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South Asia received only 10.1 percent of its equality share of income (2.3 percent of total
income/22.8 percent of total population).
The relatively better-off Latin America and the Caribbean region, by comparison,
received about 65 percent of what its hypothetical equality share of world income would
have provided in 2005 (5.5 percent of total income/8.5 percent of total population). From
1985 to 1995, Sub-Saharan Africa™s share of total world income fell slightly, even as its
share of the world™s population rose, which is why average income fell in the region over
that period. Since 1995, Sub-Saharan Africa™s share of world income has recovered slightly,
but the region™s share of total world population has grown. As a consequence, Sub-Saharan
Africa™s average income declined from 17.2 percent of its equality share in 1985 to slightly
more than 11 percent in 2005.
East Asia and the Pacific increased its share of total world income since 1985. At the same
time, the region™s share of total population declined. This meant rising average income levels.
The disparities between the less-developed nations vis-à-vis the developed nations shown
in Tables 1.2 and 1.3 are not of recent origin. Worse, differences within the less-developed
world itself have been growing, both between regions and within countries themselves.
Many of the poorest countries have suffered a relative decline, and in some instances, an
absolute deterioration in their position on many significant measures of productivity and in
their contribution to world output.
Between 1960 and 1990, for example, the share of total world output received by the
poorest 20 percent of the world™s population fell from 2.3 percent to 1.3 percent. Their share
of world trade decreased from 1.3 percent to 0.9 percent, and their contribution to global
domestic investment fell from 3.5 percent to 1.1 percent (UNDP 1993: 27, Table 2.1). The
contributions of the poorest to production, to trade, and their share of world income declined
relative to those of other groups in society, including better-off nations within the less-devel-
oped world.
It is a clich©, perhaps, to say that “the rich get rich and the poor get poorer.” But in the
1980s and 1990s, clich© or not, that is what took place in some regions of the world, particu-
larly in South Asia and Sub-Saharan Africa. Since 1995 or so, some improvement in incomes
can be noted from the tables. But not enough.
18 The Process of Economic Development
Nonetheless, there are gains that have been made in the less-developed world despite a
sometimes weak and uneven record of economic growth and production since the 1980s that
provide reason for continued hope that positive and reasonably equitable progress remains
possible if societies make the right choices. Advances in the human condition continue to
be made, often in the direst circumstances. Continued progress toward the amelioration of
poverty and further improvements in the standard of living of a greater part of the world™s
population must be one of the highest goals, and the Millennium Development Goals are a
constant reminder of what remains to be done.

Why development, and why now?
Nations like Great Britain, the United States, Germany, Japan, Australia, France, and the
Scandinavian countries that today can be considered developed did not attain that status over-
night.12 In fact, development in all its economic, political, and social dimensions took place
quite slowly and proceeded unevenly over a very long period of time, centuries in fact.
The great majority of the countries now considered to be less developed have had
significantly less time to become developed, at least as independent political entities. It is
important to recall how many of the nations of Africa, Asia, and the Caribbean achieved
political independence only since the end of the Second World War in 1945, when the
drive to de-colonize as a result of pressure from the newly created United Nations began in
earnest. Since then, well over 120 newly independent countries have been established from
the former colonial empires and later the collapse of the former Soviet bloc. It is in these
new nations that the problematic of becoming developed and of making progress toward
authentic human well-being and of achieving the MDGs is most pressing.
It is essential to keep this time dimension in mind, without finding in it an ultimate excuse
for slow progress in some economies. Most of the less-developed nations have had, at best,
only a few decades to work on the fundamental twin goals of post-colonial construction:
nation-building and progress on the path toward higher levels of economic and social
development. One can argue that it takes time to undo the ingrained patterns of production,
social class, and power inherited from the past. What we will call adverse path dependence
in Chapter 3 often weighs heavily on the present in many poor nations.
On the other hand, the means to realize development goals are closer to hand than at any
time in history.13 The range of available and potentially applicable knowledge would seem
to make the diffusion of technological progress, of advances in medicine, of techniques of
efficient business and government administration, and so on easier to attain for today™s less-
developed nations than it was for earlier developers who had to painstakingly create that
knowledge. If only this vast array of knowledge could be effectively transferred, harnessed,
and applied in the less-developed nations, the current state of poverty in most parts of the
world could be overcome.
It is thus necessary to try to balance the short time-frame that most countries have had in
which to try to become more developed with the fact that the “know-how” for achieving devel-
opment is available now as never before. Does that then mean that the less-developed nations
are on the brink of becoming developed? Not necessarily. Whether the knowledge about how
to increase economic growth and about how to become more developed can be applied in
ways that succeed in taking the less-developed nations across the threshold to developed-
world status depends upon how stubborn the barriers to development continue to be in each
of those nations. Possibility still needs to be transformed into actuality, and the means to
effect that transformation is central to the subject matter of development economics.
The development imperative 19
Economic growth and development require structural change
Economics is often defined as the study of “how societies can best allocate scarce resources
among alternative uses” so as to maximize something “ usually the level of each individual™s
or household™s satisfaction or utility “ the presumption being that maximizing individual
satisfaction also will maximize society™s total well-being simultaneously. The allocation of
society™s resources is assumed to take place within a given institutional and organizational
setting that is taken to be exogenous to the analysis done by the economist.
This operating framework of orthodox, or neoclassical, economics in which the allocation
of existing resources occurs within a given and presumably immutable or slowly changing
social and institutional structure has been the key to the robust analysis and the predictive
capability of modern economic models. These are the theories studied in most introductory
and intermediate economic theory courses. The presumption of given institutions and of
marginal adjustments by economic agents to their environment is at the heart of neoclas-
sical economics as taught around the world. So basic are these underlying presumptions of
marginalism and nearly fixed institutions that the great English economist Alfred Marshall
was able to write on the title page of his Principles of Economics, first published in 1890,
“Natura non facit saltum”: nature makes no leaps.
The real-world process of a country becoming more developed, of getting on the path to
development, and shedding the ways of the past that resulted in low growth rates and limited
progress, is not, however, simply about the efficient allocation of existing resources within
a given institutional regime. It is not simply about maximizing utility or profits within the
constraints of what is currently available to that society and inherited from the past. Rather,
development is fundamentally about regime change and about the search for an optimal
growth path, or at least one that is superior to the existing allocation of resources and current
efficiency levels. Further, fomenting development typically requires substantially new insti-
tutional patterns and organizational structures necessary to support such a dynamic process
of change.
To get a country on the road to development very often requires a “leap” “ often a quite
substantial one “ away from the past structures. Marginal modifications of the economy and
society simply may be insufficient to initiate the forward momentum needed to propel the
system in the requisite new direction and on to a higher path of progress for the future. For
the less-developed nations, development compels them to undertake substantial qualitative
structural change. The future cannot be just an extension of the past, of doing more of what
is now being done. Change must be dramatic. The past and its weight on the present are
precisely what have made these nations poor and are what need to be transcended.
There are a number of major structural changes and patterns identified by development
economists and economic historians that are believed to be characteristic of any successful
development process. We shall be examining these in detail in later chapters. In fact, much
of this book is about the importance of these structural changes and what can be done to
foment change in the desired direction. Here these structural changes are briefly introduced
to suggest the nature of qualitative change required and to point out the direction we shall be
taking in the chapters that follow.

1 Increase in industrialization. economic growth and development are strongly associ-
ated with an increasing share of a nation™s output and labor force involved in industrial,
especially manufacturing, activities, at least initially, as we will see in Chapter 9. Over
time, services become increasingly important too as an economy matures even further.
20 The Process of Economic Development
Wages tend to be higher in the industrial sector than in agriculture, because the level
and use of technology is greater. This leads to both higher levels of production and
worker productivity, and the resulting higher income that is created is shared by workers
and owners of enterprises. Production methods also become relatively intensive in the
use of knowledge “ human capital “ and of physical capital. As part of this unfolding
process, the urban population tends to grow both relatively and absolutely compared to
the rural population, as rural workers migrate to the cities in search of the higher income
promised by urban and industrial pursuits.
2 a decrease in agriculture. Parallel to the expansion of the industrial sector of the
economy is a decline in the share of agricultural output in total output. This also means
a reduction in the share of the total labor force employed in agriculture and a decrease in
the share of the rural population within the total population.
The increase in industrialization and the decrease in agriculture are intimately related.
“Surplus labor” (i.e. low-productivity labor) in agriculture migrates to urban areas in
search of the promise of better-paid and higher productivity industrial employment. It is
this shift of workers from low-productivity agricultural employment to higher-produc-
tivity industrial employment that contributes to a sharp increase in total national output
when this process of internal labor migration is initiated. Technological progress and
labor productivity is typically lower in the primary (agriculture, mining, and fishing)
sector, but over time, output per person approaches the level reached in the industrial, or
secondary, sector as the fewer workers in agriculture produce more output per worker.
One leading development expert has written that “economic development is a process
of moving from a set of assets based on primary products, exploited by unskilled labor,
to a set of assets based on knowledge, exploited by skilled labor” (Amsden 2001: 2).
This description captures the nature of these first two fundamental structural changes
required for long-term development progress.
3 Changing trade patterns. Successful development is almost always marked by a
maturation in the structure of trade, as a limited range of primary exports “ agriculture
and fishing products, unprocessed mining and other extractive minerals, and forestry
products “ is replaced by both a greater diversity of export products and by an evolving
export mix toward manufactured goods and services.
Successful developers shift from a dependence on the traditional, primary export
products that marked their colonial past toward, first, simpler manufactured and non-
traditional primary exports, and ultimately toward more complex commodity exports,
from motor cars to computers to biotechnology products to information technology and
other types of high value-added production.
As a result of this evolutionary transformation, manufacturing exports typically come
to dominate the export profile of more developed nations as the share of primary exports
in total exports shrinks within the export profile.
4 Increased application of human capital and knowledge to production. economic
growth and development require increases in the productivity of labor in all sectors of
the economy if incomes and the standard of living of the population are to rise. This is
achieved partly, but quite importantly, through improvements in the training and educa-
tion of the existing and future labor force by means of increases in what economists call
human capital accumulation. This takes place not only through the formal schooling
process but also via “learning-by-doing” at the workplace.
Increased productivity of labor is also a consequence of an expansion in the use of
more physical capital, that is, more machines and tools which typically embody more
The development imperative 21
advanced technology and knowledge that can help to make a properly trained labor force
even more efficient.
Human capital accumulation, physical capital accumulation, and technology thus all
contribute in a synergistic process to increase the productivity of the labor force. Greater
productivity means the possibility of higher wages for labor and an easier workplace
environment, both of which contribute to the potential well-being of the population.
We shall stress again and again the essential complementarity of human and physical
capital accumulation and the urgency for less-developed nations not only to tap into the
existing pool of knowledge available at the world level but also developed over time an
autonomous technological capacity based on indigenous labor skills (this is discussed
in Chapters 8 and 13).
5 Undertaking essential institutional change. economic growth and development
require fundamental institutional change. New organizations such as banks, stock
and bond exchanges, and insurance companies gain added importance as an economy
modernizes. The role of the central government “ the state “ must change to facilitate
and not thwart private initiatives. Physical infrastructure such as roads, ports, communi-
cations, the provision of electricity, water, and other essential services must be improved,
and the state typically must play a central role in these areas, particularly during early
stages of structural transformation.
The specific nature of the legal system and of property rights; the rules and regulations
governing the emerging financial system of banks, stock and bond markets and other
financial intermediaries; the creation and operation of a civil service system; determining
what will be taught in the schools and how success will be measured and so on all must
be worked out and codified by government.
Without fundamental changes in the rules of the game, without the specifics defining
how new institutions will work and provide improved outcomes compared to existing
institutions, many of the “big-picture” structural changes suggested in this text will
not have their full desired effects. The state thus has a challenge in clearly defining
and enforcing the rule of law, including the defense of property rights, as one of its
fundamental tasks. This means that the central government, which is itself an institution
inherited from the past, must be modified and made more efficient and streamlined if
economic growth and development are to be advanced effectively.
It is thus not only physical infrastructure that must be built, maintained, and improved,
but also these “soft” infrastructural institutions of the state, like the law and property
rights, that must be created and put into place if a more modern, productive, and equitable
outcome is to be attained.
Needed institutional change runs deep into basic values and motivations too. Busi-
nesses must increasingly be operated with more attention to efficiency and profitability
in a more competitive and open environment. Old ways of thinking and doing will
undoubtedly be threatened by what often will appear to be unsettling attention paid
to profit maximization by “new” entrepreneurs in industry, agriculture, and services,
like retail sales. Even the family is often redefined during the process of development
and structural transformation, as the extended family of the past is replaced by the
nuclear family of modern society, as individualism becomes more ingrained in behavior
patterns, and as maximization behavior replaces the satisficing mode of operating in
the past.
These institutional changes and others will be considered in the following chapters.
Economic growth and development, however, definitely require a break with the past.
22 The Process of Economic Development
Some of the most cherished institutions of many societies today, such as close family
structures and interpersonal relations, religious traditions and the general pace of life,
will be altered over time, becoming more and more like those institutions and patterns
of behavior in other societies on the path to development and more like those institutions
and values already in place in developed nations. There is no doubt that these changes
can be conflictual and often wrenching.


