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stripped of their position, power, and prestige, and thus resistance to industrialization and
industrial exports at the expense of primary product exports did not materialize. No elite
group with political power was threatened by the transition to a changed export mix domi-
nated by manufactured goods that the easy export substitution strategy implied. Fundamental
agrarian reform in those countries made it feasible for those remaining in agriculture, now
typically small farmers created after the agricultural revolutions, to increase the productivity
of the land they worked.
Without any substantial agrarian reform in Latin America and India, any effort to shift the
export structure away from agriculture encountered fierce resistance from the landed elites.
This is another institutional difference of importance that made initial endowments and their
distribution act as barriers to effective industrial transformation in Latin America and other
countries with similar structures. In East Asia, these potential internal barriers to change had
been dismantled as a result of war and social turmoil.

Policy choices and institutional appropriateness
But there is another dimension to the differences in the strategies of development followed
in East Asia compared to Latin American economies and others that followed a similar
development trajectory. East Asian policy-makers, on the whole, made better decisions,
implemented their chosen policies better, monitored their policies better, and were willing
and able to alter relatively quickly any decisions and policies if they did not bring forth the
desired results.
While all governments affect the operation of their economies and the nature of future path
dependence, in East Asia

the government intervened “ systematically and through multiple channels “ to foster
development, and in some cases the development of specific industries. Policy interven-
tions took many forms: targeting and subsidizing credit to selected industries, keeping
deposit rates low and maintaining ceilings on borrowing rates to increase profits and
retained earnings, protecting domestic import substitutes, subsidizing declining
324 The Process of Economic Development
industries, establishing and financially supporting government banks, making public
investments in applied research, establishing firm- and industry-specific export targets,
developing export marketing institutions, and sharing information widely between
public and private sectors. Some industries were promoted while others were not.
(World Bank 1993: 5“6)

This quotation from the World Bank™s study of the HPAEs makes clear that policy inter-
vention to shape the East Asian economies was pervasive. In South Korea and Taiwan, the
banking system was, until quite recently, entirely publicly owned, and the Korean govern-
ment has not hesitated to nationalize banks again in crisis situations that threaten the economy
(such as the 1997“98 financial debacle). “Financial repression,” in which interest rates were
reduced and loans provided to firms that could meet the desired social, economic, and devel-
opment goals, helped to speed investment, technological change, and growth.
The East Asian path of industrialization and development does not exemplify what a
“market-based” approach can attain, but rather just the opposite. It shows what a “governed”
market potentially can do. The East Asian experience clearly presents the possibilities of
vigorous and competent policy-making with well-defined goals (look back at Focus 7.3 and
Focus 7.4 in Chapter 7 on Thailand™s and Korea™s state policies).
In East Asia the goal was to raise the level of efficiency and technological capabilities of
those economies to new levels that would permit a higher standard of living and the pros-
pect of greater human development for a larger proportion of the population. They did this
through a policy of shared growth, in which all classes gained from progress, albeit slowly
during some periods, and by development from within, that is, by depending predominantly
on local capital and local capitalists to operate industry, based on expanded human capital
accumulation and an augmented technological capacity. To a great degree, East Asians did
the industrialization and fomented structural change themselves and for themselves.
Critics sometimes have charged that the South Korean economy was able to grow rapidly
because of severe labor repression and a long period of non-democratic rule, which ended
in 1988. And there is some truth to that charge. But with time and economic expansion, and
given the relatively high levels of education within the population, there have been substan-
tial spread effects accompanying the structural transformation of the economy and society, so
that average incomes have risen rapidly with a relatively low degree of inequality and with
substantial progress on the key human development indicators.
In Korea in 1988, the share of total income received by the richest 20 percent of income
earners as a ratio of the share of income received by the poorest 20 percent was 5.7 (=
42.4 percent/7.4 percent). By 1998, as average incomes continued to grow, income became
even more equal, as the ratio of the income of the richest to the poorest fell to 4.8 (= 37.5
percent/7.9 percent). The share of income received by the poorest rose slightly, while that of
the richest quintile fell, much like on the downward sloping portion of a traditional Kuznets
curve.
In Mexico, by comparison, in 1984, the ratio of the income of the richest 20 percent to
the poorest was 13.6, falling to a multiple of 12.8 in 2002 (= 55.1/4.3). In Brazil, the ratio of
income of the richest to the poorest income earners was 32.1 (67.5 percent/2.1 percent) for
1989 and 23.9 (= 62.1/2.6) as incomes became slightly more equal, reflecting economic strat-
egies that helped to spread incomes somewhat more equitably (World Bank 1994: 220“1,
Table 30, World Development Indicators 2006).
Incomes are certainly not equal in South Korea, but the degree of inequality between the
rich and the poor is much lower than in any of the Latin American countries. Given the higher
Strategy switching and industrial transformation 325
rates of growth and higher income in South Korea, it would seem that economic expansion
over time has tended to promote, or at a minimum sustain, equity. This trend toward greater
equity also has been strengthened by the spread effects of greater human capital accumula-
tion reaching a broader spectrum of the population, especially through education, as we shall
see in Chapter 12. Shared growth has been a fundamental component of the Korean state™s
strategy for sustaining economic growth and for legitimizing its policies. It is a goal and
means to other goals from which other economies could and should take heed.
The South Korean and other East Asian states can certainly be faulted for certain excesses,
but there also have been undeniable accomplishments that could, if emulated, help other
countries poorer than the HPAEs make substantial progress out of extreme poverty and put
them closer to achieving the Millennium Development Goals.22 One does not have to go too
far back in time to when Korean and Taiwanese per capita income levels were well below
those of Mexico or Brazil; today the relation is reversed (see Focus 10.2). And even though
we know quite well that per capita income is not all of what development is about, it is an
important part of what development is about.


Subsequent strategy switches
Since the 1970s, both the East Asian economies and the larger Latin American economies
have further altered their development strategies, again going in slightly different directions
that have once again changed the nature of their path dependence, but with important and
distinct consequences.


FOCUS 10.2 COMPARATIVE INCOMES: EAST ASIA AND LATIN
AMERICA
Income levels of the HPAEs, though they started off in the 1950s substantially lower, now
rival those in Latin America, where industrialization has had a longer history. For all the
economies of East Asia and the Pacific, real per capita income was but 7 percent of Latin
America and the Caribbean™s in 1960. By 2004, the ratio of East Asia™s real income to Latin
America™s had risen to nearly one-third, as per capita real incomes in East Asia rose by 790
percent and in Latin America by only 92 percent.


GDP per person (constant 2000 $US)

1960 1970 1980 1990 2000 2004

East Asia and Pacific 141 175 273 481 952 1,254
Latin America and the Caribbean 2,035 2,616 3,568 3,261 3,853 3,917
Korea 1,110 1,912 3,221 6,615 10,884 12,762
Mexico 2,554 3,576 5,114 4,966 5,935 6,056


If we consider one major economy from each region, the table shows that whereas
Korea™s per capita income in 1960 was less than half of Mexico™s, by 2004 the relationship
had completely reversed, as South Korea™s real income per person was more than double
Mexico™s. This is a powerful demonstration of how the different industrialization paths of
East Asia and Latin America, one more optimal than the other, have affected the rates of
growth and the levels of income of countries in each region.
Source: World Bank, World Development Indicators Online
326 The Process of Economic Development
Difficult ISI with difficult export substitution: East Asia™s next strategy
switch after easy export substitution
Even before the export substitution boom in consumer non-durables began to slow, Korea
and Taiwan (and Japan before) entered a stage of state-promoted difficult ISI accompanied by
difficult export substitution (Ranis 1981; World Bank 1993: 123“55). In selected industries
like chemicals and machinery, electronics and automobiles, and other durable consumer
goods from microwave ovens to refrigerators, the state assisted in the formation of industries
with backward linkages to existing industrial sectors. These new difficult ISI industries
operated behind substantial infant industry tariff and non-tariff barriers that shielded them
from international competition as they initiated production, just as the easy ISI firms before
them. But the state also required that these industries be prepared to export at an increasing
rate over time as a condition of obtaining loans or subsidies to finance domestic production
or any other special considerations. And these infant industry tariffs were not to be permanent
either.
Over time, these more sophisticated goods with their higher value-added and higher wages
began to be exported. Slowly they began to replace “ substitute for “ some of the non-
durable exports of the previous phase of easy export substitution industrialization. Once
again, the East Asian economies consciously worked to alter their export profile, replacing
relatively simple non-durable consumer good exports with the ever more complex manufac-
tured exports characteristic of difficult ISI. These exports also tended to have higher income
elasticity values. With growth in incomes in the international economy, the demand for these
goods could be expected to rise rapidly, contributing to the expansion of export income and
national incomes (see Focus 10.3).
The East Asian state provided constant guidance and assistance to the private sector
throughout these transformations, though with an important quid pro quo attached. Firms
receiving state subsidies or privileged access to credit or special training or whatever cost-


FOCUS 10.3 CREATING DYNAMIC COMPARATIVE ADVANTAGE
Korean manufacturing giant Samsung Industries began making microwave ovens in the
early 1970s in a cramped old laboratory, turning out a few hundred overpriced ovens
annually for the heavily protected domestic market. This was the stage of difficult ISI in
the economy. By the 1990s, Samsung was making 80,000 microwave ovens a week and
ranked as the world™s biggest producer. How did a Korean company with almost no expe-
rience manufacturing complex ovens beat better-financed and more experienced US and
Japanese companies?
The government™s Economic Development Board was a key player in Samsung™s success.
Government officials were keenly aware that the Republic of Korea could not rely forever on
low-wage manufacturing. Just as the United States had lost countless textile industry jobs
to Korea, they reasoned, so Korea would one day find it could no longer compete for labor-
intensive manufacturing jobs with lower-wage neighbors such as China and Indonesia. To
prepare for that day, government officials, working in consultation with the private sector,
developed incentives for new knowledge- and capital-intensive industries. Incentives varied
widely and included government-sponsored building of industrial parks, subsidized utilities,
tax rebates for exports, and the provision of cheap loans for investment in new products.
By 1980, urged forward by subsidies and incentives, Korean industry had moved into steel,
ships, and even automobiles and was about to leap into world-class electronics.
Source: World Bank 1993: 130, Focus 3.3
Strategy switching and industrial transformation 327
saving advantage government benefits provided were expected to meet specific performance
standards, particularly exporting targets, if they hoped to be recipients of state assistance
in the future. Unproductive rent-seeking by the private sector thus was kept to a minimum,
aided by the fact that most government bureaucrats were above being bribed, unlike in
other countries. Firms could and did earn above normal economic profits, but they were
permitted and assisted to do so with government help on the condition that the firms continue
to meet the performance standards set by the state. When firms failed that test, they lost
access to subsidized credit, marketing outlets, bank loans, and so on, usually wiping out
their economic profit or worse. Thus the pressures to conform to government policy by the
private sector were strong, and at the same time, this persuasion by government ensured that
private decision-makers™ goals tended to be consistent with those of the overall development
strategy. Government programs helped firms in the private sector to prosper, but only if they
played by the rules of the game, with exporting manufactured goods being the yardstick for
measuring success. The result of this state intervention was a private sector that was forced
and helped to become increasingly more efficient and productive, and the entire economy
tended to benefit from the state“private partnership through shared growth and wide spread
education initiatives.

