels of education no later than 2015
Goal 4 Reduce child mortality
Target 5: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate
Goal 5 Improve maternal health
Target 6: Reduce by three-quarters, between 1990 and 2015, the maternal mortality
ratio
Goal 6 Combat HIV/AIDS, malaria, and other diseases
Target 7: Have halted by 2015 and begun to reverse the spread of HIV/AIDS
Target 8: Have halted by 2015 and begun to reverse the incidence of malaria and other
major diseases
Goal 7 Ensure environmental sustainability
Target 9: Integrate the principles of sustainable development into country policies and
programs and reverse the loss of environmental resources
Target 10: Halve, by 2015, the proportion of people without sustainable access to safe
drinking water and basic sanitation
Target 11: Have achieved, by 2020, a significant improvement in the lives of at least 100
million slum dwellers
Continued
10 The Process of Economic Development
Goal 8 Develop a global partnership for development
Target 12: Develop further an open, rule-based, predictable, non-discriminatory trading
and financial system (includes a commitment to good governance, development, and
poverty reduction “ both nationally and internationally)
Target 13: Address the special needs of the least developed countries (includes tariff- and
quota-free access for exports, enhanced program of debt relief for HIPCs and cancel-
lation of official bilateral debt, and more generous ODA for countries committed to
poverty reduction)
Target 14: Address the special needs of landlocked countries and small island developing
states
Target 15: Deal comprehensively with the debt problems of developing countries through
national and international measures in order to make debt sustainable in the long term
Target 16: In cooperation with developing countries, develop and implement strategies for
decent and productive work for youth
Target 17: In cooperation with pharmaceutical companies, provide access to affordable
essential drugs in developing countries
Target 18: In cooperation with the private sector, make available the benefits of new tech-
nologies, especially information and communications



FOCUS 1.3 MDG GOAL 1: ERADICATE EXTREME POVERTY AND
HUNGER
Meeting MDG Targets 1 and 2 would reduce by half the share of the population with incomes
of less than $1 per day and of those suffering from hunger. A glance back at Table 1.1 shows
that there has been substantial progress toward achieving Target 1. In 1990, 27.9 percent of
the less-developed world™s population received less than $1 per day; by 2004, the propor-
tion of the population in the LDCs with incomes below the $1 per day standard had dropped
to 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 be
reached.
One region (East Asia and the Pacific) has already met MDG Target 1; China™s progress
in reducing poverty in that region has been extraordinary. The Middle East and North Africa
are close to meeting Target 1. There was an increase in the incidence of poverty after 1990
in Europe and Central Asia, primarily due to the collapse of the former Soviet bloc; the
trend 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 a
day 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 reducing
extreme poverty. If the MDG goals are going to be reached in any meaningful way, the
international community needs to find ways to kick-start development in Sub-Saharan
Africa. In future chapters we shall see that it is this region where progress toward develop-
ment has been the weakest, with tragic consequences.
In 2002, despite the more than 30 percent decline in the incidence of overall poverty
since the MDGs were announced, 1,015 million persons still fell below the $1 per day
poverty line, compared to 1,218 million in 1990, a decrease in the absolute number of
poor of only 16.7 percent. The number of extremely poor in Sub-Saharan Africa actually
increased by more than a third (from 227 million to 303 million) because of the lack of
progress in reducing the incidence of poverty.
The development imperative 11
without proper sanitation; 854 million adults were illiterate (64 percent of whom were
women); 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-
able improvements in living standards in the less-developed world since 1970. Life expect-
ancy at birth rose absolutely and relatively compared to the developed world, from forty-six
years in 1960, when it was equal to 67 percent of life expectancy in the developed nations, to
sixty-five years in 2005, which is equal to 82 percent of the level achieved in the developed
countries. Infant mortality between birth and age one fell from 149 per 1,000 live births in
1960 to 56 in 2005. Adult literacy rose from 46 percent to nearly 80 percent over the same
period to 2005, though in the least-developed nations 70 percent of all adults and only half


