PART ONE. PRINCIPLES AND CONCEPTS OF DEVELOPMENT

I    Introduction

Nature and Scope of the Text

This book is about the economics of developing Asia, Africa, Latin America, and Central and Eastern Europe, whose peoples include impoverished peasants and slum dwellers, factory workers, small farmers, landlords, businesspeople, managers, technicians, government officials, and political elites. The economics of development also includes lessons from the past economic growth of today’s industrialized countries and middle-income economies. It is suitable for students who have taken principles of economics.

   The book differs from other development textbooks:

1. Unlike most texts, it discusses why modern economic growth originated in the West; gives reasons for Japanese growth (before its hiatus in the 1990s); and explains different growth rates among developing countries, including the success of the newly industrialized countries – especially Taiwan, South Korea, Singapore, Hong Kong, and Malaysia (despite the Asian crisis of the late 1990s).
2. The book illustrates concepts from all major third-world regions (Latin America, Asia, Africa, and Eastern Europe), with discussion of Asia’s recent growth acceleration, Latin America’s slowing growth, sub-Saharan Africa’s food and economic crisis, and how developing regions have been affected by a globalized economy.
3. I provide a more detailed and balanced discussion of economic adjustment (structural or sectoral adjustment, macroeconomic stabilization, or economic reform) in emerging economies, including former socialist economies such as China, Russia, Ukraine, Poland, the Czech Republic, and Hungary, making the transition to a market economy. The text also analyzes the roles of rich nations, the International Monetary Fund (IMF), and the World Bank in supplying external resources and setting domestic and international economic conditions for adjustment. Moreover, the book examines the lessons learned during the reaction against reforms imposed by the IMF and other external lenders on Africa, Asia, and Latin American in the last 25 years, and on countries such as Russia, Ukraine, Poland, and Hungary since 1990. Although this material is scattered throughout the book, I present a comprehensive treatment of adjustment programs in Chapter 19.
4. The case studies I discuss – Russia–Soviet Union, Japan, South Korea, Taiwan, China, the Philippines, Thailand, Indonesia, Malaysia, Bangladesh, India, Nigeria, Congo (Kinshasa), South Africa, Argentina, Brazil, and Mexico – are not isolated at the ends of chapters but are integrated into the discussion of major concepts in the chapters.
5. Instead of stressing abstract models of aggregate economic growth, the text emphasizes poverty, inequality, unemployment, and deficiencies in food, clothing, housing, education, and health of people in less-developed countries, including the HIV/AIDs, malaria, and tuberculosis pandemics.
6. Rather than being isolated in a separate chapter, employment and income distribution are discussed along with development throughout the book.
7. Problems of measuring economic growth are stressed along with adjusting income for purchasing power.
8. I examine institutional (see Chapter 4), social, and political factors that accompany economic development throughout the book rather than limiting this discussion to only one or two chapters.
9. Economic performance is explained in the context of both domestic and global economies, and international interdependence is stressed. Three chapters are devoted to the balance of payments, aid, foreign investment, reverse capital flows, technical transfer, financial crises, the financial and currency crises, the external debt crisis, World Bank and IMF policies, international trade, exchange-rate policies, trade in services and agricultural products, and regional economic integration. I discuss a subject little noted by other economists – how U.S., Japanese, European, and other global production networks have increased international competition and reduced production costs and how Asia’s increasing share of the world’s middle-class population is providing increased competition for the industrialized countries’ middle class and college graduates, especially in electronics, software, and services.
10. A section of Chapter 11 on capital formation and technical progress concentrates on information technology, electronics, and (especially mobile) telecommunications, examining the market breakdown by geographical region, returns to investment in information technology, the contribution of information technology to GDP, the rate of price reduction in electronics, computer, and information technology, the adaptation of this technology in less-developed countries (LDCs), and the extent to which LDCs can leapfrog stages to use state-of-the-art electronic and telecommunication technology.
11. The text analyzes views opposed to prevailing Western economic thought. Two of these views are the dependency theory, which explains the underdevelopment of the third world in terms of the economic and political domination of the industrialized world, and neo-Marxism, which sees international class conflict as a struggle by workers and peasants in the developing world against their own political elite, who are in alliance with the elite of the developed world. Only by carefully considering these perspectives can a reader understand third-world economic ideologies and political discontent. Indeed, most neo-Marxists put more emphasis on criticizing the prevailing system, especially capitalism, than on prescribing socialism. I try to present a balanced view of neo-Marxism and the dependence theory – neither attributing these views to a “devil theory of history” nor using them to explain the distributional effects of international trade as unequivocally unfavorable to developing countries.
12. The discussion on development policy making and planning is integrated with other chapters, emphasizing that antipoverty programs, family planning, agricultural research and extension, employment policies, education, local technology, savings, investment project analysis, monetary and fiscal policies, entrepreneurial development programs, and international trade and capital flows are included in economic planning. I analyze the role of the state and the market in policy making, with a section on the dirigiste debate (the role of government) in Chapter 18 and on the liberalizing process in adjustment programs in Chapter 19.