Contests: rules, rewards, and referees
MIT economist Alice Amsden (1989, 1994) identified the importance of East Asia™s use of
a “performance-based allocation” system as central to their success. What Japan, Korea and
Taiwan did was to create a structure, what she calls “contests,” wherein there were rules,
rewards, and referees for private firms wishing to gain access to, say, credit or a license to
open a branch bank. To “win” a contest, a firm had to meet the performance standards set
by government (the “rules”) if there was any hope for the reward of above-normal profits
(World Bank 1993: 93“102). Typically, one of the rules of the contests was sustained export
performance, so that firms were forced, as a condition of obtaining special access to credit or
tax benefits or exclusive licenses to produce something, to become and remain internationally
competitive as revealed by their ability to export manufactured goods.
This has required firms to pay constant attention to learning about and utilizing best-
practice knowledge and technology, to the upgrading of labor and management skills,
and generally to increasing efficiency and decreasing costs per unit of output via the
utilization of superior production methods, the best physical capital, and highly trained
human capital. Contest-based competition among firms meant that the possibility of
earning above-normal returns and monopoly profits via bribery and other unproductive
activities were substantially reduced. Instead, above-normal economic returns became
the reward for efficient performance, not corruption and rent-seeking, thus forcing
productive activities to dominate. East Asian policy-makers chose to take the high path
of improving the quality of production methods and of its factor inputs as the means to
reduce costs as the means to compete internationally, rather than relying on the low path
of holding costs down by keeping wages low as other less-developed countries have so
often tried to do (Amsden 1994: 635).
The capacity to export and to expand exporting over time provided the yardstick for deter-
mining which firms had become efficient. Firms that attained international levels of effi-
ciency could compete on world markets on the price-quality spectrum, and those that did
so and met their export targets were rewarded with continued access to state assistance and
special treatment. Thus the East Asian governments cooperated with and assisted private
328 The Process of Economic Development
sector firms in ways that increased their private profits, but only if such firms were meeting
the desired social goals of greater efficiency, productivity, employment, and other targets
that contributed to overall social welfare. This sounds very much like Adam Smith™s idea of
harmony of interests at work in capitalism.
Key to the success of the contests was the integrity of the referees. These might be banks
that provided credit or government bureaucrats in charge of economic development in the
issuance of licenses, subsidies, tax breaks, or other special privileges. The creation of an
honest, professional, and dedicated civil service seems absolutely essential to good policy-
making. A corrupt and incompetent cadre of bureaucrats will result in poor quality policy, to
no one™s surprise. If this is not to occur, it is important that civil servants be relatively well-
paid compared to what could be earned in comparable jobs in the private sector. The lower
the relative income paid to members of the civil service, the lower will be the average level
of competence and the higher the probability that “informal” income, that is, bribery and
corruption, will permeate the system as a substitute for income earned on the job.
Any prestige and employment security that comes with a government job cannot fully
compensate for incomes that are too low. In Taiwan, public sector salaries averaged about
60“5 percent of comparable private sector income; in South Korea, public sector income
averaged 82“99 percent of private sector salaries; and in Singapore, where the civil service
is highly regarded, public sector salaries often exceeded comparable private sector opportu-
nity cost earnings. The relatively high incomes of the East Asian civil service compared to
the private sector at least partly accounts for the higher average quality of these government
administrators.
On the other hand, Argentina™s public sector workers, at every level, received between 25
and 30 percent of what could be earned in the private sector, and in Somalia, the pay was less
than 15 percent of private sector incomes (World Bank 1993: 177). Can countries that pay
their civil servants at these levels expect to recruit and retain the best public sector workers
possible? Should bad policy decisions, and perhaps endemic corruption, emanating from
such civil servants be unexpected or surprising? Low pay for government lawyers or accoun-
tants or financial analysts, for example, will attract those unable to compete in the private
sector, and their average level of ability will very likely be quite low. Such civil servants may
be more tempted to accept bribes to supplement their incomes to levels closer to their better
paid, but also more productive, colleagues in the private sectors. Low pay for civil service
workers does not save government money, however. If anything, the cost to government and
society from paying public sector workers less than comparable employment in terms of low
quality, bad policy decisions, and corruption as civil servants boost their incomes via bribes
and pay-offs is a multiple of what it would cost to attract higher-quality public employees
whose decisions will be closer to the social optimum.
Of course, if less-developed countries have bloated public sectors and if public employ-
ment is being used to provide posts for urban workers with few other alternatives for employ-
ment, it is difficult to pay higher salaries. But the reason for over-staffing in public employ-
ment often reflects a failure of the existing development program to generate sufficient
employment in the private sector for those migrating from the rural areas to the cities. What
is required, then, for economies that have started import substitution industrialization is a
strategy switch along the lines followed in East Asia. The need for a shift toward a labor-
using easy export substitution strategy and the efficiency it promotes cannot be overstated.
Then there can be a phase-out of excess government employment, as the industrial strategy
begins to pay dividends in increased industrial employment as the export market creates
additional demand, allowing domestic industries to continue to expand production.
Strategy switching and industrial transformation 329
With the ability to shrink public sector employment rationally rather than through whole-
sale lay-offs that neoliberal economic policy often demands, there can be a turn toward the
recruitment to the public sector of competent and dependable civil servants who can rise
within a merit-based employment system. It is this core of government bureaucrats who can,
with some integrity and relatively insulated from pressures from the private sector, oversee
the policies and programs that the state in late-developing economies must implement to
assist the private sector in reaching maturity, with higher efficiency, increasing private sector
employment, and shared growth as the goals.
If one thinks of a competent and honest civil service as part of the essential social infra-
structure required to achieve a higher level of development, then this is another area for
public investment which promises a very high pay-off in terms of the positive externalities
which can be expected to accrue to society at large. The relatively high pay commanded by
workers in key public administration sectors, such as budgeting, economic planning, over-
sight, and so on, will be well worth the expenditure if economic growth, productivity and
efficiency are positively affected, for it will at least partly be the result of their efforts, ideas,
and monitoring of the progress of the economy.

Export promotion: the Latin American economies avoid export substitution
When the larger Latin American economies shifted from easy ISI to difficult ISI, part
of the rationale had been to try to reduce imports so as to improve the trade balance
and to relieve the constant problem of insufficient foreign exchange. However, during
difficult ISI, the demand for imported goods continued to expand, not only for imported
industrial inputs required by the ISI industries. The demand for imports also expanded
because of economic growth and rising incomes for manufactured goods and services
the economy did not produce at all, or did not produce in the right quantities or with the
desired qualities, such as televisions, computers, sporting goods, movies, insurance, wines
and liquors, designer clothing, and foreign travel. Unfortunately, the ability to purchase
the increased volume of imports desired by Latin American consumers was threatened
because export income continued to be based on primary products which grew only very
slowly and typically only by increasing the quantity of exports. The premature difficult ISI
strategy in Latin America did not solve the balance of trade and foreign exchange problem
by reducing total import expenditures. The basic problem of foreign exchange inadequacy
increasingly revealed itself to be a failure to export and to earn foreign exchange. Saving
foreign exchange was not a sufficient solution to the balance of trade dilemma for the Latin
American economies.
The countries which prematurely initiated difficult ISI faced the realization that the possi-
bility of further reducing imports via a deepening of the import substitution process could
never generate sufficient foreign exchange savings relative to the foreign exchange that might
be earned by expanding manufactured good exports. It was at this point that the larger Latin
American economies, such as Brazil, Mexico, Chile, and Argentina, perceived that saving
a unit of foreign exchange via import substitution was not always equivalent to the earning
of a unit of foreign exchange via exporting. Saving foreign exchange generated a one-time
benefit that could not overcome the problem of declining terms of trade that continued to
afflict their traditional primary product exports. On the other hand, creating additional export
capacity and shifting from primary to manufactured good exports could, year after year,
provide cumulative returns in terms of foreign exchange earnings, particularly if the new
exports were income elastic.
330 The Process of Economic Development
What the Latin American economies turned to in the 1960s and 1970s, however, was not
easy export substitution as had been the case in the East Asian economies. Instead, they began
to practice what Ranis (1981) called export promotion. The Latin American countries began
adding on to the existing primary product export structure some specially-promoted manu-
factured good exports, but without the intention of reducing the importance of the primary
product export base within the overall export structure. In other words, export promotion was
not export substitution. There was not a fundamental underlying change in the structure of
production that put less emphasis on traditional agriculture and more on labor-using manu-
facturing that might absorb the surplus labor in urban centers. Instead, manufactured exports
were added on top of the primary product export base.
Nor was the export of manufactured goods the natural consequence of the maturing of
a domestic entrepreneurial elite that had learned to be more efficient and internationally
competitive over a period of time, as it was with the East Asian export-substitution experi-
ence. export promotion was rather the consequence of special subsidies extended to multina-
tional corporations to export some of their output to the world market.23 The residual strength
of the landed agriculture and mineral elite class contributed to the difficulty of fundamentally
modifying the structure of both production and exports and moving toward a more dynamic
and productive economy on a higher sustained path of growth and development (see Focus
10.4).
As we shall see, the larger Latin American economies and India were eventually forced by
international forces to strategy switch to export substitution to varying degrees. Not all the
Latin American economies have fully made this transformation; Mexico has perhaps been the
most successful in getting the most out of the efficiency-enforcing effects of producing manu-
factured goods for the international market (Weiss and Jalilian 2004). The inefficiencies from
maintaining protected ISI industries and failing to fundamentally shift from being primary
product exporters to manufactured good exporters had become impossible to sustain. From
the 1980s, as a result of the international debt crisis (Chapter 17), it became impossible.