Barriers to development
Throughout our study of economic development, we will confront repeatedly the perplexing
problem as to why some countries are more developed than others are. Why is Great Britain
more developed than Angola, or the United States than Colombia? The very simple answer,
since it is basically a truism, is that the level and pace of economic development are lower
the greater are the barriers to economic progress and transformation in a country, and more
rapid the fewer and less intractable are those obstacles.
The challenge for the development analyst is thus to attempt to identify the most significant
barriers to development in each country and to formulate effective measures, including public
policy, that can begin to undo, remove, or at least minimize the effects of these obstacles to
progress that slow or thwart the development process.
Potential internal barriers to development: Some examples of possible internal
barriers that may block fundamental structural change and thus thwart economic growth
and development are:

a inequalities in the existing distributions of income and wealth, including the distribution
of land ownership. For most countries, the wealth distribution is intimately related to the
nature and power of class relations in society and to control over economic resources
and the political sphere;
b the level and efficiency of physical infrastructure (roads, electricity, water, communica-
tion services, port facilities, and so on);
c the role and level of development of organized banking and lending activities and of
equity (stock) and other financial markets and financial intermediaries;
d an ineffective or underdeveloped educational system, including low levels of general
literacy and an imbalance between allocations of financing to primary, secondary, and
higher education;
e prevailing ideological concepts and their impact on thinking and behavior, including
the influence of religious thinking, the accepted role of women and ethnic or religious
minorities, the prevailing economic orthodoxy, and so on;
f the initial endowment of natural resources of a nation;
g the role of the state, that is, the power and nature of the influence of the central govern-
ment, including the degree of political freedom and the strength of democratic processes
(included here is the macroeconomic environment that government at least partially
controls, including the nature and definition of property rights and the functioning of the
legal system);
h the extent and importance of political corruption and patronage and the impact of these
on public policies and on economic behavior of those governed;
i the existence of substantial “market failures” such that market signals are not fully,
completely, or accurately transmitted to economic agents, thus distorting resource allo-
cation, production decisions and spending patterns;
The development imperative 23
j geographic characteristics, for example, land-locked nations, mountainous terrain, extensive
deserts, and even small country size;
k diseases specific to certain locations;
l civil war, and so on.

Potential external barriers to development: examples of possible external barriers to
development include:

a multinational corporations that control national resources;
b the international division of labor and the prevailing patterns of international trade (e.g.
primary commodity exporting countries versus manufactured-good exporting countries),
including the operation of the organized institutional structure of the international trade
system, the effects of the World Trade Organization™s negotiations and of regional trade
blocs, such as the European Union (EU) or the North American Free Trade Agreement
(NAFTA);
c the functioning of international financial institutions, including not only the interna-
tional private commercial banks but also the World Bank and the International Monetary
Fund (IMF);
d the influence of the geopolitical and strategic interests of larger economic powers vis-à-vis
smaller and weaker economic entities;
e the economic policies of more developed nations on interest rates, for example, or on
tariffs or non-tariff barriers on the global economic system;
f external debt;
g the availability of foreign aid and investment, and so on.

This very broad listing of internal and external barriers is meant only to be suggestive in a
general way of the types of barriers to progress that can confront individual countries; it could
be extended and refined almost indefinitely. Throughout the book we shall be considering
and analyzing these and other specific barriers to progress that many less-developed nations
confront.
For any specific nation, be it India or Thailand, Côte d™Ivoire or Somalia, Bolivia or
Guyana, the list of possible internal and external obstacles can only be a guide toward the
identification and detailed specification of the unique particulars of the barriers actually oper-
ating to thwart progress in that country. For every nation, the barriers to change, and then the
specifics of how each obstacle acts as a restraint on progress, need to be clearly and analyti-
cally defined so that the nature of the remedy is also made more apparent.
The relative weight of external versus internal barriers should not be considered a constant
in any particular situation.14 The influence of internal and external barriers can and will alter
in importance over time and because of unique situations particular to specific countries. The
relative influence of internal and external barriers cannot be presumed a priori but must be
understood in each specific and changing circumstance.
What we can state with confidence is that where barriers to change, be they internal or
external, are not terribly powerful, progress tends to be more rapid. On the other hand, devel-
opment will be less vigorous where the barriers to change exert a more powerful adverse
influence.
All countries, including developed nations, always face both internal and external barriers
that act as possible obstacles to continued progress. What is central in any particular nation,
then, is not whether there are obstacles to progress “ for there always are “ but rather how
24 The Process of Economic Development
these existing barriers are to be overcome by that society so that positive change can
follow. New obstacles to continued progress inevitably will arise as growth and develop-
ment proceeds, often as a consequence of overcoming an earlier barrier, and solutions to
these new obstacles must be devised. All countries thus confront forces “ some active, others
simply a consequence of lethargy “ that tend to slow the pace of change and block the path
of development unless they are overcome.
The issue, then, is not why some countries face obstacles and others do not, since all
nations constantly encounter barriers to further progress. The challenge is to try to discover
how those nations that have been successful at fostering and sustaining economic growth and
development have been able to do so by overcoming successive barriers to change and what
might be learned from their experiences.


resources for student use and suggestions for further reading
With every passing day, there are more resources available containing data and other infor-
mation on the situation of nearly every country in the world. Of course, the internet has
opened up possibilities for research and data collection and analysis beyond what could have
been imaged even a decade ago. every year the data become somewhat more comprehensive
and reliable. It is possible to find information on everything from income to levels of education
of women, to kilometers of roads, to the number of doctors and nurses, to the percentage of
dwellings with indoor plumbing. Most college and university library collections are likely to
have one or more of the publications listed below and those with access to the internet have
a world of information at their fingertips “ for free!
The statistical data included in this text are but an insignificant fraction of the data to be
obtained from the available sources. You are encouraged to peruse the sources listed here
and others in your library. We already encouraged you to begin to do that in Focus 1.2 at the
beginning of this chapter. Learning how to “read” statistics, that is, attempting to determine
the meaning and implications of data presented in statistical tables without reading the text
accompanying such data, will vastly improve your powers of economic and social analysis.
The following sources should be of great help in studying the problems of economic
development.

World Bank, World Development Report, by year. Issued annually, this is an invaluable

resource tool. Besides the statistical tables at the end of every volume, which, unfortu-
nately, have been reduced in recent years, each report has a “theme” that is explored in
detail. For 2007, the focus was on youth and their prospects; the 2006 report returned
to the theme of equity and development; in 2003, the focus was on “transforming institu-
tions, growth, and quality of life”; for 2002, it was institution-building for development; in
2001 the theme was poverty, and in 1999, it was knowledge. In previous years, the focus
had been on workers (1995), health (1993), poverty (1990), the environment (1992), and
development strategies (1991). Every major university library should have copies of at
least some of these volumes.
Some of the data in the current World Development Report is available on-line at
http://www.worldbank.org. Look in the Data category. This site has a large and varied
quantity of data available for use. Many of the problems at the end of the chapters in this
text ask you to access the World Bank data.
United Nations Development Programme, Human Development Report, by year. Also

issued annually, this report is complementary to the World Development Report in that it
The development imperative 25
covers a broader range of development indicators and issues (available on-line at http://
www.undp.org). The focus is more on people and the changes in economies that impact
on “human development,” as opposed to focusing on the economic side of the ledger.
This is an important, evolving source of information, having been published only since
1990. We will examine in more detail in the next chapter some specific information on
human development published in the Human Development Report. Larger university
libraries are also likely to have this publication in hard copy in their international docu-
mentation section, but the full report is available electronically.
• The United Nations also publishes various kinds of data, mostly economic in nature,
via its several regional Economic Commissions. One can find statistical and interpre-
tive data published by: the UN Economic Commission for Asia and the Pacific; the UN
Economic Commission for Africa and the Middle East; the UN Economic Commission
for Latin America and the Caribbean; and the UN Economic Commission for Europe.
If you can locate these volumes, interesting and often quite detailed statistical data may
be discovered, though it may be more difficult to work with than data from either of the
above two sources, since different assumptions or definitions may be used in assembling
the data.
• There are a number of scholarly journals related to the study of economic development
that often have recent empirical research, as well as more “cutting-edge” theoretical
articles. The most widely distributed are World Development (monthly), Economic
Development and Cultural Change (quarterly), Journal of Development Economics
(quarterly), and the Journal of Development Studies (quarterly). Also worth reading are
the World Bank Economic Review (thrice annually) and the papers of the Annual Bank
Conference on Development Economics available on the World Bank website.
• If you have not visited or lived in a less-developed country, it is often difficult to fully
comprehend what it means to be extremely poor. To convey a sense of the deprivation
which absolute poverty entails, Robert Heilbroner in The Great Ascent, Chapter 2, trans-
forms a middle-class family in a developed country into an impoverished family in a
“typical” less-developed nation. For gaining a sense of empathy short of travelling to a
less-developed nation, this is an excellent resource.
As an alternative, there also are short vignettes scattered throughout Jeffrey Sachs™
powerful The End of Poverty that drive home the reality of living poverty daily. His
book can usefully be read alongside this text.