With the explosion of internet resources, I have expanded references to URLs and included them in the bibliography at the back of the book; I also have provided Internet assignments for each chapter in a Web site available for the text, http://www.ksu.edu/economics/nafwayne/, which also provides a student Study Guide by Ramesh Mohan; a Supplement to the text; and a list of links to useful Internet sites (see the Guide to Readings at the end of this chapter).

Organization of the Text

The book is organized into six parts. The first five chapters focus on principles and concepts of economic development. Chapters 6– 7 examine income distribution, including a discussion of the distribution between urban and rural areas and the process of agricultural transformation. Chapters 8–13 analyze the role of population, production factors, and technology in economic development, with special emphasis in Chapter 13 on the environment and natural resources. Chapters 14–17 discuss the macroeconomics and international economics of development. Chapter 18 looks at planning for economic development, and Chapter 19 analyzes stabilization, adjustment, reform, and privatization.

   Sections presenting terms to review, questions to discuss, and guides to readings can be found at the end of each chapter. Highlighted terms are defined or identified in the glossary near the end of the book. References in the chapters and guides to reading are cited in full in the bibliography, including Internet URLs, when available.

How the Other Two-Thirds Live

INEQUALITY BETWEEN THE WORLD'S RICH AND POOR

Development economics focuses primarily on the poorest two-thirds of the world’s population. These poor are the vast majority, but not all, of the population of developing countries, which comprise 82 percent of the world’s population. Many of them are inadequately fed and housed, in poor health, and illiterate. Calculations based on national accounts and income distribution indicate that about 700–1000 million (10–15 percent) of the world’s 6.5 billion people (5.3 billion in developing countries) are poor or living on no more than $1 a day.¹ Most Americans, Canadians, and Britons have never seen poverty like that, the overwhelming majority of which is in sub-Saharan Africa, South Asia, and East Asia.

   If you have an average income in the United States and Canada, you are among the richest 5 percent of the world’s population. The economic concerns of this 5 percent are in stark contrast to those of the majority of people on this planet. The majority see the American with average income as incredibly rich, perhaps as an average American views the Mellons or Rockefellers. By and large, a person’s material well-being (whether rich, poor, or in between) is tied to the long-run growth record of his or her country (Dollar and Kraay 2002:195–225), a focus of this book.

   Income inequality is even greater for the world as a whole than for countries having high income concentration, such as South Africa and Brazil. To see these contrasts more clearly, let us briefly compare living conditions in North America to those in India, a low-income country, one that is not as poor as the poorest region of the world, sub-Saharan Africa.

A NORTH AMERICAN FAMILY

An average intact family in the United States and Canada, the Smiths, a family of four, has an annual income of $US55,000 to $US60,000. They live in a comfortable apartment or suburban home with three bedrooms, a living room, kitchen, and numerous electrical appliances and consumer goods. Their three meals a day include coffee from Brazil, tinned fruit from the Philippines, and bananas from Ecuador.

   The Smith children are in good health and have an average life expectancy of 77 years. Both parents received a secondary education, and the children can be expected to finish high school and possibly go to a university. Modern machinery and technology, even where these require physical work, will probably relieve their jobs. But although the Smiths seem to have a reasonably good life, they may experience stress, frustration, boredom, insecurity, and a lack of meaning and control over their lives. Their air may be dirty, their water polluted, and their roads congested. Some of these problems may even result from economic progress. Nevertheless, millions of less fortunate people throughout the world would be happy with even a portion of the Smiths’ material affluence.

INDIAN FARM FAMILIES

The family of Balayya, a farm laborer in India, has a life far different from the Smiths’. Although work, family structure, food, housing, clothing, and recreational patterns vary widely in the developing world, Balayya’s family illustrates the low income of the majority of the world’s population in Asia, Africa, and Latin America relative to North America. Balayya Lakshman, his wife, Kamani, and their four children, ranging in age from 3 to 12 years, have a combined annual income of $US900 to $US1,200² (but several times that in purchasing power), most of which consists of goods produced rather than money earned. Under a complex division of labor, the family receives consumption shares from the patron (or landlord) in return for agricultural work – plowing, transplanting, threshing, stacking, and so on.