FOCUS 10.4 REGIONAL TRADE ASSOCIATIONS
One way to expand the demand for manufactured and other goods, and thus perhaps
reduce per unit costs of production by sliding down the average cost curve (remember
Figure 9.1 in Chapter 9?), is through regional trade associations. Such arrangements
give preferential treatment to goods traded among members of the association, usually
reducing tariffs on traded goods to zero. This, of course, should increase exports and
imports among members of the trade association and help economic growth.
Such trade groupings have proliferated and have different structures. Take a look at the
on-line encyclopedia Wikipedia, and search for “trade bloc.” Then look at the table for a
“comparison of trade blocs.” You will see that some of the regional associations are free
trade areas (FTAs), others are customs unions, and yet others involve substantially more
integration among members in a common market arrangement (like the European Union,
EU). You should be able to identify the key differences between these different types of
trade associations as to internal tariffs, tariffs with non-member nations, monetary and
fiscal policy, immigration, and so on.
Sometimes these regional trade associations can be a force for positive change by
enforcing more competition among members. In other cases, they may be a way in which
regional elites can sustain economic growth in their countries by extending the market and
increasing total output via exporting but without undertaking the fundamental reforms and
policy switches that have been discussed in this and the previous chapter.
Strategy switching and industrial transformation 331
Continuing strategy switches
Figure 10.1 shows a fifth phase of transformation for the East Asian economies. They have
begun to move toward even higher value-added production both for the domestic market and
for export in knowledge- and technology-intensive industries, such as electronics, computer
technology, software, biotechnology, communications equipment, precision instruments,
and so on. These are “cutting-edge” industries and services with rapidly rising demand and
excellent possibilities for future growth. These are industries that build upon the existing
human capital base, and at the same time contribute to additional human capital accumulation
via continued learning-by-doing.
There may even be a Stage 6 or 7 that will need to be added in the future to Figure 10.1.
What the East Asian economies have done, as have successful developers in the past, is to
climb the product cycle from simple goods to more complicated manufactured goods and
services. This has been achieved via timely “strategy switches” promoted by innovative and
flexible state policy which encouraged and allowed the private sector to continue to innovate
and prosper with economy-wide spillover benefits. As proficiency is gained at each level
of production, ascending to the next level has been made easier by past policies that have
contributed to the creation of even more advantageous path dependence.
At the base of the East Asian success have been a series of beneficial past policy decisions:
expanding educational opportunities; creating a competent civil service; creating mecha-
nisms (“contests”) to promote technological adaptation and efficiency in the private sector;
and supportive government spending, advice, and policies to increase profitability of firms
that contribute to overall social welfare.24
The Latin American and Indian economies still lag behind the most successful East Asian
economies on account of past policy errors, though these were often the result of ingrained
political pressures rooted in deep economic inequalities that continue to slow progress. Good
policies require a political environment conducive to and accepting of change, which can


Sub-optimal (Latin American/India-type)
Optimal (East Asia-type)

Stage 1 Primary production, pre-industrial Primary production, pre-industrial
(agriculture-based) (agriculture-based)
Easy ISI (first industrial stage) (opening Easy ISI (first industrial stage) (infant
Stage 2
of economy begins) industry protection continued)
Easy export substitution (primary Premature difficult ISI (infant industry
Stage 3
products replaced by manufactured protection continued; primary product
exports) exports still most important)
Export promotion (pushing out of
Stage 4 Difficult ISI with secondary export
substitution (higher value-added manufactured exports; primary product
manufactured goods replace exports not replaced or reduced in
non-durable consumer goods exports) absolute significance)
Stage 5 Knowledge-intensive production; ISI Export substitution begins in non-durable
and export substituting continue in new, and durable goods and in services as
dynamic industries economies attempt to recover from
skipped stages of industrialization



Figure 10.1 Stages of structural and industrial transformation and strategy switches.
Sources: Based on Ranis 1981; World Bank 1993: Chapter 3.
332 The Process of Economic Development
be difficult to achieve when political and economic elites are resistant to change. Along
with many of the countries in Africa and the Middle East, the economies of India and Latin
America need shifts in political power that can open the possibilities for even more positive
and sustainable economic transformation.

What can other less-developed nations learn?
Many nations of Africa and South Asia have yet to proceed as far in their structural
transformations as have the East Asian or the larger Latin American economies or India,
which provide our recent historical insight. Without being over-simplistic (“If becoming
developed is so easy would not every country be doing it?”), following a path similar to the
general outlines of the optimal East Asian strategy in Figure 10.1 promises the best outcome
in a relatively open, growing world economy.
Small economies face special problems associated with market size, but even these can
use the East Asian prototype as a guide to structural transformation by focusing on a limited
range of ISI products and then expanding into exporting as efficiency levels are improved.
For small economies, regional trade arrangements may be essential so that economies of
scale become feasible and the benefits of learning-by-doing can contribute to the over-
coming of transitional inefficiencies prior to beginning to export to the world market. Larger
economies with a higher level of domestic demand have more opportunities for both import
substitution and exporting, but they also face more potential pitfalls, especially if they are
land or natural resource rich and those resources are owned by a relatively small elite, as
our discussion of the resource curse suggested.
As Gerschenkron (1962) stressed in his famous Economic Backwardness in Historical
Perspective, no nation can or should attempt to duplicate the success story of any other.
Nations have been able to build on the accomplishments of other nations, often skipping
over, and learning from, the arduous steps taken by path-breaking nations. Thus, Table 10.1
is not a blueprint for “how to develop,” so much as a source of guidance for thinking about
the sequence of structural change that has been most beneficial in a growing, relatively open
international economy.

Institutions matter
What a close study of the differences between the more successful East Asian economies and
the less prosperous larger Latin American economies reveals is how important sound policy-
making by government and the private sector is to creating cycles of virtuous change. The
institutions of society, the soft infrastructure, profoundly matter, from the civil service, to
banks, to educational institutions, to professional bodies, like accountancy organizations, to
the importance placed on honesty in business and personal relations, and so on. As Amsden
(1994: 632) put it:

Since East Asia has had some of the highest growth rates of output and productivity
in the world, and since East Asia provides no evidence that any other set of policies
is as good or better than its own set, why not advise developing countries the world
over to adopt a variant of the East Asian model? ¦ why not use the [World] Bank™s
awesome powers of conditionality to help other countries to build the institutions and
skills necessary to adopt, modify and effectively implement East Asia™s approach to
suit their own needs?
Strategy switching and industrial transformation 333
In other words, what other late-developers would be advised to do is to create the building
blocks of the proper institutional structures that can allow them, using their human capital,
physical capital, and financial resources, to replicate a variant of the East Asian experience.
These institutions are pre-conditions or co-requisites of more rapid development, and what
Amsden is suggesting is that the international community, especially the World Bank and
other international institutions, assist countries to construct these building blocks. This
can be done with the “stick” of withholding aid when such institutions are not created as
planned or promised and the “carrot” of lower interest rates, easier repayment schedules,
debt reduction, marketing assistance, technological sharing mechanisms, and other perqui-
sites extended to the private sector which can lead, as the East Asian economies have shown,
to rapid “performance-based” results.

Where we are headed, where we have been
Figure 10.2 schematically shows how institutions, policies, and an economy™s endowments
interact to contribute to the structural transformations that are aimed at achieving a society™s
goals of development.


INSTITUTIONS
• Technocratic insulation (state autonomy)
• Efficient civil service
• Banks and financial intermediaries

¯
POLICIES
• Macro stability
GOALS
STRUCTURAL
“ internal balance (inflation,
TRANSFORMATION
unemployment, fiscal deficit)
“ external balance (exchange rate,
¯




external debt, balance of payments) • Easy ISI • Higher income
• Easy export • Higher HDI
• Financial policy
substitution • Less inequality
• Export policies
¯




• Difficult ISI with and poverty
• Competition
secondary export • Participation
“ market-based (international
substitution • Democracy
and domestic)
• Agricultural
“ contest-based
revolution
• Foreign capital and technology
• R&D
¯
INITIAL AND AUGMENTED ENDOWMENTS
• Natural resources
• Physical capital
• Human capital
• Saving and investment
• Efficiency and productivity growth


Figure 10.2 The transition to development.
Source: Adapted from World Bank 1993: 88, Figure 2.1.
334 The Process of Economic Development
To read Figure 10.2, begin from the right-hand side, Goals. These were enumerated in
Chapter 2; they are the ends toward which society is directed. Moving to the left in the
figure, we see that achieving these goals requires fundamental structural transformation in
the productive and export structure of an economy. This structural transformation is affected
both by the policies of state and by the initial and augmented resource endowments of the
economy and society (with augmented endowments contributing to changing comparative
advantage via state policy and as a consequence of individual decisions, e.g., education and
entrepreneurs producing new goods and services). Society™s institutions, only three of which
are listed here, affect the efficiency of policy-making and hence the nature of the structural
transformation.
In Chapters 9 and 10, we considered the industrial side of the structural transformation. In
Chapter 11, the agricultural aspect will be examined. Chapter 8 considered the importance
of augmenting resource endowments such as human capital accumulation, technology, and
research and development (R&D) to the overall development process, themes which are
examined in more detail in Chapters 12 and 13. The issues surrounding macroeconomic
policy, the role of multinational corporations, financial policies, and aid are examined in
Chapters 14“17.
Figure 10.2 serves to remind us that the goals of development are attained only through a
complex web of institutions, policies, and endowments interacting, and at times conflicting,
which impact on the structural transformation leading to the desired ends. There is much to
do and much that can go wrong, but the essentials of what is required to move from being less
developed to higher levels of income and human development are relatively well-defined.

Questions and exercises
1
a explain what is meant by a foreign exchange shortage.
b What is it that typically causes such a shortage of foreign currency for LDCs during
their easy ISI phase of industrialization?
c When does a foreign exchange shortage become a foreign exchange crisis?
d What, in general, do countries need to do to overcome a foreign exchange crisis
situation in the future?
2 What is meant by a strategy switch? Why are strategy switches an important component
of good policy-making?
3 Define easy export substitution. What exactly is being substituted for what?
4 Define difficult ISI. In what sense do we say that the Latin American countries entered
this stage “prematurely” while the East Asian economies entered this stage “maturely?”
What potential problems are there for countries which follow easy ISI with difficult ISI,
thus skipping the export substitution stage of transformation?
5 Go to http://hdr.undp.org/hdr2006/statistics/data/ and choose “Data by Country” (you
may need to change 2006 to 2007, etc. in the URL). Choose an LDC that interests you,
or which you are assigned, from the drop-down menu and click on “Data.”
a Then go to category 16 and make a table showing primary exports (as percentage
of merchandise exports) for the two years in the table; manufacturing exports (as
percentage of merchandise exports) for the two years in the table; and high tech-
nology exports (as percentage of manufactured exports) for the two years in the
table.
Strategy switching and industrial transformation 335
b List the terms of trade for the year in the table; what is the base year?
c What story does this data tell you about the particular stage of industrialization
your country might be in using Table 10.1 as a guide to the stages? Explain what it
is about the data you collected in parts a and b that makes you think your country is
in the stage of industrialization you have identified.
6
a explain why a country that is currently a primary commodity exporter and that has
a relatively large land area and abundant natural resources might be more likely
to remain a primary product exporter compared to another country, which is also
now a primary product exporter, but which lacks abundant land and other natural
resources.
b Do abundant resources necessarily act as a brake on the evolution of the economic
structure (this is the resource curse issue)?
c Under what conditions might natural resources and abundant land be a blessing for
future growth possibilities? Might there be a difference in terms of the “resource
curse” effect between countries which have abundant but equitably owned natural
resources and those with abundant but unequally owned resources where control is
concentrated in a small elite?
7 explain the importance of the easy export substitution stage of industrial transformation
as a means to absorb labor from less productive sectors, particularly agriculture. Why
is it that this stage is able to absorb more labor than the difficult ISI stage? (Hint: think
about how goods are produced.) What other benefits are there to easy export substitution
compared to premature difficult ISI as a stage of industrialization to follow after easy
ISI?
8 How were the East Asian economies able to avoid unproductive rent-seeking by indus-
trialists interested in earning above-normal profits who might have wanted to extend
infant industry protection via the payment of bribes to government officials, while the
Latin American economies seemed unable to avoid such costs? What role do “contests”
play in reducing unproductive rents? Explain.
9 A competent, merit-based civil service system seems indispensable for making good
policy. What steps can governments take to implement such a civil service system if one
is not in place? What obstacles might be expected to be encountered in overhauling the
existing civil service system in countries where corruption seems endemic?
10 One of the buzz-word issues amongst policy experts in recent years has been “transpar-
ency.” This has to do with the openness and fairness with which government, in partic-
ular, carries out its activities. Are the same rules/laws/policies applied to everyone? Are
the rules/laws/policies clear and worth more than the paper on which they are written?
How much corruption is there? In other words, does government operate in a “trans-
parent” way so that the “rules of the game” are fairly applied? Go to http://www.trans-
parency.org and open the Corruption Perceptions Index (CPI) file. Record the CPI value
for China, India, Korea, the UK, Nigeria, Mexico, Saudi Arabia, and one other country
that interests you. What does the CPI value tell you? What are the critical cut-off values
of the CPI?
11 Some observers believe that the East Asian countries have succeeded because they have
followed a policy sometimes called “shared growth.” Explain what shared growth is,
how countries might achieve it, and why shared growth might be expected to contribute
to a more rapid pace of economic development.
336 The Process of Economic Development
12
a What role can foreign direct investment (FDI) and multinational corporations
(MNCs) play in the industrialization process as economies pass through the different
stages summarized in Figure 10.1? Are they a positive force or a negative force?
b How was the experience with FDI and MNCs different in the East Asian develop-
ment experience and in Latin America and India? Were FDI and MNCs helpful or
harmful? Discuss.
13 Might some cultures or religions be more accepting of fundamental structural change
than others? What evidence is there to support your viewpoint?