Questions and exercises
1 List five key characteristics that you think are shared by most less-developed economies
(not just “low income,” which is obvious, but things like “low level of education,” etc.).
2 How does the “headcount” measure of poverty differ from the “poverty gap” measure?
Do these two measures provide different information about the extent of poverty in a
country? Explain in what sense they tell us different things about the extent of poverty.
3 Development tends to be slower the stronger are a nation™s barriers to the fundamental
structural changes enumerated near the end of the chapter.
a For your own country, or for a less-developed nation about which you know some-
thing, list three specific obstacles that you think may be acting to slow the pace of
economic development. Indicate whether each is an internal or an external barrier.
b Briefly explain how each obstacle acts to retard economic progress.
26 The Process of Economic Development
4 Foreign multinational corporations (MNCs) often are the target of criticism for their alleged
detrimental impact on the economic welfare of less-developed nations. Their operations in
the less-developed world are often controversial and evoke strong emotional responses. In
actuality, the operations of MNCs, discussed in more detail in Chapter 14 as transnational
corporations (TNCs), can be either positive or negative in their consequences.
List and explain (a) two possible advantages that MNCs might provide to the less-
developed nations where they operate and (b) two possible disadvantages that might
result in those nations from the operations of MNCs within their borders. (In Chapter
14, we consider how a country might go about attempting to maximize the net benefits
from the location of foreign MNCs within its economy; here you are being asked only
to speculate about the effects of MNCs on the less-developed nations based upon your
existing level of knowledge.)
5 Why might former colonies that are only recently independent be more likely to be
less-developed than long-independent nations? Can you think of any former colonies
of European powers that have become developed? Of long-independent nations that
remain less developed?
6 The deadline for attaining the Millennium Development Goals (MDGs) outlined in
Focus 1.2 is approaching. In Focus 1.3, we looked at the success of meeting Goal 1 on
poverty reduction by mid-2007 or so. What progress have the major regions made in
attaining Goal 1? You can find the data at the World Bank website in the Data section.
7
a How does the technology of agricultural production in use differ in, say, the Sudan
from that used in a developed nation, like the United States? Why do such differ-
ences exist?
b Could Sudan use the same kinds of technology “ tractors, harvesters, combines,
fertilizers, irrigation, and the know-how to effectively utilize these tools “ on its
lands? Why, or why not? (Hint: If you have learned about isoquants and isocost
curves in one of your economics courses, draw two graphs with capital measured on
one axis and labor on the other. Make one of the graphs for the Sudan and the other
for the US. Consider how the different prices of capital and labor in the two countries
might affect the most efficient combination of machines and labor in use.)
8 Many countries in Sub-Saharan Africa suffer from a high level of HIV/AIDS infection,
in some cases above 20 percent of the population. What are some of the direct and indi-
rect (opportunity) costs to an economy of a high incidence of HIV/AIDS?
9 Just to help cement the concepts in your head, list here the fundamental structural
changes that countries must undertake if they are to make progress over the future.
Discuss briefly the ways in which these changes are interrelated.

Notes
1 Another way of looking at these statistics is to realize that if children in the less-developed world
faced the same mortality rates as children in the already-developed nations, the number of deaths
would be reduced by more than 90 percent. That would have meant 1.1 million under-five deaths,
rather than the 12.4 million actually recorded.
2 Most often diarrhoea is the result of a lack of access to safe drinking water and inadequate sanitation.
Young girls or women often collect the water for their families from irrigation ditches, rivers and
streams, or dirty well sources. If this water is not properly handled “ boiled, for example “ and even
when it is, intestinal problems that can lead to diarrhoea can easily develop.
3 This is not to suggest that no progress has been made. Since 1945, the death rate of children under
The development imperative 27
the age of five has dropped by half, but the growth in population since that time means the total
number dying from poverty remains unacceptably high.
4 See Blackwood and Lynch (1994) for formal definitions of poverty, including alternative defini-
tions, such as the Sen Index, which attempts to combine a headcount of the numbers in poverty, the
poverty gap, and the distribution of income into one measure of poverty. Their article is an excellent
primer on the differences in, and the variety of, poverty measures.
For more recent measures of the poverty gap, but for different years for most countries, see the
World Bank™s Global Poverty Monitoring site at http://www.worldbank.org/research/povmonitor.
There they provide poverty gap measures for the $1 and $2 per day poverty thresholds. The poverty
gap in Table 1.1 is for the $1 per day poverty line. For some Sub-Saharan African countries, such
as Gambia, Lesotho, Mali, and Niger, the poverty gap now exceeds 20 percent and in some cases,
30 percent for the $1 per day poverty line and is even higher for the $2 per day gap as the poverty
situation in Africa worsened over the 1990s.
5 The term “Third World” was used to describe those nations and regions that were neither developed
capitalist (i.e. “First World”) nations and regions, like the United States, Canada, Europe, and Japan,
for example, nor part of the socialist (i.e. “Second World”) bloc of China, the former Soviet Union,
and Eastern Europe. There was some blurring around the edges (was Cuba part of the Third or
Second World?), but in general, the Third World nations were considered to be the less-developed,
poorer nations of Asia, Africa, and Latin America and the Caribbean. In gross numbers, some 140
countries might still be considered as coming within such a Third World classification.
With the collapse and fragmentation of the Soviet bloc after 1989, the continued usefulness of the
First, Second, and Third World categories has been called into question. The People™s Republic of
China remains the sole major Second World nation, and many would have classified China as part of
the Third World, not the Second. Also in vogue for a time was the “North“South” terminology, with
“North” being a shorthand for the already developed capitalist nations and the “South” denoting
the less-developed countries. We have elected, for simplicity™s sake, to use the terms “developed”
and “less-developed” (or sometimes “underdeveloped” or “developing”) to describe those nations
which were considered part of, respectively, the First and Third Worlds.
6 The publication of a World Bank (1993c) study and responses to it by Asian economic specialists
provides a growing body of knowledge that may be applicable to those nations that continue to be
less-developed.
7 In fact, the emergence of the so-called new, or endogenous, economic growth theories in the 1980s
can at least partly be traced to a concern with the stagnation of economic growth and the rise in
unemployment rates in Europe and the United States. These theories and their important implica-
tions for economic development in the less-developed world are discussed in detail in Chapter 8.
8 Included in South Asia are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and
Sri Lanka.
9 Included in Sub-Saharan Africa are Angola, Botswana, Burundi, Comoros, Democratic Republic of
the Congo, Eritrea, Ethiopia, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mayotte, Mozam-
bique, Namibia, Rwanda, Seychelles, Somalia, South Africa, Sudan, Swaziland, Tanzania, Uganda,
Zambia, and Zimbabwe in East and Southern Africa; and Benin, Burkina Faso, Cameroon, Cape
Verde, Central African Republic, Chad, Republic of Congo, Côte d™Ivoire, Equatorial Guinea, The
Gambia, Gabon, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, São
Tom© and Príncipe, Senegal, Sierra Leone, and Togo in West Africa.
10 What was the cost of that economic slowdown? The World Bank (1993a: 41“2) estimated that if
economic growth rates had been as rapid in the 1980s as in the period 1960“80 the number of infant
deaths in the less-developed world would have been reduced by 6 percent (350,000 fewer deaths).
In Latin America, which especially suffered from the slowdown in economic growth in the 1980s,
infant deaths would have been 12 percent lower if there had been an economic growth rate more
similar to the historical trend.
11 With 15.9 percent of world population, the equality share of world income for the developed
world also would be 15.9 percent. Since, however, world income was not distributed equally, the
developed world actually received 78.1 percent of total world income, or roughly five times its
hypothetical equality share.
12 Of course, there are some who would argue that the crime, violence, drugs, lack of community,
unemployment, pollution and environmental degradation, growing relative poverty, and homeless-
ness in many of the developed nations, especially in their crowded urban areas, make them unworthy
28 The Process of Economic Development
of the name “developed.” If “development” is the goal, some would argue, there is much about the
already-developed economies that it is not particularly desirable to emulate. An economist might
suggest that these are, perhaps, trade-offs that are the “price” of economic progress, that economic
growth and development are not “costless,” and that what each nation must do is to evaluate both the
benefits and the costs associated in achieving a higher level of economic growth and development.
One must also question as well to what extent the problems of the developed nations are perhaps
the result of particular patterns of unequally shared growth and development, rather than being
necessarily inherent problems that accompany progress per se. Is it possible to achieve a higher
level of economic growth and a higher level of development without incurring the problems
mentioned above? That, too, is a challenge for the future.
13 See Gerschenkron (1962) for a fascinating study of so-called “late developers.” Gerschenkron
believed that late-developing economies had advantages in attempting to accelerate their pace of
development by having access to the most recent technological advances, but that this was always a
latent possibility. There was no guarantee that late-developing economies actually would utilize that
knowledge to the best advantage. In other words, progress toward higher levels of economic and
social development, though possible, was not predetermined simply by the availability of higher
levels of world technological knowledge and know-how. It was still up to individual economies to
find the means to effectively make use of such possibilities and to create the institutional structures
capable of effecting such a transition. This theme, well captured by the endogenous growth theories
and theories of technological progress we will be discussing in later chapters, forms a large part of
this book™s understanding of the development process.
14 For example, it was common in the dependency literature on development in the 1960s and 1970s
(see Chapter 6) to assume that the less-developed nations were poor primarily because of external
forces. Whether these external barriers were the International Monetary Fund, the multinational
corporations, or simply “imperialism,” the presumption was that it was the external barriers that
kept the less-developed nations poor, and that internal barriers, while perhaps not insignificant,
were largely secondary to broader external forces.
We make no such a priori presumption about what the barriers to development are or of their
relative weight in any particular country. Nor do we presume anything about the relative impor-
tance of internal versus external obstacles to future progress. Each nation™s situation is somewhat
sui generis and must be analyzed with as few preconceptions as possible.


