EconomicDevelopment
T E N T H E D I T I O N
Michael P. TodaroNew York University and the Population Council
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Stephen C. SmithThe George Washington University
ADDISON-WESLEY
xn imprint of Pearson EducationHarlow, England • London • New York • Boston • San Francisco • TorontoSydney • Tokyo • Singapore • Hong Kong • Seoul • Taipei • New DelhiCape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan
Contents
PrefaceCase Studies
Vll
xxvii
Part One Principles and Concepts 1:
1 Economics, Institutions, and Development:A Global Perspective 2How the Other Half Live ^ 2Economics and Development Studies 6
The Nature of Development Economics 7Why Study Development Economics? Some Critical Questions 9The Important Role of Values in Development Economics 12
Economies as Social Systems: The Need to Go Beyond Simple Economics 13What Do We Mean by Development? 14
Traditional Economic Measures 14The New Economic View of Development 15Sen's "Capabilities" Approach 16Three Core Values of Development 20The Central Role of Women 22The Three Objectives of Development 22The Millennium Development Goals 22
Conclusions 25EJ Case Study: Progress in the Struggle for More Meaningful Development: Brazil 28
2 Comparative Economic Development 39Defining the Developing World 41Measuring Development for Quantitative Comparison across Countries 43Some Basic Indicators of Development 48
A Holistic Measure of Living Levels: The Human Development Index 49Characteristics of the Developing World: Diversity within Commonality 56
Lower Levels of Living and Productivity 56
xv
xvi Contents
Lower Levels of Human Capital 58Higher Levels of Inequality and Absolute Poverty 59Higher Population Growth Rates 62Greater Social Fractionalization 63Larger Rural Populations but Rapid Rural-to-Urban Migration 64Lower Levels of Industrialization and Manufactured Exports 65Adverse Geography 66Underdeveloped Financial and Other Markets 67Lingering Colonial Impacts 68Relative Importance of the Public and Private Sectors and Civil Society 70
How Low-Income Countries Today Differ from Developed Countriesin Their Earlier Stages 71
Physical and Human Resource Endowments 72Relative Levels of Per Capita Income and GDP 72Climatic Differences 73Population Size, Distribution, and Growth 73The Historical Role of International Migration 74The Growth Stimulus of International Trade 76Basic Scientific and Technological Research and Development Capabilities 77Efficacy of Domestic Institutions -77
Are Living Standards of Developing and Developed Nations Converging? 78
Long-Run Causes of Comparative Development 82
Conclusion 88
Case Study: Divergent Development: Pakistan and Bangladesh 91
Classic Theories of Economic Growth and Development 109Classic Theories of Economic Development: Four Approaches 109
Development as Growth and the Linear- Stages Theories 110Rostow's Stages of Growth 111The Harrod-Domar Growth Model 112Obstacles and Constraints 114Necessary versus Sufficient Conditions: Some Criticisms of the Stages Model 114
Structural-Change Models 115The Lewis Theory of Development 115Structural Change and Patterns of Development 120Conclusions and Implications 121
The International-Dependence Revolution 122The Neocolonial Dependence Model 122The False-Paradigm Model 124The Dualistic-Development Thesis 124 N
Conclusions and Implications 125The Neoclassical Counterrevolution: Market Fundamentalism 126
Challenging the Statist Model: Free Markets, Public Choice, and Market-FriendlyApproaches 126
Contents xvii
Traditional Neoclassical Growth Theory 128Conclusions and Implications 129
Classic Theories of Development: Reconciling the Differences 131
E3 Case Study: Schools of Thought in Context: South Korea and Argentina 133
Appendix 3.1 Components of Economic Growth 142
Appendix 3.2 The Solow Neoclassical Growth Model 147
Appendix 3.3 Endogenous Growth Theory 151
1 Contemporary Models of Development andUnderdevelopment 158Underdevelopment as a Coordination Failure 159
Multiple Equilibria: A Diagrammatic Approach "-y~ 162Starting Economic Development: The Big Push 167
The Big Push: A Graphical Model 168Other Cases in Which a Big Push May Be Necessary 173Why the Problem Cannot Be Solved by a Super-Entrepreneur 174
Further Problems of Multiple Equilibria 176
Kramer's O-Ring Theory of Economic Development 179The O-Ring Model 179Implications of the O-Ring Theory 182
Economic Development as Self-Discovery 184
e The Hausmann-Rodrik-Velasco Growth Diagnostics Framework 185
Conclusions 188
El Case Study: Understanding a Development Miracle: China 193
Part Two Problems and Policies: Domestic ] 207|
5 Poverty, Inequality, and Development 208Measuring Inequality and Poverty 210
Measuring Inequality 210Measuring Absolute Poverty 217
Poverty, Inequality, and Social Welfare 222What's So Bad about High Inequality? 222Dualistic Development and Shifting Lorenz Curves: Some Stylized Typologies 224Kuznet's Inverted-U Hypothesis 227Growth and Inequality 232
Absolute Poverty: Extent and Magnitude 233Growth and Poverty 236