Notes
1 For any particular commodity, the impact of aggregate income growth on demand for that good will
depend on the income elasticity of that individual good, as well as any changes in the distribution
of income affecting consumption patterns.
2 Consumer goods imports, even of non-durables, are unlikely to ever be fully replaced by domestic
production. There will always be some goods, say, for example, Scotch whisky, that are not
produced domestically. Further, more expensive consumer non-durables, including brand names
not licensed for production in the local economy, will continue to be imported for the consumption
of those with higher incomes willing and able to pay both higher prices and any tariffs imposed on
such items. Durable consumer goods “ like home appliances, motor cars, computers “ will also be
part of total imports.
The import coefficient is equal to M/GDP, where M is the value of total imports. It is the share of
3
total income spent on imports.
4 You will remember from the previous chapter and the discussion in Chapter 6 around the Prebisch-
Singer hypothesis that balance of payments problems as a result of the difficulties in importing and
exporting during war and economic crisis had pushed the larger Latin American economies on the
road to easy ISI by the 1930s. In fact, it has been balance of payment crises that most often force
countries to rethink and alter their strategies of economic development. This is another example of
how imbalances and disequilibriums can be functional in identifying problem areas in an economy
that need attention. At times, for example, with an imbalance between the quantity demanded and
the quantity supplied of laundry soap, the market can most easily, efficiently, and rapidly resolve the
disequilibrium. In other instances, as when the complex of economic policies guiding an economy
are creating imbalances, the state will have to take some sort of action to change the direction of
path dependence. This functional change undertaken by means of government policy we refer to as
a strategy switch.
5 There is one other option: the use of an economy™s foreign exchange savings or official foreign
exchange reserves. The balance of payments is examined in more detail in Chapter 15. We are
simplifying greatly here by assuming there are no other flows of foreign exchange in the current
account besides exports and imports.
6 Chapter 16 examines the issue of external debt in detail.
7 Alternatively, we could say that each strategy creates new forms of path dependence, with one
a progressive and transformative path and the other much less so. We say this realizing that the
optimal path depends upon the existence of a growing world economy and relatively open trade
among countries. The first condition is met over the longer term, if not always in the short-run.
Relatively open and free trade among nations has been institutionalized only since the end of the
Second World War, especially via the various “rounds” of talks of the General Agreement on Tariffs
and Trade (GATT), which have reduced border restrictions on trade by slashing tariffs and, to a
lesser degree, non-tariff barriers. If, in future, the open trade system closes, a new optimum strategy
of development may need to be discovered and implemented.
The GATT was replaced in 1995 by the World Trade Organization (WTO), a more formal and
ostensibly more powerful institutional structure for maintaining an open international trade system.
The WTO (and the GATT before it) is the trade “leg” of the tripartite international institutional
Strategy switching and industrial transformation 337
structure for overseeing international economic relations among nations forged at Bretton Woods in
1944. The other two “legs” are the International Monetary Fund (IMF), concerned with exchange
rates and balance of payments issues, and the International Bank for Reconstruction and Develop-
ment (the World Bank), responsible for issues related to economic development. There is more
about this division of labor among international agencies in Chapter 17.
8 Such selective interventions by government are considered “market friendly” by the World Bank
(1991, 1993) in that they assist the market in doing what it would do if there were not substantial
market imperfections. The World Bank has cautiously recommended such stimuli but recognizes
that to be effective the preconditions for their success must be in place, including an effective and
relatively incorruptible government bureaucracy and constant monitoring of the results of such
selective intervention in meeting the goals of structural transformation and development.
In the opinion of some area specialists, like Wade (1990) and Amsden (1989), such interven-
tions by government in East Asia have been more than simply market friendly. Wade terms the East
Asian development strategy as one of “governing the market” through a variety of practices, some
of which are discussed in the latter parts of this and other chapters. Such practices, it is suggested,
have allowed the East Asian economies to improve upon what even a perfectly functioning compet-
itive economy would have achieved by bending the allocation of productive resources in more
dynamic directions than would have been achieved by the market alone. By governing the market,
it may be possible to outperform what a perfectly functioning market would achieve. These policies
are the “carrot” rewarding firms for becoming more efficient, and they work alongside the “stick”
of reduced infant industry tariffs.
9 Nations with large domestic markets have more room for maneuver. A large domestic market
means, assuming there are a number of firms in each ISI industry, that the forces of domestic
competition for market share can complement the external threat of eventual foreign competition as
infant industry protection is withdrawn. In such economies, like Brazil or China, domestic competi-
tion also can be a spur to greater productivity (Pazos 1985“6). Even in these economies, however, a
reduction of tariff and other protection would still seem to be warranted to ensure that international
efficiency levels are approached.
10 There are three developed countries with a high level of primary product exports rather than manu-
factured goods exports: Australia, New Zealand, and Norway. However, production in these econo-
mies is quite diversified, and there has been an evolution over time in the nature of the particular
primary products exported. In other words, these countries did not remain with static comparative
advantage in one or a few primary product exports but rather the primary product pattern adapted
to changing external circumstances and evolving domestic comparative advantage (Lewis 1989:
1596). It may be the case that some less-developed countries can follow such a path of non-tradi-
tional primary product exporting. One such example may be Chile, which has had rising income
per capita with a continued high level of primary, but diversified and changing, exports (see Focus
9.1 in the previous chapter).
11 Exports, X, are a component of the total output and income of an economy, since Y = C + I + G +
(X ’ M). Thus, increasing X, all else constant, will increase an economy™s total GDP and aggregate
income level. You will remember from Chapter 2, Focus 2.5, that China™s rapid economic expan-
sion since the 1980s has been driven by exports, something that worries some analysts, since the
domestic market is playing a smaller and smaller role.
12 We emphasize the role of exports and the foreign trade sector, because nations must have some
strategy to overcome the foreign exchange shortage that comes with easy ISI. The imbalance
between import spending and export earnings need to be resolved or foreign exchange shortages
will lead to increased external indebtedness and, eventually, a cessation of economic growth, as
discussed at the beginning of the chapter.
Nonetheless, for any nation with a sizeable population, production for the domestic market will
remain an important factor for long-term economic growth. In South Korea, for example, which is
often put forward as an exemplar of economic growth, roughly 70 percent of all economic activity
takes place within the national economy.
Although conventional wisdom often has argued that South Korea™s rapid economic growth has
been the consequence of its success in exporting, it is important to keep in mind that a relatively
large and growing domestic economy can generate economies of scale in industry and that a viable
export capability typically follows from and builds upon successful performance in the domestic
economy as a result of the easy ISI stage of industrialization.
338 The Process of Economic Development
Actually, causality runs both ways: exports can stimulate the growth of the local economy, and
the growth of the domestic economy can strengthen a nation™s capacity to export via higher levels
of investment, technology and research, training, education and so on, which improve productivity
and increase competitiveness on the international market. Domestic and international markets are
complementary to one another.
13 Income elasticity measures the relative change in consumption of a good resulting from a change
in income. Technically, the income elasticity, EY, of good Z, is