references
Amsden, Alice H. 2001. The Rise of “the Rest”: Challenges to the West from Late-Industrializing
Countries. Oxford: Oxford University Press.
Blackwood, D.L. and R.G. Lynch. 1994. “The Measurement of Inequality and Poverty: A Policy-
Maker™s Guide to the Literature,” World Development 22 (April): 567“78.
Foster, Phillips Wayne. 1992. The World Food Problem: Tackling the Causes of Undernutrition in the
Third World. Boulder, CO: Lynne Rienner Pubs.
Gerschenkron, Alexander. 1962. Economic Backwardness in Historical Perspective. Cambridge, MA:
Harvard University Press.
Heilbroner, Robert. 1963. The Great Ascent. New York: Harper & Row.
Kuznets, Simon. 1971. Economic Growth of Nations. Cambridge, MA: Harvard University Press.
McNamara, Robert S. 1976. Address to the Board of Governors of the World Bank, Manila, Philippines,
4 October. Washington, D.C.: World Bank.
Sachs, Jeffrey. 2005. The End of Poverty: Economic Possibilities for Our Time. New York: Penguin
Books.
UNDP (United Nations Development Programme). 1993. Human Development Report 1993. Oxford:
Oxford University Press.
””. 2001. Human Development Report 2001. Oxford: Oxford University Press.
””. 1995. Human Development Report 1995. Oxford: Oxford University Press.
World Bank. 1990. World Development Report 1990. Oxford: Oxford University Press.
””. 1991. World Development Report 1991. Oxford: Oxford University Press.
The development imperative 29
””. 1993a. World Development Report 1993. Oxford: Oxford University Press.
””. 1993b. Development Brief 20 (July): 1“2.
””. 1993c. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford
University Press.
””. 1994. World Development Report 1994. Oxford: Oxford University Press.
””. 1995. World Development Report 1995. Oxford: Oxford University Press.
””. 2000. World Development Report 2000/2001. Oxford: Oxford University Press.
””. 2003. World Development Report 2003. Oxford: Oxford University Press.
World Development. 1994. Special section reviewing The East Asian Miracle, vol. 22 (April).
WHO (World Health Organization). 1994. The State of the World™s Children 1994. Geneva: WHO.
2 Measuring economic growth
and development




after reading and studying this chapter, you should better understand:
• the difference between economic growth and development;
• why GNI and GDP can differ, how to calculate each, and the adjustments to these
so they can be used as more reliable measures of the level and rate of development
of economies;
• how the purchasing power parity (PPP) definition of income differs from the
usual GNI or GDP measure and why it may be a better indicator for comparing
nations;
• the importance of knowing something about income distribution, the Lorenz curve,
and the Gini coefficient when evaluating the level of development of a country;
• the Human Development Index (HDI) and how it can be used as an alternative or
complementary measure of development;
• the importance of sustainable development;
• the significance of the Kuznets inverted-U hypothesis.



Introduction
What is meant by development? The answer to this deceptively simple question shapes
how one judges the respective levels of development of different economies. It affects
what factors we consider as contributing to progress, and our answer to what develop-
ment is will influence the public policies aimed at achieving a society™s development
goals. Knowing what is meant and what is not meant by development is thus a necessary
first step if, as the British economist Joan Robinson once insisted, we are to ask the right
questions.
We begin by considering how economists typically measure the level of development
of a nation. There are two broad methodologies. One, the income per person, or economic
growth criterion, suggests that income levels are reasonably good approximate measures for
comparing economies. In this view, income per person can serve as a surrogate for gauging
overall progress.
The competing perspective argues that development is such a complex, multi-faceted
notion that it should be conceived from the outset as considerably broader than income and
hence can only be measured by entirely different standards. Let us turn to a discussion of
these two viewpoints and methodologies.
Measuring economic growth and development 31
The economic growth/income criterion of development
Economists often use the level of a nation™s per capita income as a proxy measure for
evaluating the overall level of national development and welfare. The rate of growth of
income per person can be used to judge the progress of economies over time.
Those who use income per person to evaluate progress are quite aware that the develop-
ment of a nation encompasses much more than the level of average income and the growth
rate of that income. Development incorporates the diverse and broad aspirations of what
might be called the “good life” in all its economic, social, and political dimensions that each
society sets, if only implicitly, for itself.
Societies may value, each perhaps differently, goals as diverse as:

a equality of opportunity;
b a rising income and standard of living, including a wider array of consumable goods and
services over time;
c equity in the distributions of income and wealth;
d political democracy and widespread participation in society™s decision-making;
e an expanded role for women, minorities, and all social classes in economic, political,
and social life;
f increased opportunities for education and self-improvement irrespective of class, race,
ethnicity, religion, or gender;
g the expanded availability of, and improvements in, health care;
h public and private safety nets to protect the most vulnerable “ particularly the young, the
old, the infirm and the poorer “ from extreme hardship;
i a reasonably clean and healthy environment;
j an efficient, competent, transparent, and fairly administered public sector;
k a reasonable degree of competition in the private sector; and so on.

Each of us could add to or subtract from this list of goals (see Alkire 2002 for an overview
of the issues involved in defining what encompasses human development). But there is no
doubt that development encompasses a wide range of social and human goals that, while
including the level of income and economic growth, go well beyond these as well (see
Focus 2.1 on high-quality growth).
Development, being broader than income alone, typically requires fundamental structural
change in the economy and society, as discussed at the end of Chapter 1. To attain a higher
level of development does not mean that a poor economy simply needs to do more of what
it already has been doing. Less-developed countries are less developed precisely because
they produce, sell, and export a sub-optimal array of goods and services in inefficient ways.
Development requires that these nations make changes that will result in a radically trans-
formed future in which new values and ways of doing things, new institutions, and better
functioning markets emerge. It is not small marginal change that is required, though that
can help. Ultimately, however, wholesale social and economy-wide transformations are
essential.
The process of becoming more developed by undertaking the necessary fundamental
structural reforms is without doubt often a process of wrenching social change. The full
range of development goals of any nation goes far beyond any simple concern with the level
of income per person. All economists recognize this, including those who use a nation™s
income per person as an index for the broader development ambitions listed above.
32 The Process of Economic Development

FOCUS 2.1 HIGH-QUALITY GROWTH
The International Monetary Fund (IMF) has often been taken to task for the “condition-
ality” it puts on borrowing countries, conditions that often have contributed to increases
in poverty and lower average incomes (Chapter 17 considers this issue in depth). Over the
1990s, the IMF seemed slowly to be learning from the criticisms of its policies and from its
own evaluations of past lending policies and their impact on economic growth.
Now, the IMF sees itself as promoting so-called “high-quality growth,” defined as:

growth that is sustainable, brings lasting gains in employment and living stand-
ards and reduces poverty. High-quality growth should promote greater equity and
equality of opportunity. It should respect human freedom and protect the envi-
ronment. Obviously, growth cannot be high quality ¦ if it does not benefit fully,
tangibly, and equitably a group that constitutes more than one half the population
of the world and still bears the primary responsibility for the care, nutrition, and
education of the world™s children. Achieving high-quality growth depends, there-
fore, not only on pursuing sound economic policies, but also on implementing a
broad range of social policies.

Economic development is not just about economic growth, then, but about a particular
kind of economic growth: high-quality growth in the IMF™s terminology. And you will notice
how many of the broader development goals we listed above are touched upon in the
IMF™s definition.
Source: “Gender Issues in Economic Adjustment Discussed at UN
Conference on Women,” IMF Survey (September 25, 1995): 286“8


Nonetheless, it is often convenient and simpler to use income per person as a substitute
gauge for the broader goals of development. Imagine how difficult it would be to not only
collect data on a wide range of development goals such as those listed above but then, with
so many variables, trying to compare these for several countries to rank them in terms of
which were “better off.” The complexity of comparing across many variables with different
values and interpretations is simply too daunting, even if each goal can be measured. (You™ll
remember that we asked you to try to do precisely this in Focus 1.4 in Chapter 1.) Our brains,
as complex as they are, still need some degree of simplification when many dimensions are
being compared.
Fortunately, there is empirical evidence, some of which we shall examine below, to at least
partially support the claim that income per person is highly correlated with key measures of
the broader aspirations of economic, social, and political progress. Thus many economists,
acknowledging that it would be wrong-headed to suggest that higher income and economic
growth are the same as development, firmly believe that it is reasonable to focus on a nation™s
economic growth and level of income as the measure of development. This is because it is
believed that improvements in the specific dimensions of development, such as those listed
earlier, are more easily achieved at higher income levels. It is precisely from such higher
income over time that the means for reaching the broader goals of development can be
obtained.1
For most economists, then, it is reasonable as a first approximation to rank nations from
highest to lowest by per capita income levels as a measure of their relative development
achievement. Focus 2.1 on “high-quality growth” illuminates this view of the process of
economic growth and its relation with the broader concept of development.
Measuring economic growth and development 33
Part of the attractiveness of using the per capita economic growth criterion is its very
simplicity. All countries collect data on their level of economic activity, though with varying
degrees of accuracy, despite efforts by international institutions to unify the methods of
data collection and to strive, to the degree feasible, for the comparability of the information
collected.2 The data for comparing income among countries, or for any particular country
over time, are thus reasonably readily available and roughly comparable. We make use here
of the annual data published by the World Bank in its World Development Report and in its
World Development Indicators, a source which provides a consistent and reliable series of
data available to researchers around the world.