   The rice-based daily meal, the one-room mud house thatched with palm leaves, and the crudely stitched clothing are produced locally. The house has no electricity, clean water, or latrine. Kamani fetches the day’s water supply from the village well, a kilometer (three-fifths of a mile) away. Although there is much illness, the nearest doctor, nurse, or midwife is 50 kilometers away, serving affluent city dwellers. Average life expectancy is 63 years. Few villagers can afford the bus that twice daily connects a neighboring village to the city, which is 40 kilometers away.³ The family’s world is circumscribed by the distance a person can walk in a day.

   Neither Balayya nor Kamani can read or write. One of their children attended school regularly for three years but dropped out before completing primary school. The child will probably not return to school.

   Despite inadequate food, Balayya and the two sons over seven years old toil hard under the blazing sun, aided by only a few simple tools. During the peak season of planting, transplanting, and harvesting, the work is from sunrise to sunset. Kamani, with help from a six-year-old daughter, spends most of her long working day in the courtyard near the house. Games, visiting, gossip, storytelling, music, dancing, plays, worship, religious fairs and festivals, weddings, and funerals provide respite from the daily struggle for survival.

   Balayya has no savings. Like his father before him, he will be perpetually in debt to the landlord for expenditures, not only for occasional emergencies but also for the proper marriages of daughters in the family.

   The common stereotype is that peasant, agricultural societies have populations with roughly uniform poverty, a generally false view. Although many third-world villagers are poor, a number are better off. A tiny middle and upper class even exists. Accordingly, Sridhar Ramana, Balayya’s landlord, together with his extended family – his wife, two unmarried children, two married sons, their wives, and their children – is relatively prosperous. The family, whose annual income is $US6,000, lives in a five- to six-room brick house with a tile roof and a large courtyard. Their two daily meals consist of a variety of meats as well as seasonal fruits and vegetables.⁴ Machine-stitched clothes are acquired from the local tailor, from the village bazaar (open-air marketplace), or on monthly bus trips to the city. The house has electric lights and fans. Servants shop for food, cook, clean, carry water, and tend the lawn and garden. Sridhar and his sons and grandchildren have completed primary school. Some of the grandsons, and occasionally a granddaughter, will complete secondary school, or even graduate from the university.

CONGESTION, POVERTY, AND AFFLUENCE IN INDIA'S CITIES

In the large Indian cities, there are few proper footpaths for pedestrians or separation of fast-moving vehicles from slower ones; the flow of traffic consists of the juxtaposition of buses, automobiles, taxis, trucks, jeeps, motorcycles, motor scooters, powered cycles, bicycles, human-drawn and motorized rickshaws, oxcarts, handcarts, cattle, dogs, and pedestrians walking or carrying head loads. Congestion, squalor, destitution, and insecurity characterize the lives of the unemployed, underemployed, and marginally employed in cities such as Kolkata (Calcutta), Mumbai (Bombay), and Delhi – more so than for the rural, landless worker. In the central city, people literally live in the street, where they eat, wash, defecate, and sleep on or near the pavement (see Jagannathan and Halder 1988:1175–78). During the monsoon season, they huddle under the overhanging roofs of nearby commercial establishments. Others with menial jobs live in crowded, blighted huts and tenement houses that make up urban shantytowns. In contrast, the family whose major income earner is steadily employed as an assembly line worker in a large company or as a government clerk may live in a small house or apartment. Upper-income professionals, civil servants, and businesspeople usually live in large houses of five to six rooms. Although they have fewer electrical appliances than the Smiths do, they achieve some of the same material comfort by hiring servants.

   Social institutions and lifestyles vary greatly among third-world countries. Nevertheless, most low-income countries have income inequality and poverty rates at least as high as India’s. Even the poorest Americans and Canadians are better off than most of the people in India and other low-income countries.

Globalization, Outsourcing, and Information Technology

Yet both Indians and North Americans are living in worlds affected by domestic economic change and greater integration into the global economy. In the United States, household income distribution is shaped more like an hourglass, with a slender middle, so that families such as the Smiths are falling from the middle class from job loss or rising to higher incomes. In India, the gains from economic growth and reform – although these gains bypass some – mean rising commercial farm income for the families of Sridhar and Balayya and increased business and employment opportunities in the cities. Furthermore, as Anthony P. D’Costa (2003:212) notes, India’s incomes are uneven so that “You have fiber optic lines running parallel with bullock carts.”