EY = (% ”QZ) · (% ”Y),

where ”QZ is the change in the consumption of good Z and ”Y is the change in income, Y. If EY >
0, Z is a “normal good,” meaning that as income increases, consumption of good Z also increases.
If EY < 0, Z is an “inferior good,” meaning that as income increases, the consumption of good Z
decreases.
For normal goods, if 0 < EY < 1, as income increases the consumption of the good rises, but by
less in percentage terms than income rises. If EY > 1, the consumption of good Z increases faster, in
per cent terms, than income increases. It is this category of “superior or luxury normal goods” that,
over time, a country would like to expand within its overall export mix.
Technically, a country would like to have the sum of the weighted average of the income elastici-
ties of all its export goods exceed one. Then, as world income increases, spending on that country™s
exports in the aggregate also will rise.
14 Based on an econometric study, William Cline has issued a cautionary warning about the gener-
ality of this process. He argues that the East Asian export strategy cannot be universalized for
all less-developed nations. His results suggest that increasing manufactured exports in a manner
similar to that achieved in the East Asian nations would require the industrial nations to import
about 60 percent of their manufactured products from the developing nations. Cline argued that
the less-developed nations had, by the early 1980s, reached a threshold level with their manu-
factures and that further incursions into the world market for manufactures would call forth a
protectionist response from the more-developed economies (Cline 1988). This possibility has not
yet materialized, as the international market appears to date to be able to absorb an increasing flow
of traded goods.
From 1950“73, the volume of the world™s exports rose by 8.6 percent per year; in the period
1973“9, this growth rate slowed to 4.8 percent, leading to the pessimism expressed by Cline.
However, over the 1990“2004 period, world exports have increased at a robust 7.1 percent annual
rate (Maddison 1982: 60, Table 3.7; IMF 1995: 3; World Development Indicators 2006). Given that
the latter growth rate is calculated on a growing volume of trade, it does not appear that the market
for exports is in danger of drying up. And there is no reason it should, as long as world incomes
continue to rise over time.
15 Total exports are the sum of merchandise and service exports.
16 We say “partially explain,” since the HPAEs have different endowments from other regions. We
know, for example, from the studies of endogenous growth in Chapter 8, that the East Asian econo-
mies have a higher average level of human capital accumulation than other regions (this is consid-
ered again in Chapter 12). They also have had lower average inflation rates; have not had seriously
over-valued exchange rates (Chapter 15); have a lesser degree of income inequality (Chapter 8);
and policy-makers have generally been more adept at designing appropriate policies for growth
and development, in implementing and monitoring them, and in changing policies when required
to maintain the pace of both growth and development. So, there are other significant factors that
contribute to overall development success besides transitioning from one stage of industrialization
to another.
17 Recalling our discussion of external barriers to growth in Chapter 1, it is important to recognize
that timing can be a major determinant in the choice of a development strategy. In the early 1950s,
when the Latin American economies faced balance of payments crises and foreign exchange short-
ages due to the easy ISI strategy that required a change in economic strategy, the global economy
was relatively closed, with Europe and Japan still recovering from the Second World War. Conse-
quently, the absorption capacity for additional manufactured products from the less-developed
economies in the international economy was highly constrained.
By the early 1960s, however, as a result of the success of reducing tariff barriers between nations
Strategy switching and industrial transformation 339
and other efforts to achieve greater openness, the East Asian economies were able to ride the crest
of a new wave of trade expansion when they faced the need to alter their economic strategy to
handle their easy ISI balance-of-payments crises. At this turning point, however, the Latin Amer-
ican nations failed to take advantage of an historical opportunity in which they too might have
advanced their economic strategy by shifting to an export substitution phase of industrialization in
certain sectors.
18 From basic macroeconomics, the income multiplier determines the maximum change in total
output and income in an economy from a one unit change in total investment (or any autonomous
spending). In the simplest formulation, the income multiplier = 1/(1 ’ MPC) = 1/MPS, where MPC
is the marginal propensity to consume and MPS is the marginal propensity to save. Thus, if the
MPC = 0.95 (95 percent of an additional £1 of income is spent on consumption), then the maximum
income multiplier = 1/(1 ’ 0.95) = 1/(0.05) = 20. An increase of £5 million of investment would
have a maximum effect of increasing total output and income by £100 million. In more realistic, but
similar, calculations, the income multiplier™s maximum value will be reduced by any “leakages”
from the domestic spending stream, for example, for imports or for taxes.
The employment multiplier measures the change in employment resulting from a change in
income or total output. The size of the employment multiplier depends upon the capital“labor ratio
of the economy, the incremental capital output ratio (ICOR) and the pace of change in total output.
Thus,

”L = ”L/”K — ”K/”Y — ”Y

which says that the change in employment, ”L, is equal to the change in the inverse of the incre-
mental capital“labor ratio times the change in the incremental capital“output ratio times the change
in output.
Crowding-in refers to the stimulus to additional investment following from some initial invest-
ment. For example, investment in the production of motor cars may stimulate investments in battery
production or glass to supply the motor car industry. This description of how an industrial structure
evolves should sound familiar; it is the linkage, or strategic disequilibrium, perspective associated
with Albert Hirschman™s unbalanced growth theory considered in Chapter 5.
19 This shift in control over production was especially evident where MNCs tended to enter the local
market through the purchase of existing production facilities, thus “denationalizing” the production
process and replacing domestic capitalists with foreign capitalists (see Chapter 14).
20 These often are the economy™s most skilled workers, with a higher than average level of training
and education. They work in more capital-intensive activities, and their level of productivity and
income tend to be higher. On the other hand, being capital-intensive, such industries cannot absorb
the continued growth of the labor force arriving in the cities at a pace greater than the absorption
capacity of these industries. If the easy ISI firms are no longer expanding as a result of demand
limited to the domestic market, then the only place for rural migrants to go is into informal sector
activities.
21 And even in the larger economies, such as Brazil and India, with large internal markets, the forces
of internal competition amongst enterprises in the same industry was not always sufficient to assure
a high level of technological competency.
22 South Korea repressed labor by banning labor unions and strike activity that helped to keep wages
lower and contributed to the extended period of labor-intensive production in the easy ISI and
easy export substitution stages of industrialization. And there is abundant evidence of high-level
corruption of government officials that no one can condone. Still, neither direct labor repression (as
opposed to wage restraint) nor corruption seem central to the success of South Korea™s economy
over the past five decades and even less so over the past decade or so.
23 For a discussion of Mexico™s troubled export promotion program and its reliance on MNCs, see
Cypher (1994).
24 It would take an entire book, or various books, to detail all the different microeconomic policies a
country might implement in pursuit of its development goals. A careful reading of the World Bank™s
study (1993) of the HPAEs can provide a wealth of specifics on policies that have worked and on
others which have been less successful. Policy-makers truly interested in taking positive strides
toward better decisions could do worse than to carefully study that volume.
340 The Process of Economic Development
references
Amsden, Alice. 1989. Asia™s Next Giant: South Korea and Late Industrialization. New York: Oxford
University Press.
””. 1994. “Why Isn™t the Whole World Experimenting with the East Asian Model to Develop?:
Review of The East Asian Miracle,” World Development 22 (April): 627“35.
Banamex. 1994. “Income Distribution,” Review of the Economic Situation in Mexico (April): 170“90.
Cline, William R. 1988. “Can the East Asian Model of Development be Generalized?,” pp. 282“97 in
Charles Wilber and Keith Jameson (eds.), The Political Economy of Development and Underdevel-
opment, 4th edn. New York: Random House.
Cypher, James. 1994. “Mexico™s Export Promotion Policies,” pp. 191“216 in Paul Ganster (ed.),
Changes in US-Mexican Economic Relations. Mexico City: UAM-Profmex-Anuies.
Edwards, Sebastian. 1992. “Trade Orientation, Distortions and Growth in Developing Countries,”
Journal of Development Economics 39: 31“57.
Gerschenkron, Alexander. 1962. Economic Backwardness in Historical Perspective. Cambridge, MA:
Harvard University Press.
IMF (International Monetary Fund). 1995. World Economic Outlook (May). Washington, D.C.: IMF.
Lewis, Jr., Stephen R. 1989. “Primary Exporting Countries,” Chapter 29 in Hollis B. Chenery and
T.N. Srinivasan (eds.), Handbook of Development Economics, vol. ii. Amsterdam: North Holland
Publishers.
Luedde-Neurath, Richard. 1988. “State Intervention and Export-oriented Development in South Korea,”
Chapter 3 in Gordon White (ed.), Developmental States in East Asia. New York: St. Martin™s Press.
Maddison, Angus. 1982. Phases of Capitalist Development. Oxford: Oxford University Press.
Pazos, Felipe. 1985“6. “Have Import Substitution Policies Either Precipitated or Aggravated the Debt
Crisis?,” Journal of Interamerican Studies and World Affairs 27 (Winter): 57“73.
Ranis, Gustav. 1981. “Challenges and Opportunities Posed by Asia™s Superexporters: Implications for
Manufactured Exports from Latin America,” The Quarterly Review of Economics and Business 21
(Summer): 204“26.
Sachs, Jeffrey D. 2005. The End of Poverty. London: Penguin Books.
Wade, Robert. 1990. Governing the Market: Economic Theory and the Role of Government in East
Asian Industrialization. Princeton: Princeton University Press.
Weiss, John and Hossein Jalilian. 2004. “Industrialization in an Age of Globalization: Some Compari-
sons Between East and South Asia and Latin America,” Oxford Development Studies 32 (June):
283“307.
World Bank. 1991. World Development Report 1991. Oxford: Oxford University Press.
””. 1993. The East Asian Miracle. Oxford: Oxford University Press.
””. 1994. World Development Report 1994. Oxford: Oxford University Press.
””. 2002. World Development Indicators 2002. Online.
””. 2006. World Development Indicators 2006. Online.
11 agriculture and development




after reading and studying this chapter, you should better understand:
• the significance of the triple biases confronting agriculture: urban bias, gender
bias, and landlord bias;
• why agricultural development is crucially dependent on governmental infrastruc-
ture investments;
• the extent and nature of the difficulties faced by mono-exporters of primary
products;
• the special conditions and behavioral responses to economic variables of peasant
cultivators and the concept of “de-agrarianization”;
• the nature of environmental problems in the agricultural sector, including issues
of erosion and deforestation, the “circle of poison” effect, and the dispute over
property rights and resource depletion;
• the structural barriers created by historically defined land tenure systems;
• the Green Revolution™s achievements and limitations and the prospects for a
Transgenic/Biotech Revolution;
• the compelling logic of a pro-poor, “Ag first” development strategy;
• the nature of large-scale agricultural enterprises;
• the developmental limitations of plantation economies and the promise and limits
of transnational agribusiness;
• the elements of successful land reform and its role in undergirding development
strategies.