Measuring economic growth
The level of economic development and economic growth can be measured either by the
growth of total output or of total income. The two most common measures used for interna-
tional income and output comparisons, and hence for measuring economic growth, are gross
national income (GNI) and gross domestic product (GDP).
GNI is the total value of all income accruing to residents of a country, regardless of the
source of that income, that is, irrespective of whether such income is derived from sources
within or outside the country.3 GDP is the total value of all income (= value of final output)
created within the borders of a country, regardless of whether the ultimate recipient of that
income resides within or outside the country.
How and why do the GNI and GDP measures of income differ? There will be no difference
if an economy is completely “closed” to the rest of the world. Closed in this sense means that
there is no migration of workers and no flows of investment between a country and the rest
of the world. exports and imports of goods, however, do not affect the measurement of GNI
or GDP since trade flows do not have anything to do with differences in the values of the two
income measures. It is simply that can be no labor or investment flows between economies
if GNI is to equal GDP and an economy is to be considered “closed.”
If an economy is closed in this sense, then the only income that would be received by
residents of a country would be derived from new productive activity taking place within the
borders of that country. There would be no income received by residents inside the country
originating from sources outside the country and no flows of income created within the
borders of the country going to income recipients in other nations. In this case, GDP “ the
income produced within the borders of the country “ would equal GNI “ the income received
by residents of that country.

Income flows between economies and GNI and GDP
However, in a world with multinational corporate investment moving across national bound-
aries and with a myriad of financial flows between nations, an economy™s GNI will typically
diverge from its GDP.
Take the case of the United States, which has many of its corporations and banks operating
in other economies. As a result of these multinational investments, as well as US bank loans
to other countries and other financial investments, the US economy received an inflow of
profit, dividend, and interest income from the rest of the world equal to $350.9 billion in
2000 and $474.6 billion in 2005.
This income inflow from outside the US became part of the GNI of the United States. It was
not part of the US GDP, however, since it did not from income created within the borders of
34 The Process of Economic Development
the US. In fact, the value of this flow of profits, dividends, and interest to the US was included
as part of the GDP of the other nations from which it originated. These income flows from
other countries added to US GNI, tending to make the income available to US residents
greater than the income created within the borders of the US, that is, greater than US GDP.
Of course, just as US firms, banks, and individuals had investments in other countries, so
too do foreign firms, banks and individuals have investments in the US. These investments
created income and output within the US borders that were included as part of US GDP.
However, not all that income remained in the US to become part of US GNI. Profit, interest,
and dividend income equal to $329.9 billion in 2000 and $463.4 billion in 2005 flowed to
countries like the United Kingdom, Germany, Mexico, and Japan that had made investments
in the United States in the past. This income was created in the US (that is, it was part of US
GDP), but it belonged to and flowed to income recipients outside the US, thus tending to
reduce US GNI below the level of US GDP.
The net effect of the inflow of profits, interest and dividends to the US from other nations
minus the outflow of profits, interest, and dividends from the US to the rest of the world was
equal to $21.1 billion in 2000 and $11.3 billion in 2005. This made US GNI > US GDP,
everything else was the same, since more income payments flowed into the United States as
returns on US investments and loans abroad than was paid to foreigners who had invested in
or made loans to the United States. The same sorts of flows can create a divergence between
GDP and GNI in other economies as well, as a result of the flows of investments that take
place between nations.
A second type of income flow between nations that can result in a divergence between GDP
and GNI is due to worker remittances. As workers migrate from their home country to another
in search of work, it is not uncommon that they leave some members of their families and other
relatives behind. Often these workers send a portion of their income home. Such remittances by
workers in one country to their families in their home country have the effect of tending to make
GNI < GDP in the sending country where the migrating worker is located and GNI > GDP in the
receiver nation where the family and relatives of the worker reside, all else being the same.
For example, many workers from the Philippines work in Asia and Europe. Some of their
income is sent home to family still living in the Philippines, which adds to the GNI in the
Philippines above the GDP created in the Philippines. In 2000, workers™ remittances sent to
the Philippines totaled $5.2 billion; by 2005, this inward flow of income from the rest of the
world had reached $10.7 billion (World Development Indicators Online). These inflows of
income tended to make the Philippines™ GNI > GDP, as there was more income to be spent by
residents of the Philippines than there was income created within the Philippines.
In general, then, whether a country™s GDP < GNI or its GDP > GNI depends on the sum
of all the income inflows into the country from the rest of the world (ROW) less the sum of
the income leakages leaving the country and flowing to the ROW. Again, remember that the
only transactions between nations that create a difference between GNI and GDP are income
flows; the level of exports and imports do not create any difference between the measured
values of GNI and GDP.
When the income inflows received by a country from the ROW exceed the income outflows
to the ROW, then that country™s GNI > GDP. When the income inflows from the ROW are
smaller than the income outflows to the ROW, then GDP > GNI for that country.
Table 2.1 provides some summary data on the two income measures for a number of
economies for 1990 and 2006.
This table provides information on total GDP, total GNI, and the GDP/GNI gap, that is, the
difference between GDP and GNI. When the GDP/GNI gap is positive (i.e. GDP ’ GNI > 0),
Measuring economic growth and development 35
Table 2.1 GDP and GNI comparisons, selected nations, 1990 and 2006
Total GDPa Total GNIa
Population GDP/GNI GNI per
gapb
(millions) capita ($)

1990 2006 1990 2006 1990 2006 2006 1990 2006

Algeria 25.3 33.3 62.0 114.7 60.0 107.3 7.4 2,371 3,218
Argentina 32.6 39.1 141.4 214.1 135.2 208.6 5.4 4,148 5,333
104.0 144.3 30.1 62.0 30.8 65.4 ’3.5 296 453
Bangladesh
6.7 9.3 4.9 11.2 4.6 10.8 0.4 694 1,156
Bolivia
1.4 1.8 3.8 10.3 3.7 9.7 2,580 5,498
Botswana 0.7
Brazil 149.4 188.7 462.0 1,068.0 449.7 1,038.4 29.5 3,010 5,503
9.7 14.4 1.1 1.1 6.9 0.3 114 481
Cambodia 7.2
13.2 16.5 31.6 145.8 29.8 129.8 16.0 2,261 7,892
Chile
1,135.2 1,311.8 354.6 2,668.1 355.7 2,694.8 ’26.8 313 2,054
China
Côte d™Ivoire 12.7 18.5 10.8 17.5 9.2 16.0 1.5 865
728
3.1 4.4 7.4 22.1 21.4 2,325 4,870
Costa Rica 7.2 0.8
55.7 75.4 43.1 107.5 42.0 108.0 ’0.5 755 1,433
egypt
51.2 12.1 13.3 12.0 13.3 235 183
ethiopia 72.7 0.0
15.5 22.5 5.9 12.9 5.8 12.8 0.1 373 569
Ghana
8.9 12.9 35.3 7.5 35.3 843 2,735
Guatemala 7.7 0.0
6.9 8.6 2.9 5.0 4.3 0.6 413 501
Haiti 2.8
849.5 1,109.8 316.9 906.3 312.7 900.9 5.3 368 812
India
178.2 223.0 114.4 364.5 109.2 348.7 15.7 613 1,563
Indonesia
2.4 4.6 10.5 4.2 9.4 1.1 1,740 3,525
Jamaica 2.7
Kenya 23.4 35.1 8.6 21.2 20.9 0.3 351 596
8.2
Korea (Rep.) 42.9 48.4 263.8 263.6 6,149 18,340
888.0 888.0 0.0
17.8 25.8 44.0 148.9 42.2 144.2 4.7 2,362 5,596
Malaysia
83.2 104.2 262.7 839.2 254.1 830.7 8.5 3,053 7,970
Mexico
Mozambique 13.4 20.1 2.5 7.6 2.3 6.9 173 344
0.7
Nigeria 94.5 144.7 28.5 114.7 25.6 103.3 11.4 271 713
108.0 159.0 40.0 128.8 41.7 126.2 387 793
Pakistan 2.7
61.1 84.6 44.3 116.9 44.1 127.8 ’10.9 721 1,511
Philippines
7.1 9.2 2.6 2.5 2.6 2.5 362 268
Rwanda 0.0
17.0 19.8 7.9 26.6 0.4 462 1,344
Sri Lanka 8.0 27.0
26.1 37.0 13.2 37.6 12.4 34.2 3.4 476 925
Sudan
54.6 64.7 85.3 206.2 84.3 202.1 4.1 1,542 3,122
Thailand
Venezuela 19.8 47.0 181.9 46.3 180.4 1.5 2,342 6,676
27.0
66.2 84.1 6.5 60.9 6.1 59.4 1.5 92 706
Vietnam

Source: World Bank, World Development Indicators Online.
Notes
a Billions of US dollars.
b GDP/GNI gap = GDP ’ GNI, in billions of US dollars. A positive value means that GDP > GNI; a negative value
indicates that GNI > GDP.

a country had outflows of income to the ROW that exceeded inflows into the economy from
the ROW, and thus its GDP > GNI. When the GDP/GNI gap is negative (GDP ’ GNI < 0),
the economy had inflows of income from the ROW that exceeded outflows to the ROW, and
thus its GNI > GDP.
For example, China™s total GDP was $2,668.1 billion in 2006 while its total GNI equaled
$2,694.8 billion; thus China™s GDP/GNI gap was ’$26.8 billion. More income was received
by residents of China (GNI) than was created within the borders of China (GDP) due to a net
inflow of income from the rest of the world. In Brazil, on the other hand, there was more income
created within the borders of the country (GDP) than was received by residents of Brazil, and
36 The Process of Economic Development
the positive GDP/GNI gap of $29.5 billion is the amount of income created within Brazil that
did not remain for the use of Brazilians but rather belonged to residents of other economies.
Which of the two measures of an economy™s income is preferred when using an economy™s
income as a proxy measure of its overall level of development: GDP “ all income created
within a country regardless of who received it “ or GNI “ all income received by residents
of a country and available for use? You may already have a good idea of which is a better
indicator of total welfare, but before we answer that question directly, it is necessary to look
a little deeper into the two measures of income and refine them a bit.

Necessary adjustments to the GDP and GNI measures
The values for both total GDP and total GNI for 1990 and 2006 shown in Table 2.1 are total
nominal figures, that is, they are the total current US dollar value of the two alternative
measures of total income. There are a number of adjustments to these total nominal values
that are desirable if income is to be used in a reliable manner as a surrogate measure suitable
for ranking economies as to their level of development.