   With globalization, the worlds of India and the United States increasingly are intersecting, much beyond the expanding Indian-American representation in electronics, academics, business, medicine, and journalism in the United States. Some U.S. corporations (or state or local governmental units) outsource service jobs to India, where an entry salary for a university graduate is $US300–500 monthly, a good salary and career opportunity by local standards. The corporation may have an Indian subsidiary or may subcontract work to an Indian firm. In India, two million English-speaking college students graduate yearly, and most work for one-tenth to one-fifteenth the salary that a U.S. worker of comparable skill receives.

   Low-cost high-quality telecommunications means that U.S. companies can open a call center almost as easily in Kolkata, Delhi, Dakha, Johannesburg, and Manila (Hookway 2003:A1) as in Omaha, Austin, or Tallahassee. Indian employees spend several weeks of training to Americanize their accents and take a crash course in Americana – “holidays, regional speech patterns, weather patterns, and the meaning of terms such as ‘frat party’” – to disguise the callers’ location (Bengali 2003:A1).

   As night settles in Mumbai, Megha Joshi enters an office with a group of young graduates, sitting in a row of sound-muffling cubicles, talking into their designer headsets. She phones someone in the United States, 12 time zones away. “Good morning, this is Meg,” she says, Anglicizing her name. Working from a script, she offers the respondent a major credit card. Other Indian call center workers handle routine work, such as helping a customer make a standard order, check a bank or food stamp balance, pay a bill, or activate a credit card; processing insurance claims; recovering bad debts; or providing other customer services; routing more complicated questions back to the call center in the United States. Other outsourcing spans the technology spectrum, including software code writing, chip design, product development, accounting, Web site designing, animation art, stock market research, radiology, airline reservations, tax preparation and advice, transcribing, consulting, prayers for the deceased, and other support services, especially in south India’s Silicon Valley, Bangalore, and other high-technology cities (ibid.; Kansas City Star 2004; World Bank, Development News, December 26, 2002; Guardian 2001; Landler 2001).⁵ Yet with India’s sustained economic growth and increasingly attractive job options for college graduates, call centers will find it more difficult to hire university graduates cheaply.

   In software and related services, India moved up the information and communications technology (ICT) value chain from Western corporate outsourcing and small IT enterprises to a major exporter. Chapter 15 discusses J. T. Banerjee (not his real name), Kolkata director of TRP Software, Limited, a data systems and software company that designed information management systems for firms and governmental units. TRP took advantage of India’s low-salaried university graduates to put together competitive bids overseas. However, TRP’s export growth did not take off until after 1991, when India’s liberalization of input purchases and foreign exchange allowed Mr. Banerjee to travel overseas freely and purchase inputs in a timely way.

   Domestic firms such as TRP, joined by the emerging technically talented Indian diaspora, provided the skills for India to play a major role in the global information technology industry. In the late 1990s, Chinese and Indian immigrants ran one-third of the high-technology firms in the Silicon Valley, California. Indian- and Indian-American-owned companies in the United States, frequently spinoffs from large American companies, have become suppliers to former U.S. employers or other contacts, using Indian employees. Moreover, Indian software firms raised capital in the United States to acquire U.S. companies, set up offices to interact with clients, and undertake research and innovation. India undertook innovation and skill deepening in “solid systems integration skills, imaging and scientific programming, such as GIS and CAD/CAM, and real time programming, such as telecom, multimedia, and e-commerce.” India’s software sector represents “the first time India has produced a skill-based, high value export-oriented sector. The sector has also attracted considerable foreign direct investment by multinational corporations and brought in some expatriate professionals” (D’Costa 2002, with quotations from pp. 10, 4).

   India’s ICT production grew from $10 million in 1986–87 to $1.7 billion in 1994–95 to $16.5 billion ($9.5 billion exports) in 2002–03, comprising 3 percent of GDP and 18 percent of exports. In 2002, Forbes ranked India’s software services magnate, Wipro’s Azim Premji, 41st in the world in net worth, with $6.4 billion, and one of the other top 500 billionaires was from India’s software industry (NASSCOM 2003a; NASSCOM 2003b; NASSCOM 2003c; D’Costa 2002:1, 5). “Mumbai,…a highly developed financial and commercial center [has] large software firms, such as TCS, Tata-Infotech and Citibank.”⁶ Still, India’s global ICT share in 2001 was just over 1 percent (D’Costa 2002:8).