FOCUS 1.4 PROGRESS AND REGRESS, WINNERS AND LOSERS
We have relied above on some statistical data to get a “snap-shot” of the situation of
poverty in the less-developed world. It is important and instructive to collect and try to
understand some of this data yourself.
To get you started in that direction, and if you have access to the internet, go to the
website of the World Bank, http://www.worldbank.org (alternatively, look for a recent issue
of the World Bank™s World Development Report, which will have similar data, though what
is 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 to
find 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 year
available: mortality rate, infant; malnutrition prevalence; life expectancy at birth; improved
water source; school enrolment, primary; and the population growth rate.
What “picture” does this data give you about each of these countries? What general
conclusions can you draw about these countries just using this data as your source of
information? Which country do you think is “best off”? Which is “worst off”™? Rank these
countries from best to worst using these indicators alone as your guide. You will have to
decide 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 the
same tables. Rank the countries again from best to worst using only the GNI per capita
data. Is this ranking of countries substantially different from the first ranking you did using
the 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 the
lowest level of poverty? Does the country you rank last have the highest rate of poverty?
Let™s 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. Choose
the “Poverty” link and then record the data for each of the above countries for “poverty
gap at $1 a day” and the “poverty headcount ratio.” Does the incidence of poverty in the
countries 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” have
the lowest incidence of poverty? If there are discrepancies, can you explain them?
12 The Process of Economic Development
of adult females could be classified as literate (see Focus 1.4 Progress and Regress, Winners
and Losers).
Except for the last figures, all of the above are average values. In general, women do
not fare as well as men on these social indicators. Rural areas suffer relative to urban
areas, and ethnic groups and different social classes often have widely diverging outcomes
as well. One can find nations that have made, at best, only modest progress on the path
toward fuller economic and social development. But there are reasons to be hopeful in
many nations.
There remains much to be done to bring as many persons as possible out of poverty and
the deprivation it produces and that is one reason why understanding how economic develop-
ment takes place is so important.

The development enigma
It was the disturbing reality of world poverty, of a sharp division between rich nations and poor
nations and within nations, and of so much human suffering in far too many countries that first
brought us, in the late 1960s and early 1970s, to be keenly interested in development economics
and the problems of what was then called the “Third World.”5 Why, we asked ourselves, when
crossing the international border between the United States and Mexico from San Diego to
Tijuana, did we witness such a dramatic and obvious change in incomes, living standards, and
levels of human development? After all, the boundary between these two nations is an artificial
political division. The geography on one side of the frontier is much like that on the other; in
fact, 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 into
Mexico, not only a different world culturally and linguistically, but also one so unquestion-
ably poorer and with fewer possibilities for individuals to realize their full potential when
compared to the United States?
Other similar enigmas come easily to mind. Why is so much of Africa substantially
less developed and poorer than Latin America (see Table 1.2 below), though both regions


Table 1.2 Average income per capita and growth rates of per capita output
Income per capitaa Annual % change in real outputb

1970 1980 2000 2005 1980“1990 1990“2000 2000“2005

1,155 1,742 1.03 2.14 3.89
222 702
Less-developed economies
East Asia and Pacific 122 294 907 1,628 5.38 7.32
7.08
Latin America and 579 2,053 3,770 4,157 ’0.87 1.62 1.13
Caribbean
256 1,266 1,662 2,223 ’0.05 1.76
Middle east and 2.07
North Africa
South Asia 117 264 444 693 3.37 3.21 4.71
Sub-Saharan Africa 662 485 743 ’1.04 ’0.34 2.05
207

2,918 10,456 26,305 34,962 2.62 1.87 1.40
Developed economies

Source: World Bank, World Development Indicators Online.
Notes
a Gross National Income (GNI) per capita, in US dollars
b Of per capita Gross Domestic Product (GDP) in 2000 dollars
The development imperative 13
are considered part of the less-developed world? What accounts for the recent economic
success of some East Asian countries, like South Korea and Taiwan, or, taking a slightly
longer time span, of Japan, such that they seem to have passed over the threshold from
underdevelopment to development? Why does India, with its large number of highly
educated citizens and its immense potential market, remain one of the most impoverished
nations, while other countries “ again, South Korea is an illustration “ with a skilled and
educated labor force have been able to make the transition toward higher and more equitable
levels of economic development? How has China, the most populated nation on earth, been
able to make such remarkable progress that it went from being poorer than India to having
nearly three times the income per person?
These are the sorts of incongruities and conundrums “ and the list could be extended quite
easily “ 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, and
human 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 no
easy answers that apply always and everywhere. There is no magic, one-stop, cure-all solu-
tion that can be offered that applies to every country in all parts of the world. Becoming more
developed is a challenge that requires vision and hard work from both the leaders of nations
and their citizens. Nonetheless, there are patterns and lessons to be learned from successful
as well as unsuccessful development experiences that can help those with the power and the
will to move their economies and nations forward.
It is to these patterns and regularities based upon the concrete historical experiences of
successful and failed development episodes that we shall turn repeatedly. We are looking for
the critical signposts that mark the “process” of development, such that it will be possible to
determine what, broadly speaking, needs to be done and what should be avoided if progress
is to be made.
Many abstract theories about how to develop have been advanced by economists, and
some of these will be considered in later chapters. Such theories are an integral part of devel-
opment economics and provide an important historical window on how economists have
thought and continue to think about development.
Also of importance for less-developed nations are the concrete, positive, historical experi-
ences of successful developers. We shall be looking to the lessons that can be gleaned from
the rapid growth of Japan, South Korea, Taiwan, and Hong Kong, as well as other nations
of that region that the World Bank calls the “High-Performing Asian Economies” (HPAEs).6
China™s amazing rates of growth over more than two decades provide lessons too, though in
many ways what is happening there affirms what others have done before them. The analysis
and recommendations for action in subsequent chapters often are based upon the lessons of
the HPAEs and the now-developed nations, as well as contrasts with less productive cases
of transformation, such as the Latin American economies, where the growth process slowed
dramatically 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 to
extend the fruits of these values to the greatest majority of the world™s population. These
human values include, but are not limited to:

• the opportunity for meaningful employment and the possibility to provide for one™s self
and family;
14 The Process of Economic Development
• sufficient food, shelter, and other amenities for a decent and meaningful life above the
poverty 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 to
touch upon at least some of the primary ingredients toward which development, and not just
economic 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 of
the gravest consequence. It touches our shared humanity. The great economists of the eight-
eenth, nineteenth, and early twentieth centuries “ Adam Smith, David Ricardo, John Stuart
Mill, Karl Marx, Alfred Marshall “ were inspired by a profound concern for understanding
the roots of economic wealth and the reasons for poverty, as well as for discovering the
mechanisms through which economic and social gains might best be increased and shared
amongst the members of society. These matters have captured the attention and hearts as well
as the minds of many brilliant thinkers. They are noble questions that often lead students to
wish to study economics in the first instance.
This book is an inquiry into what those in the less-developed nations must do if they
are to improve their economic and social lot. As well, there is reflection on how the devel-
oped world, including concerned citizens of those countries, might understand their role
and responsibilities in our increasingly interdependent world of rich and poor. The MDGs
are an important recognition of the global obligation of all nations to end extreme poverty,
wherever it is found. Everyone™s economic interests are joined in a global economic system,
sometimes positively, other times negatively, no matter how remotely connected we at times
may seem to be. It is one world, albeit unequal, but our destinies are increasingly intertwined
via markets, communication networks, the environment, and politics. Achieving the MDGs
and making progress toward fundamental structural reforms of the sorts discussed throughout
this book is a win“win outcome for all nations.


recent trends in economic growth
The 1980s and early 1990s were not particularly propitious for either economic growth or
development (the differences between the “growth” and “development” are spelled out in
greater detail in Chapter 2). Even the developed world suffered a slowdown in its rate of
economic expansion from the 3 percent per person growth rates of the 1960s and 1970s to the
slower growth of GDP per person shown in Table 1.2. Some developed countries experienced
a 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 concentrated
heavily in segments of relatively lower-paying, lower-productivity service sectors that
offered meagre benefits and other perquisites “ from sick leave to health care to retirement
packages “ that had become integral to the rising living standards of the developed economies
after the Great Depression of the 1930s.
The development imperative 15
In the United States, real wages have decreased for a broad spectrum of the workforce
since 1973. Family incomes barely have edged upward, and when they did it was due prima-
rily to the fact that more family members, particularly women, entered the labor force in
record numbers in an effort to maintain a family standard of living. For increasing numbers
who do find work, it is often irregular and part-time, as permanent workforces were replaced
by contingent workers with fewer rights, lower incomes, and futures that have become ever
more precarious. So even the already-developed economies can experience problems of
long-term progress during some periods, and these problems are often more complex today
given the impact of global competition amongst nations and firms.7
The less-developed world, on average, fared even worse than the developed economies
during the 1980s. However, average growth rates of output for the less-developed economies
have 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 and
the 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 of
output 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-
ities in 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 trends
shown in the table continue that will soon change.8 Annual income per capita in South Asia in
2005 averaged less than 2 percent of what was received in the developed world. Comparing
regions within the less-developed world, South Asia received 42.6 percent of the average
income received in East Asia and the Pacific and just 16.7 percent of what was received in
Latin America and the Caribbean, the region in the less-developed world with the highest
income per person.
Sub-Saharan Africa fared only slightly better than South Asia; it is the second-poorest
region in the world.9 Income per person was actually lower in 2000 than in 1980, and the
growth 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 and
Latin America and the Caribbean are, on average, relatively better-off. Still, compared to the
developed world, their average incomes were, respectively, only 6.4 percent and 11.9 percent
of what was received in the developed economies in 2005.
Clearly there remains a substantial gap in average incomes between the less-developed
and the developed worlds, a gap that has widened on average from 1970, when income in
the less-developed world was 7.6 percent of that in the developed, to 2000, when average
income in the less-developed economies had fallen to but 4.4 percent of the average in devel-
oped economies. By 2005, there had been a change in direction, but average income in the
less-developed economies in 2005 as a share of that in the developed world was still below
what it had been in 1970.
Of course, as can be confirmed from the data in Table 1.2, East Asia™s average income gap
compared to the developed economies has shrunk over time, but even there, much remains
to be done in terms of absolute income levels.