Introduction
Most people in the developing regions are either cultivators, farm laborers, or relatively
small-scale producers of services or manufactured goods in the countryside. In 1970, 75
percent of the population of low- and middle-income countries lived in rural areas; by
2004, this share had fallen to 58 per cent. As we saw in Chapter 9, there is a strong inverse
relationship between a nation™s level of per capita income and the size of the population
living and at work in agriculture. In 2004/5, 70 percent of the population in “low-income”
nations with average per capita income of US$ 585 per year were located in the rural
sector “ 2.4 billion people “ whereas in the “middle-income countries” with average per
capita income of $2,600 per year, the rural population accounted for only 47 percent of the
342 The Process of Economic Development
total population (World Bank 1994: 222“3, Table 31; UNDP 2001: 157; UNDP 2006: 300;
World Bank 2007). In absolute terms in 1993 there were over 2.2 billion people involved
in agriculture as producers, while another 800 million lived in rural areas; by 2004 the
total rural population was essentially the same, 2.94 billion. Despite the large proportion of
the population living and working in rural areas, mostly in farming activities, agriculture
contributes a relatively small share of total gross domestic product.
This is why incomes are low for countries with large rural populations; agriculture tends
to be a sector which generates low value-added in production. For example, among the “low-
income countries,” only 21.5 percent of total GDP was produced by agriculture in 2005,
despite the fact that (as mentioned) 70 percent of the population lived in rural areas “ most
involved in agricultural production (UNDP 2006: 300; World Bank 2007). This relationship
clearly highlights one of the major issues in development: the pervasiveness of low agri-
cultural productivity. Despite this obvious problem, agricultural development is rarely the
central focus of most development strategies. Why?
In studies of the development patterns of what are today the more developed nations, as
was discussed in Chapter 9, it has been demonstrated that agriculture has shrunk dramatically
both in terms of the percentage of the labor force occupied in this sector and of the contri-
bution of the sector to total output. In this context agriculture has been viewed primarily
as a provider of labor to industry, to the government sector, and to the service sector of the
economy during the structural transformation process. Such a perspective was dramatically
reinforced by the Lewis model, where agricultural labor was treated as redundant, having a
very low, or even zero, marginal product. The general tendency in development economics
to overlook the significance of agriculture has been of major concern to many agricultural
specialists. John Mellor has noted that “it is surprising that the principal broad conceptualiza-
tions in development economics have not articulated a central place for agriculture” (Mellor
1998a: 136).
Today agriculture in the developing nations is caught in a three-way struggle. There is over-
whelming pressure to transform the sector via market-driven forces toward the production
of higher value-added “non-traditional” crops destined for export and the urban areas. At the
same time pressures are building to address concerns for social justice, including advancing
strategies to confront food insecurity (chronic malnutrition) and alter inequitable land tenure
systems via land reform “ both are matters that cannot be resolved through market-driven
strategies. And, third, there is pressure to introduce more environmentally sustainable forms
of farm management (including organic production) as issues of soil depletion, pesticide
use, climate change, deforestation and desertification, soil compaction, and increasing water
scarcity are treated with greater consideration.
During the 1990s the rate of growth of agricultural production dropped dramatically in
relation to the 1980s, yet the consequences of this decline were partially mitigated by strong
reductions in population growth rates. For the 2.4 billion people living in “low-income
countries” (per capita GNP averaging only $410 in 1999) annual agricultural growth fell
from 3 percent per year in the 1980s to 2.5 percent In the 1990s “ a drop in the growth rate
of 17 percent. The population growth rate fell by slightly less (13 percent), leaving the food
situation, on the whole, somewhat more critical (World Bank 2000/1: 275, 279, 295). This
discouraging trend should be considered in context “ some 840 million people suffered
from chronic malnutrition in 1996, and most lived in rural areas, with the figure dropping
by only 20 million in 2006 (Staatz and Eichner 1998: 8; FAO 2006). More disturbing was
the trend of the 1990s for “middle-income countries” (nations with an average per capita
income of $2,000 in 1999). In these nations “ then comprising 2.7 billion people “ while
Agriculture and development 343
population growth rates fell by an impressive 29 percent in the 1990s compared to the
1980s, the growth of agricultural output slowed more dramatically “ from 3.5 percent per
year in the 1980s to 2.0 percent in the 1990s (a staggering 43 percent drop in the growth
rate). Nonetheless, these nations retained a strong edge over their population growth rates,
as food output continued to grow at a rate that was forty percent faster than population
growth (Table 11.1). Recent years have brought some changes to these trends. Population
growth rates continue to drop, but much more strongly in middle-income nations, as Table
11.1 shows. But in the crucial area of output growth, for the low-income countries produc-
tion has come close to stagnating (1.3 percent growth from 2000“5) falling substantially
behind population growth rates. Much of this crisis situation relates to Sub-Saharan Africa,
where many farmers cannot now afford fertilizers which they once almost universally
applied, along with problems of soil degradation. In an otherwise generally positive envi-
ronment for developing nations in recent years, this advancing crisis in food production is
unquestionably a critical issue, particularly for Africa.1 Middle-income nations, however,
have substantially improved their level of food production, with rates of growth outstrip-
ping population growth rates by a ratio of 3:1.
As the world™s population continues to shift out of agriculture in the coming years the need
to increase food output at a rate faster than the rate of population growth will continue. It
Is currently anticipated that the food needs of developing nations will increase substantially
from 2005“15, primarily because it is thought that the two-thirds of all population growth in
this period will be that of the urban population in developing nations “ global population is
anticipated to rise by 750 million in these years to reach a level of 7.2 billion (OECD-FAO
2006: 25). With cultivatable areas now considered to be largely fixed, higher productivity
will be required to meet the food challenge to come, particularly since in relative terms
there will be in the near future fewer and fewer cultivators. For reasons explored below,
growing yields may be sufficient, yet the issue of food security “ having the means to buy or
receive an adequate diet “ will remain a critical problem for hundreds of millions of prima-
rily agrarian cultivators and laborers and their dependants. Malnutrition contributes directly
to one-half of the annual deaths of the world™s children, perhaps the most brutal expression
of the lack of food security, an issue strongly associated with the rural population (Stringer
2001: 80“1).


Table 11.1 Declining growth rate in agricultural output in low-income countries
Low-income nations Middle-income nations

$585a $2,600
GNP per capita (2005)
Population (2005) 2.4 billion 3.1 billion
Annual population growth
1980“90 2.3 percent 1.7 percent
1990“99 1.2 percent
2.0 percent
2000“5 1.9 percent 0.9 percent
Agricultural output growth
1980“90 3.0 percent 3.5 percent
1990“99 2.5 percent 2.0 percent
2000“5 1.3 percent 2.8 percent

Source: World Bank 2000/1: 275, 279, 295; 2007.
Note
a US dollars.
344 The Process of Economic Development
Urban bias and landlord bias
The relative neglect of agriculture may be partly explained by the theory of “urban bias.” This
perspective, pioneered by Michael Lipton (1977), argues that agriculture receives relatively
little attention in the implementation of most development strategies, as a result of a complex
of social forces and processes operating both in the developing and in the developed nations.
As a rule, the leading economic strategists and policy-makers in less-developed nations live
in the capital city or some other major urban area. They have relatively little contact with
and little knowledge of day-to-day activities in the rural sector. Not only are they physi-
cally divorced from the rural areas, they are also intellectually trained in a Western academic
paradigm which has little concern with or understanding of backward agricultural regions.
Development is equated with industrialization, and industrialization has been predominantly
an urban phenomenon. Hence, this urban bias leads to a neglect of the rural agricultural
sector. Urban bias can be and has been quantified: Maurice Schiff and Alberto Vald©s found
that for a sample of eighteen developing nations, had the governments of these nations not
imposed policies that were adverse to the interests of the countryside (but supportive of urban
interests) the domestic terms of trade (the price of agricultural products over time measured
against the price of urban produced goods and services) would have been 43 percent higher
in the 1960“85 period (Schiff and Vald©s 1998: 228). In spite of the fact that the research
of Schiff and Vald©s shows clearly that nations which have a low bias against agriculture
demonstrate (1) lower rates of migration from agriculture “ into the belts of urban misery;
(2) increased investment by cultivators; (3) greater technological adaptation; and (4) higher
economic growth, the bias against adequate support for agriculture remains.
As a complement to urban bias, economists and others studying the countryside have
developed the concept of “landlord bias.” In often remote areas of the countryside a small
elite of landlords may exercise a high degree of power, particularly when rural areas
interact with the central state and its agencies. Landlord bias can stall land reform initi-
atives (discussed below), they can exercise power over the local labor market to drive
down farm laborer wages, they can insure that schemes of irrigation and flood control
inordinately help their farmlands, and they can often derive the lion™s share of benefits
to improve the agrarian infrastructure. Whether the issue be one of tariff policies, credit
available to the agricultural sector, R&D, agricultural extension, or any other, frequently
the small quotient of attention and support received by the rural areas is perhaps the most
unequal form of any allocation of resources in a developing nation.


Culture and caste
The relative neglect of agriculture is often traceable to the quite strong sense of a cultural divide
prevalent in many poor nations. Small cultivators are often depicted pejoratively as “peasants,”
“tribal peoples,” indigenous people, or lower-level caste groups; they often are the “others”
who speak a different language or dialect, wear traditional clothing, and live in a milieu that is
to a very great degree seen as primitive and beneath those who occupy positions of political,
social, and economic power both in the advanced industrial nations and in the poor developing
nations themselves. Wide disparities in income between ethnic groups and those of the domi-
nant group often reflect the pervasiveness and depth of urban bias, as well as cultural and class
differences (see Focus 11.1). For example, male Bolivian Indians have an average earning level
that is only 40 percent of that of non-indigenous employees. This disparity reflects differences
in schooling and training that are often a reflection of the lack of schools in the countryside, and
Agriculture and development 345

FOCUS 11.1 GENDER bIAS: WOMEN IN AGRICULTURE
In poor nations, women typically play a major role in agricultural activities. In Africa, women
work both as farm laborers and as farmers on family plots. Women account for 60 percent
of all cultivators and produce an estimated 75 percent of the food. In India, 48 percent of
self-employed cultivators are women. In all of Asia women are the producers of more than
two-thirds of the food, while in Latin America the figure stands at 45 percent.
Total work time for women in the rural areas is about 20 percent more than for men.
Relative to adult males, women shoulder the heaviest burden: 53 percent of all labor time.
Women in agricultural regions divide their time between unpaid household duties and
paid activities, which can include direct farming and marketing, handicraft production,
garment making, and brewing. In Nepal, women spend an average of nearly three hours
per day in direct farm work, and nearly four hours per day gathering fuel wood and scav-
enging. Another three hours per day is committed to food preparation and related house-
hold activities. Rural women throughout the developing world can be seen spending long
hours on the mundane task of acquiring water. In Senegal, for example, women devote
an average of two and a half hours per day on water collection alone; in Mozambique, it
is over two hours per day.
Women often cannot acquire legal title to land ownership, or, as in the case of Africa,
maintain their customary rights to communal lands. Women cultivators have generally been
ignored in land reform programmes. Lacking title to land, women face high barriers when
they need credit. In Africa, women receive only 10 percent of the bank loans to small farmers,
a mere 1 percent of all agricultural credits, despite the disproportionate numbers of women
involved in agricultural activities. Even the multilateral lending banks (discussed in Chapter
17) ignore women farmers™ credit needs, extending 95 percent of their loans to men.
Women farmers also receive unequal support from agricultural extension services. In
India, most women farmers are excluded from the benefits of extension services completely.
In Africa, women receive 33 percent fewer visits from farm advisers than do men cultiva-
tors. Women are the poorest portion of the rural population, and they and their dependants
constitute 70 percent of all those living in absolute poverty. Indeed, if women farmers had
the same level of education and inputs as men, their farm yields would increase by as much
as 20 percent according to studies conducted in Kenya and Burkina-Faso. If anything, the
issue of gender bias is more significant than ever as a result of the explosion in migration of
millions of (largely) male small cultivators into the industrial countries in recent years. (See
Focus 12.1 on women and health, which complements this material very well.)
Sources: Stringer 2001: 94“5; Tomich et al. 1995: 29;
UNDP 1995: 38, 93; World Bank 2001: 119

outright discrimination. In India, one in every seven of the population is lower-caste, for whom
agricultural employment is one of the few occupational opportunities available.
India˜s caste system, while fraying at the edges, still condemns millions of talented cultiva-
tors and potential innovators to menial work with little possibility of social mobility. Bhimrao
Ambedkar, the first untouchable to be educated abroad and the principal author of the 1950
constitution described the caste hierarchy as “an ascending scale of hatred and a descending
scale of contempt.” In the rural villages where two-thirds of the population lives, caste inter-
marriage is rare (Luce 2007: 14). In a poll of middle-class Indians nearly three-quarters said
they would prohibit their children from marrying out of their caste (ibid.: 13“14, 298).
In Malaysia, until late in the twentieth century, ethnic Malays were confined to traditional
small-scale agriculture, with the higher income-generating activities in industry and finance
controlled by the ethnic Chinese. Only recently have governmental policies specifically
aimed to improve the educational and training opportunities of the ethnic Malays.
346 The Process of Economic Development
In Thailand, the earnings of the northern hill people in the 1990s were more than 75 percent
below the national average, and schools were attended by fewer than 30 percent of the popu-
lation, so that some 85 percent of the population could not read or write (World Bank 1995:
44“6). In South Africa in 1994 the average amount of land held per person on black-owned
farms was only 1.3 hectares, while whites held 1,570 hectares (Deininger 1999: 664)!