1 Adjusting for population size
A first necessary correction to the total GNI and total GDP figures in Table 2.1 is to adjust
them for population size. Dividing GNI (or GDP) by the total population provides a measure
of per person income, or, simply, average income. Nominal per capita GNI figures are shown
in the last columns of Table 2.1 for 1990 and 2006. If you wish, you can calculate per capita
GDP from the data provided, but these are not shown in the table.
This population adjustment is essential for two reasons. First, using total GNI (or GDP) to
compare different countries makes little sense. From Table 2.1, China had the highest total
GNI, followed very closely by India. But these two economies also had the largest popula-
tions. To be able to compare countries in terms of their relative level of development, it is
essential to use average income, as in the last columns of the table, to account for differences
in the size of economies. Otherwise, we would be trying to compare essentially non-compa-
rable values. Total GNI or total GDP tells us nothing about the average standard of living;
average GNI, or average GDP, gets us a little closer.
In 1990, South Korea, Argentina and Mexico had the highest average incomes of the coun-
tries listed in the table; Mozambique, Cambodia, and Vietnam had the lowest per capita
income levels. In 2006, South Korea remained first in per capita income by a substantial
margin, followed by Chile and Venezuela. The three poorest economies were now Mozam-
bique, Rwanda, and ethiopia, with the last two economies experiencing declining income
per person between the two years.
We can thus use per capita income as a means to rank countries from richest to poorest,
with differences in incomes reflecting presumed differences in the quality of life, which is
the rationale behind using income per person as a proxy for overall welfare.
A second reason for using per capita income is to determine if, over time, changes in the
level of aggregate income of any particular economy (a) are just sufficient to keep up with
population growth, so that per capita GNI (or GDP) remains constant over time; (b) are more
than sufficient to keep up with population growth, so that per capita GNI is rising over time;
or (c) are insufficient to keep pace with population growth, such that per capita GNI is falling
over time. Using per person income figures allows us to measure, for any particular economy,
whether average income “ and hence the average standard of living “ is growing or not.
Measuring economic growth and development 37
Since GNI per capita is simply total GNI · population, the percentage change in GNI
per capita can be determined as in equation 2.1. This tells us whether an economy™s total
income is growing fast enough to provide for an increase in the income available per
person.

% change GNI per capita = % D (total GNI/total population)
= % D total GNI ’ % D population (2.1)

The rate of growth of GNI per capita thus can easily be approximated as the difference
between the rate of growth of total GNI and the rate of population expansion. GDP can be
substituted for GNI in equation 2.1 to determine the rate of change of GDP per capita.
Equation 2.1 makes it clear why countries with high rates of population growth need to
generate higher rates of growth in total income just to keep the level of per capita income
constant compared to countries with lower population growth. If one country™s population is
growing at 2 percent per year, total GNI must increase by 2 percent per annum just to maintain
a constant level of income per capita; from equation 2.1, this results in a zero percent change
in per capita income. Another economy with 1 percent growth in population and the same
2 percent growth in total GNI would experience an increase in per capita GNI of 1 percent.
It would not be correct, however, to infer from equation 2.1 that slow population growth
causes a faster rate of growth of income per person or that rapid population growth causes
slower growth in income per person. Equation 2.1 is true by definition; it is a mathematical
identity. It does not uncover the underlying reasons that result in rapid or slow per capita
income growth. Equation 2.1 only indicates the consequences of specific rates of change of
both total population and total income. This important issue of population growth and its
precise relation to economic growth is examined in more detail in Chapter 12.
Having made this population adjustment to total income, countries with higher levels of
income per capita may be said to be more developed than countries with lower levels of income
per capita by the income criterion of development. Similarly, countries with faster growth rates
of average income as indicated by larger percentage increases in income per person may be
said to be developing faster than countries with lower growth rates of per capita income.

2 Adjusting nominal income (GNI or GDP) for price changes over time
The total and per capita GNI and GDP measures in Table 2.1 are what are called nominal
values. To judge how any economy is performing over time, that is, to really be able to
compare 1990 and 2006 per capita income figures, it is necessary to convert nominal or
current price GNI (or GDP) to real or constant price GNI (or GDP).
For example, the total GDP figures shown in Table 2.1 were calculated at their nominal
values, that is, they were estimated by multiplying the current, or nominal, market price of
each newly produced good and service by the number of units of new production of each
of these goods and services and then summing across all goods and services. Prices act as a
common unit of measure that allows us to add together physical quantities of different goods
and services that otherwise would not be able to be totaled.
The economic wealth of society that economists wish to measure is composed of what
is produced in actual physical terms, for it is that material production which is potentially
available for use in consumption and investment and which can contribute to individual
and social welfare. The available output is thus the “income” of an economy. The nominal
GDP measure of output (which is equal to total income created in an economy) permits us
38 The Process of Economic Development
to compute the total value of dissimilar physical outputs and services by measuring them
with a comparable yardstick: first by using prices stated in a nation™s own currency and
then converting this to US dollars at the official exchange rate for each economy to allow
comparisons among countries in a common currency, the US dollar.
The problem of using current prices is that when comparing different years, unless prices
have remained constant, the current price measure of each year™s GDP will be a mix not only
of changes in physical production (the Qs below) but also of the variations in the prices of
the goods and services produced (the Ps below).
equation 2.2 shows how total nominal GDP is determined as the sum of all newly produced
final goods and services with: n being the number of goods and services produced; Pi being
the price of good or service i in each country™s own currency; and Qi representing the quan-
tity of good or service i produced.

n

Total GDP = ‘ PiQi (2.2)
i=1



From this simple statement, it is clear that in different years the prices of goods and serv-
ices “ the Pis “ may vary and that different prices can affect the nominal value of total GDP
even if total physical output “ the Qis “ have not changed at all.
For example, imagine in equation 2.2 that from one year to the next all the Pi values
double, so that all prices are twice what they were in the previous year. even with the same
level of production in both years, that is, even if the Qis are the same in both years, total
nominal GDP will be twice as large in the second year as in the first. However, such an
economy would be no better off with twice the level of nominal GDP, since all the increase
was due to price increases. There is no additional real output or income available, as the Q
values did not change. So, if prices change over time, as they do, nominal GDP and nominal
GNI values are distorted by the price changes when what interests us is the “real” amount of
stuff available to be consumed or invested.
In comparing GDP in different years, then, what we want to measure is how much real
physical output, the Qis, have changed, independent of any price changes that may have
taken place between the years. To calculate real, or constant, price GDP, economists simply
value the output in different years by using the same prices, Pi, for all years compared. Once
the base year vector of prices is chosen, these constant Pis can be used in equation 2.2 to
value the current Qis. Thus we can write, for example,

n

2008 GDP1992 = ‘ Pi,1992 Qi,2008 (2.3)
i=1



Equation 2.3 shows how real GDP for 2008, calculated at 1992 prices (1992 is the base year
for prices in this case), would be determined. Using the prices prevailing for each good and
service in 1992 (Pi,1992), this price vector is multiplied by the physical quantities of all newly
produced final goods and services produced in 2008 (Qi,2008). The resulting sum is the real
value of 2008 total GDP stated in 1992 prices. Comparing 1992 GDP and 2008 GDP, prices
would be the same and any differences in total GDP values between the two years would be
due to differences in the quantity of goods and services produced and not price changes.
In practice, an equivalent approach for calculating 2008 GDP in 1992 prices is to deflate
Measuring economic growth and development 39
nominal 2008 GDP by an appropriate price index, such as the GDP deflator. For example,
if the total nominal GDP of the fictional country of Luanda in 2008 was US$3,337 million,
and the price index for 2008 was 331.7 (with 1992, the base year = 100, as is always the case
for the base year), then real 2008 GDP for Luanda, calculated in constant 1992 US dollars,
would be equal to US$1,006 million, as shown in equation 2.4.

US$3,337 million
2008 total GDP
— 100 = — 100
331.7
2008 Price Index
= US$1,006 million (2.4)

This calculation adjusts Luanda™s 2008 GDP for the change in prices that occurred between
1992, the base year, and 2008. This operation is equivalent to the calculation in equation 2.3,
where 1992 prices are multiplied by 2008 quantities.4 After making this correction, which is
absolutely necessary when comparing income between years, then real GDP per capita can
be calculated by making the population adjustment discussed above, if it was not done prior
to the price adjustment.
A similar correction also must be done to total nominal GNI to find real GNI per person by
deflating total GNI by the appropriate price index. Table 2.2 shows the real GNI per person
and the nominal GNI per person for 1990 and 2006 for a sample of the economies shown in
Table 2.1 to give an idea of why it so important to make this adjustment for price changes if
we are to compare income between years.
The real average GNI figures in the first two columns are calculated in constant real 2000
US dollars. Effects of price changes between 1990 and 2006 have been corrected by deflating
(dividing) each year™s nominal GNI per person by the corresponding price index (in this
case, the Consumer Price Index).5 The percent change in real GNI per capita between 1990
and 2006 is shown in the third column.
For the sake of comparison, the nominal GNI per capita values for each of the countries is
also shown (taken from Table 2.1) and the percentage change in nominal income per person
has been calculated in the last column of Table 2.2.


Table 2.2 Real GNI per person versus nominal GNI per person, 1990 and 2006
Real GNI per persona Nominal GNI per person

1990 2006 % Change 1990 2006 % Change

Argentina $16,681 $3,093 ’81.5 $4,148 $5,333 28.6
6,989 3,376 ’51.7 2,580 5,498 113.1
Botswana
5,555 6,717 20.9 2,261 7,892 249.0
Chile
627 1,896 202.6 313 2,054 556.2
China
631 ’27.6 368 812 120.7
India 872
2,132 886 ’58.4 613 1,563 155.0
Indonesia
Kenya 1,542 357 ’76.8 351 596 69.8
Korea 10,092 15,224 50.9 6,148 18,340 198.3
3,348 4,956 48.0 2,362 5,596 136.9
Malaysia
16,445 6,049 ’63.2 3,053 7,970 161.1
Mexico
932 572 ’38.6 387 793 104.9
Pakistan

Sources: World Bank, World Development Indicators Online and Table 2.1.
Note
a In constant 2000 US prices.
40 The Process of Economic Development
First, the change in real income per capita is lower in all economies than the change in
nominal income per person. Some of the differences are quite dramatic. For example, Botswa-
na™s nominal income per person increased by 113 percent; however, once price changes are
taken into account, real average income actually fell by more than 50 percent! In 2006, on
average, less than half as many goods and services were available per person than in 1990.
In Kenya and Mexico, the deterioration in real income was even more extreme. However,
if we had looked only at nominal income per person in Table 2.1, it would have appeared
that Botswana, Kenya and Mexico were making substantial progress because of the large
increases in average nominal income recorded. We now know from equations 2.3 and 2.4
that increases in nominal income are a mix of price and quantity changes, and that it is neces-
sary to remove the price variations so as to get a better idea of what is actually available for
consumption and investment. Clearly in these countries, price increases were much larger
than the increases in nominal GDP, so that real GDP per person was shrinking.
China™s real income growth stands out, having more than tripled, per person, since 1990.
This is remarkable progress in average income growth, which if sustained, could bring China
out of its less-developed status very soon, much as has happened in South Korea, which
joined the ranks of the high-income economies in the space of a half-century (see Focus 2.5
later in the chapter on China™s economic successes in recent decades).