India’s and Asia’s Golden Age of Development

India’s recent growth is a part of a golden age of development for Asia (Bhalla 2002:195), during years of globalization (expansion of trade and capital movements), 1980–2000. From 1980 to 2000, the absolute incomes of the industrialized countries’ middle class “slowed down to a crawl – only 1.2 percent a year, a third of that experienced by their parents – [while] that of Asian elites slowed down only marginally – to 2.9 percent” (ibid., p. 195). The impact of this has been most substantial among the world’s middle class (income range of $US10–$US40 a day or annual purchasing-power equivalent income, at 1993 prices, between $US3,650 and $US14,600). The relative income of Asian elites (top 10 percent of income earners) increased from 43 percent in 1980 to 60 percent in 2000 of the middle 50 percent of industrialized countries’ income earners, a group with comparable education and skills.

ASIA'S COMPETITION AND AMERICAN PROTESTS

Globalized firms, in their search for lower costs, are hiring Indians (and Chinese, Bangladeshis, and Malaysians) to do their work in place of middle-class Americans, Britons, Swedes, or Dutch; and in some instances, as noted earlier, Asians are subsequently establishing enterprises that compete globally. Figure 1-1 shows U.S. income, 1960–2000, falling relative to East and South Asia, virtually unchanged relative to Latin America, and increasing substantially relative to Africa.

FIGURE 1-1. U.S. Income Relative to That of Developing Regions, 1960–2000. Sources: Bhalla 2002:192; WIDER 2002; World Bank 2002h. CD-ROM.

   In the 1960s and 1970s, those representing large U.S. corporate interests, such as Nelson Rockefeller, a liberal Republican, supported populist programs of health, education, and welfare. In subsequent decades, as multinational corporations have become more footloose with greater global opportunities for outsourcing, these interests are more likely to oppose large government spending on educational and welfare programs for the middle and working classes.

   Indian and Asian elites anticipate doubling real incomes in a generation. By contrast, the middle classes of the United States and other industrialized countries are facing a collapse in growth (doubling real incomes not in one but in three generations), more competition from foreign skills, and lowered expectations for a better life. Is it surprising that many U.S. and Western middle classes are protesting against globalization?

   Latin America’s 2000 income relative to the United States is only 70 percent of its preglobalization value in 1960 (Bhalla 2002:192–96). Porto Alegre, Brazil, in Latin America (Mumbai, India in 2004) hosts an annual anti-globalization meeting, the World Social Forum, a rival to the annual World Economic Forum for the world’s economic elites, usually held in Davos, Switzerland.

   Although Asians protest the policy cartel of the IMF, World Bank, and U.S. government, they rarely protest against globalization, from which they benefit. Africa, by contrast, has few protests against expansion of global trade, capital movements, and outsourcing, from which it receives little benefit. Africans are more likely to complain about their lack of integration into the international economy.

Critical Questions in Development Economics

An introduction to development economics should help you gain a better understanding of a number of critical questions relating to the economics of the developing world. The following list is a sample of 19 such questions. Each is numbered to correspond to the chapter in which it is primarily discussed.

1. How do the poorest two-thirds of the world live?
2. What is the meaning of economic development and economic growth?
3. What is the history of economic development? How have developing countries performed economically in the last half century?
4. What are the major characteristics and institutions of developing countries?
5. What are the major theories of economic development?
6. Has economic growth in the third world improved the living conditions of its poor?
7. How can poverty be reduced in the rural areas of low-income countries?
8. What effect does population growth have on economic development?
9. Why is there so much unemployment in developing countries?
10. What factors affect labor skills in the third world?
11. What criteria should be used to allocate capital between alternative projects? How important are information and other technology in economic development?
12. What factors contribute to successful entrepreneurial activity in developing countries?
13. Are humankind’s economic policies sustainable over the next few centuries?
14. What monetary and fiscal policies should a country use to achieve economic development with price stability?
15. How can LDCs export more and import less?
16. What policies can ease the international debt and financial crises in developing countries?
17. What trade strategies should developing countries use?
18. Should developing countries rely on market decisions or state planning in allocating resources?
19. Do price and exchange-rate decontrol, financial liberalization, deregulation, and privatization improve LDC performance?