Low- and middle-income less-developed nations
In our study of economic development, we shall be mostly concerned with the so-called low-
and middle-income economies. By the World Bank™s categorization, 149 economies fell into
16 The Process of Economic Development
these two groupings in 2007 out of a total of 209 nations and territories. Of these, fifty-three
nations were included in the World Bank™s “low-income” subgroup, eleven fewer than in
1999; another fifty-five fell into the “lower-middle” income range, the same number as had
been in this grouping in 1999.
Incomes ranged from the poorest nation in the world, Burundi, with a meagre $100 per
capita yearly income in 2006, to Argentina, with $5,150 per person, to $17,690 for South
Korea (which has “graduated” from its former “upper-middle-income” status in the less-
developed world to now being including among the “high income” economies of the devel-
oped world). The world™s two most populous economies, India ($820 per capita income)
and China ($2,010) now share different fates. India remains in 2006 classified among the
low-income economies, while China, as a result of two decades of unprecedented economic
expansion, has been “promoted” to “lower-middle-income” status among the less-devel-
oped economies.
The average annual income of the low-income subgrouping of the less-developed nations
in 2005 was $584 per person. For the middle-income less-developed economies, the average
income was $2,636, with the “upper-middle-income” group averaging $5,053 (more
complete data for other nations and analysis of the meaning of these data are presented in
the next chapter).
The last columns of Table 1.2 show what was happening to the growth of real, inflation-ad-
justed output (= income) per person since the 1980s. For all regions except East Asia and the
Pacific and South Asia, income per person declined over the 1980s, as output contracted or as
output growth relative to population growth was inadequate to prevent declines in income per
person. For these regions, the income gap with the high-income nations, which experienced
positive economic growth, widened in both absolute and relative terms over that decade.10
Over the 1990s, all the regions of the less-developed world returned to positive per capita
income growth rates, with the exception of Sub-Saharan Africa, which suffered two consecu-
tive decades of declining income per person. Since 2000, growth rates have improved every-
where except in Latin America; what is critical is to keep this momentum of positive growth
rates 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-
oped nations 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 provides
a more global and yet extraordinarily dramatic portrayal of the distance that continues to
separate the developed “have” nations from the less-developed “have-not” economies.
The less-developed world, with more than four-fifths of the world™s population, received
slightly more than one-fifth of total world income in 2005. In a cruel symmetry, the devel-
oped world nations, with well less than one-fifth of the world™s population, received nearly
four-fifths of total world income in 2005, precisely the same share as in 1985, though with
a smaller proportion of total world population in 2005. Looked at slightly differently, the
developed world received about five times its “equality share” of total world income (78.1
percent of world income divided by 15.9 percent of world population).11 The less-developed
world 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 world™s population
received as much total income as the poorest 57 percent of the world™s population (UNDP
2001: 19).
examining particular regions within the less-developed world, inequality was even more
extreme 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
The development imperative 17
Table 1.3 World income, world population, and their distribution, 2001
Share of world™s Share of world™s
income (%) population (%)

1985 1995 2005 1985 1995 2005

17.5 81.7 83.2 84.1
22.0 22.0
Less-developed economies
East Asia and Pacific 4.1 4.4 6.8 30.5 30.2 29.2
Latin America and Caribbean 5.8 5.8 5.5 8.4 8.5
8.2
Middle East and North Africa 2.5 1.2 1.6 4.1 4.5 4.7
South Asia 2.4 1.6 2.3 21.8
20.8 22.8
Sub-Saharan Africa 1.6 1.0 1.3 9.3 10.4 11.7

78.1 82.5 78.1 18.3 16.8 15.9
Developed economies

Source: World Bank, World Development Indicators Online.
Note
Missing 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.

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