3 Accounting for income distribution
Income per capita values, as shown in Tables 2.1 or 2.2, are at best an imprecise measure of
the actual income received by any particular person, since they are only a simple average
derived by dividing total GNI or GDP by total population. The per capita income measure
does not provide any information about the dispersion of actual incomes around this mean.
It is thus helpful to also know something about the distribution of income in an economy
if one is to make reasonable sense of the average income figures. Table 2.3 provides income
distribution information on most of the countries in Table 2.1.
The first two columns show the shares of total income (or consumption) received by the
poorest 20 percent of the population (the lowest fifth or quintile of income earners) and for the
richest 20 percent (the highest quintile). The number of persons or families in each quintile is
the same in any nation, representing exactly one-fifth of all income recipients in that economy.
Also shown in the table in the third column is the ratio of the share of total income received
by the richest 20 percent of the population divided by the share of total income received by the
poorest 20 percent for each country. This tells us how many times larger the average income
of the richest 20 percent of the population is as a multiple of the average income of the poorest
20 percent of the population. The closer this number is to 1, the greater the degree of equality
between the lowest and highest income receivers, and the further away is the ratio from 1, the
greater the degree of relative inequality. In no country is this ratio very close to 1.
In only a few economies “ Bangladesh, Ethiopia, Pakistan, and Korea “ is the degree of
inequality between the richest and the poorest a multiple of 5 or less. In all countries, the
richest 20 percent of income recipients receive more of the total income than do the poorest
20 percent, since no economy, not even ostensibly communist China, where the income
distribution is worse than in the US, has anything approaching complete equality of income.
Thus, the average income of the richest 20 percent in all countries is higher, sometimes
significantly so, than that of the poorest fifth of the population.
Of the countries shown in Table 2.3, the richest 20 percent of the population in Botswana,
Brazil, and Guatemala receive at least 20 times the average income received by the poorest
Measuring economic growth and development 41
Table 2.3 Income distribution, selected economies
Richest 20%a Gini coefficent
Country Poorest 20% Richest 20%

Poorest20%
35.3
Algeria (1995) 42.6 6.1
7.0
Argentina (2004) 3.1 55.4 7.9 51.3
Bangladesh (2000) 8.6 42.7 5.0 33.4
Botswana (1993) 3.2 65.1 20.3 60.5
Brazil (2004) 61.1 21.8 57.0
2.8
Chile (2003) 3.8 60.0 15.8 54.9
China (2004) 4.3 51.9 12.1 46.9
Côte d™Ivoire (2002) 5.2 50.7 9.8 44.6
Egypt (1999“2000) 8.6 43.6 5.1 29.5
Ethiopia (1999“2000) 9.1 39.4 4.3 25.5
Ghana (1998“99) 5.6 46.6 8.3 40.8
Guatemala (2002) 2.9 59.5 20.5 55.1
India (2004“05) 8.1 45.3 5.6 36.8
Indonesia (2002) 8.4 45.3 5.4 34.3
Jamaica (2004) 5.3 51.6 9.7 45.5
Kenya (1997) 6.0 49.1 42.5
8.2
Korea (1998) 7.9 37.5 4.7 31.6
Malaysia (1997) 4.4 54.3 12.3 49.2
Mexico (2004) 4.3 55.1 12.8 46.1
Morocco (1998“9) 6.5 46.6 39.5
7.2
Mozambique (2002“3) 5.4 53.6 9.9 47.3
Pakistan (2002) 9.3 40.3 4.3 30.6
Philippines (2003) 5.4 50.6 9.4 44.5
Rwanda (2000) 5.3 53.0 10.0 46.8
Thailand (2002) 6.3 49.0 42.0
7.8
Venezuela (2003) 3.3 52.1 15.8 48.2
4.2 44.3 10.5 34.4
Vietnam (2004)
Japan (1993) 10.6 35.7 3.4 24.9
US (2000) 5.4 45.8 8.5 40.8

Source: World Bank, World Development Indicators 2007: 66“8, Table 2.7.
Note
a Share of total income (or, for some economies, consumption) received by the richest 20 percent of the population
divided by the share of total income (or consumption) received by the poorest 20 percent of the population.

20 percent. This is a substantial degree of inequality, which, as we shall see later in the
chapter, can have dramatic effects on economic growth.
We can go a little deeper into the relation of income equality to average income. It is actu-
ally possible to estimate the per person income of the poorest and richest income groups
separately using the data in Tables 2.1 and 2.3, as follows.
Applying Brazil™s income distribution figures to its 2006 total GNI of $1,038.4 billion
(from Table 2.1), the richest 20 percent of the population (equal to 0.2 — 188.7 million total
population = 37.74 million persons) received $634.5 billion (= 0.611 — $1,038.4 billion
total GNI) of the economy™s total GNI, for a per capita income for the richest 20 percent
equal to roughly $16,811 ($634.5 billion · 37.74 million persons). The poorest 20 percent
of the Brazilian population (also 37.74 million persons) received $29.1 billion of the total
income in 2006 (0.028 — $1,038.4 billion total GNI), for an estimated annual average per
capita income for the poorest 20 percent of Brazilians of about $770 ($29.1 billion · 37.74
42 The Process of Economic Development
million persons).6 You will note that the $16,811 average annual income of the richest quin-
tile in Brazil is 21.8 times larger than the $770 annual income of the poorest quintile of the
population, as Table 2.3 indicated.
Compare these two average income values with Brazil™s average per capita GNI of $5,503
shown in the last column of Table 2.1. The richest 20 percent of income earners received an
average income more than three times the level of average GNI per capita reported in Table 2.1,
while the poorest 20 percent of the Brazilian population received incomes that on average were
equal to about 14 percent of average GNI for the country as a whole. This clearly illustrates the
importance of at least having some rough idea of the income distribution in a country if the per
capita income figures such as those in Tables 2.1 and 2.2 are to be used to gauge the level of devel-
opment of an economy. When the gap between the richest and poorest is quite wide, as is the case
in Brazil, the average GNI value should be interpreted with some caution. This is especially true
when we are using GNI per person as a measure of the well-being of a population.
Other countries have substantial deviations between the richest income recipients and the
poorest, though none are so wide as those found in Brazil. For any country, the percent of
income received by the richest 20 percent divided by the percent of income received by the
poorest 20 percent tells us by how many times the average income of the richest 20 percent
of the population in a country exceeds the average income received by the poorest quintile of
income earners in that economy. The larger this ratio in the penultimate column, the less mean-
ingful is the average GNI per capita figure shown in Table 2.1 as a measure of the actual average
income received and as a measure of the degree of average development of an economy.
Interestingly, the lowest such ratio shown in Table 2.3 is for Japan, which has the smallest
gap “ 3.4 times “ between the average income of the richest and poorest. Why do you think
there is so little inequality in Japan? Has this relatively low level of inequality been harmful
or helpful to the Japanese growth and development experience?
Also shown in Table 2.3 are estimates of Gini coefficients for each economy. The Gini
coefficient is another method for attempting to capture in a simple form “ as does the ratio
of income of the richest 20 percent of income earners to the income of the poorest 20
percent “ the degree of income inequality in a country, though the Gini coefficient is often
a superior measure of the overall distribution of income.
The value of the Gini coefficient can vary between 0 and 100. The closer the Gini coeffi-
cient is to 100, the greater the degree of income inequality; the closer it is to 0, the lesser the
degree of inequality. Similarly, over time, a rising Gini coefficient within an economy would
indicate a worsening of the income distribution, while a falling Gini coefficient suggests an
improvement in the overall distribution of income.7
With some caution, it would be possible to say that Bangladesh with a Gini coefficient of
33.4 has a more equal distribution of income (or consumption) than did Chile with a Gini
coefficient of 54.9. More interesting and revealing, however, is to compare the evolution of an
individual country™s Gini coefficient over time. This would be an excellent class assignment.

4 Other considerations when using the GNI or GDP measure
Both GNI and GDP fail to include some new production and income that adds to the level of
well-being of individuals, while at the same time they count some production as income that
does not contribute to human welfare.
One of the most significant omissions from the GNI and GDP measures is an estimate for
the value of home production. In particular, the value of the output derived from the labor of
women and children, who cook and clean and tend children, who make and mend clothing,
Measuring economic growth and development 43
who toil in home gardens and subsistence farms and who perform a variety of other unpaid
tasks in the production of non-traded goods and services for their families™ own consump-
tion, are not included in the traditional GNI or GDP estimates. And to the extent that men and
boys do work on subsistence farms, in gardens, and in workshops at home resulting in the
production of goods or services consumed solely by the family, the value of their production
to an economy™s total production also is underestimated and ignored.
The value of this home production, including food produced on subsistence farms, is excluded
because such goods and services are not valued by or exchanged in the market. GDP and hence
GNI include only goods and services which are bought and sold on the market. Home and subsist-
ence production, by definition destined for the use of the household producing them, do not get
counted in total GDP or GNI. Without doubt, these productive activities contribute to the well-
being and to the social reproduction of these families by putting food on the table, providing
clothing, making tools, and so on (see Focus 2.2 on Women™s Work). In fact, for poor fami-
lies, such non-market activities are likely to make a larger contribution to their total income and
consumption than is true for better-off families who receive more of their income from paid
pursuits and who purchase a larger proportion of their consumption goods in the marketplace.