Inadequate infrastructural investment
Whatever the cause or causes, agriculture is either neglected or relegated to a subordinate
position in development strategies, too often an afterthought to industrialization. This relative
lack of interest takes many forms, but of paramount importance to rural cultivators, both large
and small, is the inadequate provision of infrastructure and social overhead capital: schools
and health clinics, roads, dams and irrigation canals, crop storage facilities, farm extension
services, agricultural research, and farm credit programmes are inadequate, if they exist at
all. Roads and water resources are fundamental to agriculture. Small cultivators in particular
confront tremendous difficulties in bringing their output to urban areas for marketing because
of substandard road systems. At their best, rural roads often are unpaved, and trucks are forced
to crawl along, lest a breakdown occur. This means long hours on the road, in quite small
trucks, which raises the costs of transportation inordinately and makes it more difficult for
small producers to compete with larger ones. This also means more spoilage, with a smaller
share of output reaching its final destination in usable form. Bad weather results in the wash-out
of poorly constructed bridges, or, as is more likely, streams that cannot be forded as they rise
to cover and muddy roads. The lack of irrigation means that levels of production are less
predictable as a result of the need to depend on the irregularities of rain, and growing seasons
are shorter than they might be if there were more control over nature that irrigation provides. In
many tropical regions, irrigation would permit near year-round cultivation.
To a great degree, many of the infrastructural projects mentioned above are of an all-or-
none nature. This means that for the agricultural sector, and most particularly small-scale
agriculture, it is the state which must finance these large-scale investment programmes if
productivity in agriculture is to be raised. Given urban bias, given the general lack of invest-
ment funds available to most poor nations, and given that the pay-off from investments in
agriculture and in rural areas often require decades of concentrated efforts to show success,
it is perhaps not too surprising that examples of successful agricultural programmes in less-
developed nations are few and far between. Because such programmes would have to take
place over a relatively long period of time, and because governments in most poor nations
are extremely insecure and often lack adequate financial resources, the state can rarely afford
to take the long-term view. Thus public funds tend to be allocated to areas where more
short-term, and more limited, objectives, including political support, can be achieved, and
this has typically meant stimulating industry and urban development.
In addition to physical infrastructural outlays which could directly raise agricultural
productivity, other basic public expenditures are usually desperately needed in the countryside.
Here we refer in particular to the urgent need for educational programs and health care,
both of which contribute to enriching the human capabilities of the rural population and
contribute to growth. The educational demands of rural areas may well pose special difficul-
ties for decision-makers compared to those in urban schools. In many nations, much of the
rural population may have only the most rudimentary knowledge of the dominant or official
language. Adult literacy and second-language programs may be of the utmost necessity, yet
the lack of trained personnel to provide such services may make it difficult to move forward
Agriculture and development 347
in these areas. Still, these are investments which are desperately required and for which the
returns, both individual and social, are likely to be quite high (see Chapter 12).
Health care, primarily through rural public health clinics, could immediately help to reduce
high rural infant mortality rates and contribute to raising productivity by damping-down the
widespread exposure to intestinal parasites which sap the energy of small cultivators. Public
health programmes to create and then maintain sanitary water supplies and to treat waste
water are essential for these goals, but they too demand sizeable public outlays, and the
competition with urban areas for funds has most often been lost.

Agrarian dualism
Nearly every poor nation was once a colony of one developed nation or another at one time,
as discussed in Chapter 3. Even some independent nations fell under the indirect sway of
the colonizing powers. Although the first wave of colonization and control in the sixteenth
century was concerned with extracting precious metals and controlling trade routes and trading
stations, the focus of colonization quickly turned to agricultural commodities which could
be marketed in the international markets as the flow of precious metals ultimately slowed
in the mid-1600s. The production of “King Sugar” or “white gold,” became of paramount
importance as early as the eighteenth century. A host of other primary commodities played
key roles in the determination of the agrarian structure of the less-developed nations between
1500 and 1960, when colonial rule finally ended in most nations. Tobacco, indigo, rice, tea,
jute, henequen, bananas, coffee, chocolate, sugar, cotton, and spices were some of the major
commodities produced through the centuries of colonial rule to meet the demands, usually of
the elites, of the more-developed nations. even items which were not driven by the logic of
tropical production, such as beef and wheat, were often leading commodities exported from
the colonial and post-colonial nations to the more-advanced industrial nations.
The vast trade in tropical commodities, including some such as rubber used as inputs
into industrial production, carried with it a massive structural change in rural landholdings
in colonial and post-colonial society. With rare exceptions, the colonial powers sought to
turn over vast tracts of land to a new planter aristocracy. Often this new elite survived only
because of the sophisticated slave trade which brought captive laborers to the new plantation
regions. Thus, whatever the nature of landholding prior to colonialism, the indigenous popu-
lation was generally forcefully relegated to the most marginally productive and, often, the
most distant lands. The truly optimal tracts of fertile land were claimed by well-positioned
members of the colonial powers or by colonial-born creoles, and by a select few members
of the colonized society who had become instrumental in maintaining colonial rule. Thus a
fundamental characteristic of colonial agriculture, one which persists to the present, emerged,
creating a dichotomous production structure wherein a relatively few planters controlled vast
expanses of the most productive land, while a large mass of cultivators clung tenaciously to
small plots of marginally productive land at considerable distances from urban areas with the
worst communication network of roads linking them.
This pattern, while established in the somewhat distant past, continued into the twentieth
century. In Mexico, for example, between 1877 and 1910, under the infamous rule of Porfirio
Díaz, 72 million hectares of land were appropriated from indigenous peoples and turned over
to large landowners, domestic and foreign (Smith 1972: 3). In Kenya, during the course of
1903, British colonial administrators sold immense areas of the land to British growers at
less than one US cent per hectare. Some of the estates acquired that year included Lord Dela-
mere™s acquisition of 311,615 acres; Lord Francis Scott™s purchase of 89,032 acres; and sales
348 The Process of Economic Development
to two companies known as East Africa Estates and East Africa Syndicates of 311,615 and
89,032 acres respectively (Dixon 1990: 43). The British even divided Kenya into two areas:
the “scheduled areas,” where the colonial settlers were allowed to hold land, and the “native
reserves,” to which the indigenous population was relegated. Prior to the end of the colonial
era, colonial settlers in scheduled areas had acquired 36,260 square kilometers of land, where
3,500 colonial farms and estates were established on the best soil. The 4 million “native”
farms were crowded on to 134,670 square kilometers. Foreign colonial settlers thus owned
farms averaging 10.4 square kilometers of land each, that is, more than 2,500 acres (or 1,000
hectares), while indigenous smallholders held an average of only 0.034 square kilometers, or
less than 9 acres (3…“ hectares). There was little change in land concentration after independ-
ence. In the 1980s, 2.4 percent of the cultivators controlled 32 percent of the cultivated land,
and most of the cash crop came from this land of the highest quality (Dixon 1990: 46).
Throughout most less-developed countries, this concentrated pattern of land ownership char-
acteristic of Kenya and Mexico is repeated, and neither Kenya™s nor Mexico™s inequality is the
most extreme. While Kenya had a Gini coefficient for landholding inequality of 0.77 in 1981,
the figure for Colombia in 1990 was 0.84, for Saudi Arabia 0.83 in 1983, while Brazil™s was 0.86
(UNDP 1993; Deininger 1999: 655). Translating the Gini coefficient in the case of Colombia, the
top 1.7 percent of landowners controlled 42 percent of the farmland, while the minifundistas with
less than 5 hectares (57 percent of all farmers) held a minuscule 4.2 percent of the farmland.
In virtually all less-developed countries, with the exception of those relatively few where
meaningful land reform has been consolidated, this dualism and inequality is evident. Large
numbers of peasant cultivators control extremely small parcels of land, while a few large
landholders, who constitute the landed oligarchy, own and vie with agribusiness transna-
tionals to control vast quantities of land. One study, published in the 1970s, analyzed six
Latin American nations and found that an average of 52 percent of all the farmland was
controlled by the largest landholders, though they constituted less than 1 percent of all the
agrarian households in these nations. Small farms, employing no more than four family
members, held approximately 25 percent of the land, while accounting for the vast bulk of
the agrarian households. Counting landless peasants, they and small cultivators accounted
for 94 percent of all rural households (Barraclough 1973: 326“7, 331“2).
With smallholders crowded on to the poorest and less productive land, a serious problem of
overgrazing and overuse occurs, both on the land itself and in forests and wooded areas where
firewood and fence materials are collected (see Focus 11.2). The inadequacy of fallowing, that
is, of leaving land idle for a period of time so that it can regain its nutrients, is a result of small
farm size, where families are forced into practices which abuse the natural resource base. This,
combined with relatively high population growth rates in rural areas, sets up a vicious circle of
excessive land use leading to greater degradation of soils via erosion, soil exhaustion, leaching of
minerals, and loss of water sources, which results in declining productivity of the land and falling
output levels, which, in turn, leads to even greater use of increasingly marginal land at a too-inten-
sive rate. This is an example of the “pollution of poverty” introduced before (see Focus 2.3).
This destructive and non-sustainable cycle already could be noted in Mexico and in the
Andean highlands nearly 500 years ago, as villagers were pushed up on to ever higher moun-
tain slopes, operating on more difficult lands, receiving lower yields, reducing the nutritional
content and reliability of their diet. Among the less-developed nations, only in those where
successful land reform has been implemented has there been a noticeable shift from the
dichotomous nature of agriculture and the overuse or misuse of land resources as a result
of the need for survival brought on by small farm size. High-yield varieties of wheat, rice,
corn, and some other staples, discussed later in this chapter, have brought some relief from
Agriculture and development 349

FOCUS 11.2 AGRICULTURE AND THE ENVIRONMENT:
DEFORESTATION AND SOIL EROSION
Improvements in infrastructure in agriculture must be accompanied by a strategy to sustain
the resource base. Without adequate training, adequate investment, and adequate regula-
tion in the maintenance of forests, however, deforestation has become a major problem in
much of the developing world. In Latin America in the course of the 1980s alone, over 8
million hectares were deforested annually, as trees were felled for new farms, for grazing
land, for firewood, or for the wood itself. In Asia, roughly 3.5 million hectares suffered
deforestation, while in Sub-Saharan Africa, approximately 2 million hectares of forest were
lost each year. For the decade as a whole, then, some 165 million hectares of forest were
destroyed in the poor regions of the world. From 1900 to 1990, one-fifth of all tropical
forests were destroyed, and the rate of deforestation has accelerated in recent years.
Soil erosion and soil degradation are also, unfortunately, widespread. The World Bank
estimates that in many poor nations soil depletion as a result of run-off and improper use
of land resources reduces annual growth rates by between 0.5 and 1.5 percent. Clearly,
the cumulative, long-term effect can be very large. In addition to the measured impact of
erosion on agricultural output, soil erosion also undermines and damages the fragile infra-
structure of roads, bridges, canals, and dams, while reducing water quality and adversely
affecting freshwater fish and animal habitats.
Some studies indicate that relatively simple and inexpensive measures can effectively
combat soil erosion. Mulching, for example, could reduce erosion by 70 percent or more.
Contour cultivation could reduce erosion by 50 to 80 percent, while grass contour hedges
can also be extremely effective. Unfortunately, such measures are too rarely employed,
both because they are an additional expense and because the dissemination of knowl-
edge regarding ecologically sensitive and sustainable agriculture is poor. It is not that
farmers wish to destroy the land and the natural resource base. They simply lack the tools,
including the knowledge, to be able to do different. Further, given their low incomes, the
choice is often between starvation and overuse or misuse of the land.
Erosion and deforestation can have dramatic effects: in Mexico, for example, soil
erosion reduces the amount of cultivable land by 317,000 acres a year. In addition, defor-
estation robs the country of 1.5 million acres per year. One result of these processes is
desertification, which expands the deserts of Mexico at an annual rate of 556,000 acres.
Deforestation is caused both by ecologically insensitive forestry practices and by the drive
to introduce cattle ranching. As alarming as these figures may seem, the extent of defor-
estation which exists in Mexico is exceeded in other nations. In fact, annual deforestation
throughout the developing nations averaged 113,000 sq. kilometres in 1990“5. (Impacting
an area equal to the size of the nation of Honduras.)