FOCUS 2.2 VALUING WOMEN™S WORK
A part of the work that women do is not counted as contributing to an economy™s GNI or
GDP. That is because the great bulk of work done by women in poor economies is often
done in and for the home “ caring for and instructing children, preparing meals, drawing
drinking and cooking water from wells, washing dishes, cleaning, and so on “ and is not
paid employment. The system of national accounts used to calculate the value of an econo-
my™s total income excludes such unpaid, non-market production from the total, whether it is
done by men or women, or boys or girls. However, since it is women who more likely to be
involved in unpaid household production, much of women™s work is said to be “invisible.”
What is especially interesting is that women and girls everywhere put in more total
hours per week at paid and unpaid work than do men or boys. Women in less-developed
countries accounted for 53 percent of total work hours to men™s 47 percent share. Rural
women tended to carry an even larger burden of all work performed. For example, in rural
Kenya, women were found to labour an average of 1.35 times more hours than men; in
Bangladesh, the ratio was 1.1 times more.
However, though women work more in total than men in less-developed economies, more
of women™s effort is carried out in non-paid activities (66 percent) than in paid work, which
accounted for 34 percent of women™s total contribution of hours worked. For men, on the other
hand, 76 percent of their labor contribution was in paid pursuits, while only 24 percent of men™s
total effort was performed in non-paid, non-market activities such as home food production,
child care, cooking, tool repairs, or other unpaid activities within the home or on the farm.
For example, more than fifteen hours per week were expended by women in Mozambique
just to fetch water. Women in rural Kenya labored an average of fourteen hours per week more
than men and did ten times as much housework, none of which has a “value” in terms of
adding to total income. Obviously, though, such unpaid labor is essential to the living standard
of poor families and may often spell the difference between survival and perishing.
One estimate of the total contribution of women™s unpaid, “invisible” activities was put
at $11 trillion in 1993. Given that total global GDP was estimated at $23 trillion in that
year, an adjusted measure of all production, both that which is exchanged in the market
and that which is produced for own-consumption, might result in a value for total global
GDP that is as much as 50 percent higher than the standard measure of GDP. It™s certainly
something to think about!
Source: UNDP 1995: Chapter 4
44 The Process of Economic Development
Thus, social or actual per capita income “ from paid and unpaid sources “ of poorer
families are likely to be underestimated compared to the income for families with higher
incomes. Poorer families may have less income from paid sources to use to purchase goods
and services on the market, but that paid income underestimates the purchasing power and
actual level of consumption of poorer families by not valuing those goods and services
produced at home or on a farm that are part of total consumption for that family.
On the other hand, the production of military goods, logging operations that cause
environmental destruction of forests, and production processes that spew toxic wastes
into the air and water and then force society to pay for their clean-up or which create
health problems requiring remediation via higher health costs are counted as positive
contributions to the measured level of GNI and GDP. Such activities do not add to the
level of development or to society™s welfare to the degree that their market-valued contri-
butions would suggest, since social costs and private costs of such goods diverge, often
dramatically, as a result of the negative externalities created by their production (see
Focus 2.3 on Sustainable Development).
Economists have devised alternative methods to measure an economy™s “true” output and
income that go beyond the traditional GDP and GNI values, such as the Measure of Economic
Welfare (MEW) and the Genuine Progress Indicator (GPI). These alternatives adjust the GNI
and GDP measures both for the omissions that contribute to human welfare not included
in the traditional methodology for determining GNI or GDP, as well as for those included
values that adversely impact human welfare. While the specifics of making such adjustments
are not examined here,8 it is important to keep in mind that some of the goods and services
included in the GNI and GDP measures may contribute negatively to a nation™s development
goals, while others, such as so-called “women™s work” and much of home production in
general, represent activities that contribute positively to a nation™s total production and to its
potential for full human development.


FOCUS 2.3 SUSTAINAbLE DEVELOPMENT: bALANCING
ECONOMIC GROWTH AND THE ENVIRONMENT
Since the 1970s, there has been a growing concern about the impact of economic growth
on the natural environment. In 1971, a United Nations conference on the Environment
and Development was held in Switzerland, followed in 1972 by the UN conference on the
Human Environment in Sweden. These and other gatherings of academics, politicians,
activists, and NGOs (non-governmental organizations) culminated in the UN conference
on Environment and Development “ the so-called “Earth Summit” “ held in Rio de Janeiro,
Brazil, in 1992. And, of course, concern over global warming and its relationship to how
and what economies produce has become front-page news since the late 1990s.
The outcome of these various forums and of a growing body of scientific research has
been an increasing awareness of and interest in the issue of the sustainability of economic
growth. Sustainable development was defined by the Brundtland Commission as “devel-
opment that meets the needs of the present without compromising the ability of future
generations to meet their own needs.” Simple, but quite a powerful concept.
While there is still debate over precisely what this definition means, efforts to operation-
alize it to account for the impact of current economic activities on natural resource use and
the carrying capacity of the environment to absorb changes are evident in the creation of
the Genuine Progress Indicator (GPI) and in other measures, such as the Environmentally-
adjusted net Domestic Product (EDP), as well as other efforts to “green” the national
accounts countries traditionally use to measure their economic progress.
Measuring economic growth and development 45
The motivating conviction of sustainable development is that economic growth need
not be in conflict with the natural environment if attention is paid in economic and public
policy decisions to the goal of conserving and enhancing the natural resource base and in
using technology in ways that value not only higher levels of output but also consider the
impact of such economic expansion on the environment.
Part of the new way of looking at sustainability rests on the critical observation that
there is pollution due to poverty, as well as the perhaps more familiar pollution arising
from affluence. Pollution due to poverty exists in less-developed nations as a result of the
degradation of marginal farm lands by landless farmers, leading to the erosion of top-soil
and desertification, and from the clear-cutting of forests, both of which lead to poorer
water quality after rains and run-off exacerbated by the lack of sanitation facilities. Toxic
fumes enter the atmosphere, generated by using wood as a cooking fuel and the burning
of trash by many small farms.
Pollution due to poverty extends to the cities of less-developed countries, in the slums
and shanty towns where unclean water and a lack of sanitation create environmental
hazards for the poor urban dwellers who crowd into areas that are too small and lacking
in necessary services.
But whatever the specific problem that generates “pollution of poverty,” it is the conse-
quence of a lack of overall economic growth and of national systems of income and wealth
distribution that lead desperately poor people to abuse their environment and their nation™s
stock of natural resources in their effort to simply survive. The effects of such pollution are
intensely local, of course, but often they have global consequences, too.
Pollution arising from affluence is the environmental damage due to increased industrial
production and from higher-income consumption patterns, such as the proliferation of
private motor vehicles and of non-recyclable waste and refuse that contribute to air, land,
and water degradation. This type of pollution tends to increase with economic growth,
while pollution from poverty tends to decrease, and it is not clear that they cancel out over
time with world-wide economic expansion.
Both pollution arising from poverty and pollution due to affluence can have local and
global effects. Pollution has been blamed for global warming, the depletion of the ozone
layer, desertification, and species extinction (estimated in excess of 5,000 annually). The
danger is that degradation of the water, air, and land has set in motion potentially irrevers-
ible processes, the effects of which, if unchecked, could have devastating consequences
for future generations. Goal 7 of the Millennium Development Goals introduced in Chapter
1 is focused precisely on this sustainability and irreversibility issue.
There thus is a compelling need to find the means and the will to balance the pressing
need for continued economic growth and a better distribution of income and wealth in
the poorest nations against the effects this can have on the natural environment. Equally
important, then, is the necessity to value the world™s natural and environmental resources
more rationally, from a social point of view, so that the increased mass consumption that
accompanies higher levels of GDP is not automatically counted as having value, while
the environmental costs of increased production and consumption are ignored, as if the
environment essentially was valued at a zero price. This neglect of environmental costs
has resulted in excesses in the pollution of affluence attributable to the richer nations and
in the urban areas of many less-developed countries.
In discussions over the sustainability of economic growth, however, views often
become polarized. The so-called “deep ecology” perspective tends to be virulently
anti-growth, valuing all of nature and all species and natural habitat equally. Humans,
in this perspective, have no special rights vis-à-vis other species or the environment.
The deep ecology perspective exalts relatively simple living with limited material wants
as a desirable objective.
Continued
46 The Process of Economic Development
Opposed to this viewpoint is that of those who promote economic growth as the
means to best improve human development. In this traditional perspective, nature is
there for the use of human beings. Not all species have equal value, and the expan-
sion of consumption is one of the chief ends of economic life. The environment and its
resources are a means to the end of increasing average incomes. The environment is
just another input to production that can help to increase individual income. Relatively
little attention had been afforded to environmental concerns until quite recently for
those holding to this perspective.
The truth no doubt lies somewhere between these two extreme perspectives. The effort
to define “sustainability” has been devoted to finding a middle ground between the view
that all of nature is equally valuable and should be preserved as much as possible and the
alternative view that nature is to be conquered for the benefit of human beings. Just as we
shall find that development economists are taking a closer look at human capital inputs
as being critical to progress, concern over sustainability can be seen as part of an effort
to view environmental and resource capital as key inputs to potential national and global
prosperity. In this vein, environmental and resource capital is now beginning to be valued,
measured, and thought about as a non-zero price input to production at least as important
as the more traditional inputs of labor and capital.
Increasingly, then, development economists are cognizant of the “eco-nomics” involved
in the connection between ecology and development. This requires going beyond the
attention to the potential “negative externalities” of particular behavior, such as the
dumping of toxic wastes in landfills, which has been the traditional way economics has
incorporated environmental and resource concerns into its purview. New ways of meas-
uring and valuing environmental and resource capital are called for, as are new institutions
that can operationalize and internalize such calculations, including the nature of property
rights to resources, land, and water. Increasingly, these have become not just local issues,
but global concerns, requiring coordinated action and responses.
The concept of the sustainability of economic growth and development need not
be limited to considerations about the natural environment alone. It is also possible to
conceive of the sustainability of an economy™s social structures. The pace, level, and
distribution of economic growth can be extended to quality of life issues, such as the
impact of economic change on urban crime and violence, on illegal drug addiction, on
racial and ethnic tensions, on religious conflict, on gender issues, and so on.
Goal 7 of the Millennium Development Goals focuses on the environment, including
the issue of sustainability. The World Bank (www.worldbank.org) includes updated data
on progress toward meeting this MDG™s three targets that is worth examining to see how
individual countries, as well as the world, are doing in meeting the goals set for 2015.
Sources: Bartelmus (1994: Chapter 2); Elliott (1994); Redclift (1987); WCED (1987: 43)



GNI or GDP: is one income measure better than the other?
Which income measure of economic growth should one use: real GNI per capita or real GDP
per capita? Does it make a difference?
The GNI measure provides some notion of what the residents of a nation have avail-
able to them for consumption and investment, including government spending. GNI thus
furnishes a measure of the sum total of new final goods and services available to the resi-
dents of a country for their final use. In economic terms, the level of output and income
measured by GNI is a proximate gauge of the aggregate material welfare or well-being of
the residents of a nation. If one is going to use income and the economic growth criterion
as a substitute measure for the broader goals of development for a nation, it probably
Measuring economic growth and development 47
makes sense to use real GNI per capita as the standard, since it measures what is actually
available for contributing to the standard of living of the population, both now, for current
consumption, and, in the future, as investment.
GDP, on the other hand, measures all the output and income produced within the borders
of a country, even though not all of that income will necessarily be received by residents of

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