Between 1950 and 2000 roughly 2 billion of the total of 8.7 billion hectares of farm-
land, permanent pastures, and forest/woodlands have been degraded. Through
overgrazing, deforestation, and inappropriate agricultural practices 5 to 10 million
hectares per year become unusable and impossible to restore.
Sources: Barry 1992: 264“8; Doolette and Smyle 1990,
Pinstrup-Anderson 2003: 6, World Bank 2001: 291


this vicious circle for smallholders for a thirty-year period that ended in the late 1980s or
early 1990s. In the low-income economies, land yields have remained low, and since the late
1990s rate of growth of population has consistently exceeded overall agricultural growth,
pushing down the per capita level of food production, so that in 2005 food production per
person was only 97 percent of what it was in 2000 (Table 11.2, see column 2).2
350 The Process of Economic Development
Table 11.2 Changes in per capita food production, cereal output, and irrigated land
Food production index Cereal yield Irrigated land
(1989“1991 = 100) (kg per hectare) (percentage)
(1999“2001 = 100)

1997 2005 2005 2001“3

Income groups:
109.4 97.1 2,055 24.4
Low-income economies
134.3 110.4 3,382 18.5
Middle-income countries

Geographic regions:
East Asia and Pacific 142.6 112.7 4,495 n.d.*
Latin America and Caribbean 111.4 106.8 3,310 11.4
Middle East and North Africa 121.5 105.1 2,393 32.7
South Asia 108.0 96.7 2,479 38.9
Sub-Saharan Africa 104.6 93.4 1,078 3.6

Nations:
107.0 96.7 2,367 32.7
India
131.0 114.2 5,105 47.5
China

Sources: World Bank 2000/1: 278“9, Table 3, 288“9, Table 8; 2007: 40“2, Table 2.1, 130“2, Table 3.2, and “Data
and Statistics, Agriculture.”
Note
* No data.


For the middle-income countries where significant applications of Green Revolution
technologies were employed (particularly in East Asia), food production raced ahead of
falling population growth in the 1980s and into the 1990s, with steady gains continuing into
the twenty-first century. Sub-Saharan Africa fared worse in the 1990s, and then suffered
systematic reversals far deeper than any other region in the twenty-first century, thus far. Of
note is the discouraging recent performance of India, which carries implications for more
than1 billion people (see Focus 11.3). Also note what is partially revealed by Table 11.1 “
the spectacular twenty-six-year achievement (1979“2005) of China, with a population of
1.3 billion in 2005, managing to raise food output per capita by a total of 96 percent! Directly
behind China in cereal yields, East Asia has a very low degree of inequality in land owner-
ship and successfully applied Green Revolution technologies.


Primary product mono-exporters
One further structural aspect of agriculture in less-developed nations is important to note. In
most nations, primary product food and fiber exports account for a very high percentage of
total exports. This, again, reflects the legacy of colonial rule when, in many instances, the
single strongest motivator for acquiring colonial territories had been to gain access to the
production of tropical commodities so desired in the more temperate center economies. In
many economies, then, unprocessed agricultural exports constitute the pivot on which not
only export income depends, but on which the entire economy turns. A shortfall in production
and/or a decline in the world price for one or two commodities can force a less-developed
nation into an economic tailspin as the terms of trade deteriorate. When a nation is largely
dependent on the export of one or a very limited number of exports, the term mono-exporter
Agriculture and development 351

FOCUS 11.3 INDIA™S AGRICULTURAL SECTOR
In recent years, the blossoming of India™s information technology firms and its back-office/
call-center operations have captured much attention. India is sometimes portrayed as
an economic miracle in the making, and (simplistically and inaccurately) as a successful
example of the application of “free-market” policies over the past fifteen years or so.
But there are two Indias: with 1.1 billion people, only 1“1.6 million work in the info-tech
sector and related industries. The bulk of India™s economy is to be found in rural areas
where two-thirds of the population is located, primarily engaged in subsistence cultivation.
Some 750 million Indians are scattered about in 680,000 small villages. Not all of these
are cultivators, but their existence in the village is based upon the foundational activity in
the countryside “ farming on minuscule plots. Ninety percent of India™s farmers own but
a hectare or two, not large enough for much mechanization or to afford a tractor or drip
irrigation. In fact, average farm size is only a quarter of a hectare. One hundred million are
landless villagers. As such, in 2001 more than one-third of rural households depended
upon non-farm income for their existence. Many have migrated temporarily to the cities.
Because of the minuscule formal sector (only 35 million jobs) these workers have been
forced into the massive, precarious informal sector of vendors and casual day laborers.
In the countryside only two percent of farm output is subsequently refined or processed
to add value. Meanwhile more than one-third of all vegetables and fruit rot before getting
to market. In India™s villages only approximately one-half of the population has electrical
connections, while nearly one-half of the villages cannot be reached by paved roads. Obvi-
ously, India™s rural infrastructure is in an abysmal condition, as are rural health clinics, and
the primary and secondary schools. While the government claims that the burst of economic
growth since 1980 has benefited the poor “ overwhelmingly in the countryside “ dropping
the poverty rate by 29 percent from 1991 through 2001, critics dispute these claims. The
government, in fact, changed its methodology for counting the poor in 1991. Using other,
more accepted methods Indian specialists have claimed that poverty has either fallen only
slightly, or not at all.
Agriculture was largely ignored in the first Five-Year Plan which guided public spending
after Independence “ the focus was on industrialization. Agriculture received only one-
third of the budget in 1952. By 1957, when the second Five-Year Plan was launched, less
than 20 percent of outlays were directed toward the agricultural sector where 80 percent
of the populace then resided. But the Green Revolution (as discussed in this chapter)
doubled agricultural yields in the 1970s and 1980s. India surpassed production levels
needed for food self-sufficiency in 1991 thanks in part to Green Revolution technolo-
gies. Nevertheless, most farmers cannot afford the necessary electrical connections and
pumps to obtain essentially free ground water needed to cultivate the high-yield Green
Revolution crops. Larger farmers have overused water, sinking the water table and leaving
smaller farmers to rely increasingly on rainwater. With the uneven pattern of ownership,
technology distribution, and production in the countryside, average yields per hectare in
agriculture are less than one-half those now realized in China (see Table 11.3).
The new growth in information processing and computers has created a cascading
process of wealth accumulation for India™s privileged classes and castes while leaving the
impoverished rural population to its own state of atrophy and decay. These complacent
elite classes and castes lack a sense of urgency regarding India™s developmental needs,
an astonishing absence of concern most apparent in the vast neglected countryside. Thus,
while India™s development success has been widely acclaimed in recent years, evidence
suggests that from 1989/90 to 2001/2 the poorest 80 percent of the rural population “ the
majority of India™s citizenry “ did not share in the aggregate economic growth. As such, the
urban“rural income gap has widened significantly.
Sources: Ghosh 2004; Luce 2007
352 The Process of Economic Development
is generally applied.3 Table 11.3 provides some representative data for several mono-export
nations. Most oil exporting nations, particularly throughout the Middle east, are reliant on
oil and gas exports “ Venezuela is representative, with 80 percent of exports coming from
petroleum in 2002 (Table 11.3 focuses only on agricultural products). No developed economy
depends upon only one or a few exports. There is an obvious value to producing a diversi-
fied array of exports; this reduces the risk to total export income, and hence to the ability to
import, of any downturn in the price of any one exported good.

Dutch disease and boom-and-bust cycles
Because the prices of agricultural exports, particularly tropical exports, are prone to very wide
swings in price from year to year as a result of supply variations caused by weather, disease,
and other factors, a special feature of mono-export economies (economies that depend on one
or two or three commodity exports for the majority of their foreign exchange earnings) is their
tendency toward macroeconomic instability. This can result in boom“bust cycles, which bring
about speculation on the upswing of the business cycle that, if not moderated, can result in
over-borrowing and a large inflow of foreign exchange earnings as higher export prices result
in growing export earnings. The widespread, but fortuitous, availability of foreign exchange
earnings as a result of higher prices following a bad crop elsewhere in the world can lead to
distortions in the internal structure of an economy, as imported commodities temporarily are
rendered cheaper than many which are locally produced. This occurs when the exchange rate
of the local currency increases in value, as will happen if exchange rates are not fixed but
are determined at least in part by the market, and there is an increase in total export income
because of the higher export price (see Chapter 16 for a full discussion of exchange rates).
Ironically, then, the increase in the value of the exchange rate brought on by the increased
purchases of a higher-priced export makes that export, and any other exports from that
country, more expensive on the international market, leading to a reduction in purchases
and employment in those sectors. At the same time, the increased imports of foreign goods,
made possible by the same increase in the value of the currency, can cause a downturn in
production for import substitution industries whose prices are undercut by cheaper imports
as a result of the exchange rate over-valuation. In addition, the greater income created as
a consequence of increased export revenues can set off inflation in the domestic economy.
This further exacerbates the tendencies for exports to become more expensive and imports
cheaper. Particularly affected will be the prices of those goods, like transportation and local
food products, that are not traded on the world market, so that both the “tradable” and “non-
tradable” goods sectors of the local economy are affected. Thus, perhaps paradoxically, the
higher international price of the commodity export sets in motion a series of events that
tend ultimately to slow economic activity in the less-developed nation. This phenomenon

Table 11.3 Degree of export dependency, Low Income Food Deficit nations (1999“2001)
Nation % top agricultural commodity Nation % top agricultural commodity

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