Economic Characteristics of Poverty Groups 238Rural Poverty 238
xviii Contents
Women and Poverty 239Ethnic Minorities, Indigenous Populations, and Poverty 243
Policy Options: Some Basic Considerations 244
Areas of Intervention 244
Policy Options 245
Summary and Conclusions: The Need for a Package of Policies 250• Case Study: Making Microfinance Work for the Poor:
The Grameen Bank of Bangladesh 252
Appendix 5.1 Appropriate Technology and Employment Generation:The Price Incentive Model 266
Appendix 5.2 The Ahluwalia-Chenery Welfare Index 269
6 Population Growth and Economic Development:Causes, Consequences, and Controversies 273The Basic Issue: Population Growth and the Quality
of Life 274Population Growth: Past, Present, and Future 275
World Population Growth throughout History 275Structure of the World's Population 277The Hidden Momentum of Population Growth 281
The Demographic Transition 283The Causes of High Fertility in Developing Countries:
s The Malthusian and Household Models 2861J The Malthusian Population Trap 286
Criticisms of the Malthusian Model 289The Microeconomic Household Theory of Fertility 291The Demand for Children in Developing Countries 293Some Empirical Evidence 294Implications for Development and Fertility 295
The Consequences of High Fertility: Some Conflicting Opinions 295
It's Not a Real Problem 296It's a Deliberately Contrived False Issue 297It's a Desirable Phenomenon 298It Is a Real Problem 299
Goals and Objectives: Toward a Consensus 1 302
Some Policy Approaches 303What Developing Countries Can Do 304What the Developed Countries Can Do 307How Developed Countries Can Help Developing Countries with Their Population
Programs 308
Conclusion 309
• Case Study: Population, Poverty, and Development:
China and India 310
Contents xix
7 Urbanization and Rural-Urban Migration:Theory and Policy 320The Migration and Urbanization Dilemma 320
Urbanization Trends and Projections 321The Role of Cities 327
Industrial Districts 327Efficient Urban Scale 329
The Urban Giantism Problem 331First-City Bias 332Causes of Urban Giantism 333
The Urban Informal Sector 335Policies for the Urban Informal Sector 337Women in the Informal Sector 340
Migration and Development 342Toward an Economic Theory of Rural-Urban Migration 344
A Verbal Description of the Todaro Model 345x A Diagrammatic Presentation 347
Five Policy Implications 350Summary and Conclusions: A Comprehensive Migration and Employment
Strategy 352H Case Study: Rural-Urban Migration and Urbanization in Developing Countries:
India and Botswana 355Appendix 7.1: A Mathematical Formulation of the Todaro Migration Model 366
8 Human Capital: Education and Health in EconomicDevelopment 369The Central Roles of Education and Health 369Education and Health as Joint Investments for Development 372Improving Health and Education: Why Increasing Income Is Not Sufficient 373Investing in Education and Health: The Human Capital Approach 375Child Labor 378The Gender Gap: Women and Education 382
Consequences of Gender Bias in Health and Education 384Educational Systems and Development 387
The Political Economy of Educational Supply and Demand: The Relationshipbetween Employment Opportunities and Educational Demands 387
Social versus Private Benefits and Costs 389 •,Distribution of Education 392Education, Inequality, and Poverty 394Education, Internal Migration, and the Brain Drain 396
Health Systems and Development 397Measurement and Distribution 397
xx Contentsc
Disease Burden 400HIV/AIDS 402Malaria 407Parasitic Worms and Other "Neglected Tropical Diseases" 408Health and Productivity 409Health Systems Policy 413
B Case Study: Pathways out of Poverty: Progresa/Oportunidades 416
9 Agricultural Transformation and Rural Development 431The Imperative of Agricultural Progress and Rural Development 431
Agricultural Growth: Past Progress and Current Challenges 433
The Structure of Agrarian Systems in the Developing World 438
Peasant Agriculture in Latin America, Asia, and Africa 439Agrarian Patterns in Latin America: Progress and Remaining Poverty Challenges 441Transforming Economies: Problems of Fragmentation and Subdivision
of Peasant Land in Asia 444Subsistence Agriculture and Extensive Cultivation in Africa 447
The Important Role of Women 450
The Economics of AgriculturaLDevelopment: Transition from PeasantSubsistence to Specialized Commercial Farming 453
Subsistence Farming: Risk Aversion, Uncertainty, and Survival 454The Transition to Mixed and Diversified Farming 460From Divergence to Specialization: Modern Commercial Farming 461
n Toward a Strategy of Agricultural and Rural Development:Some Main Requirements 462
Improving Small-Scale Agriculture 462Conditions for Rural Development 465
B Case Study: The Need to Improve Agricultural Extension for WomenFarmers: Kenya 468
10 The Environment and Development 483Economics and the Environment 483
Environment and Development: The Basic Issues ' 485Sustainable Development and Environmental Accounting 485Population, Resources, and the Environment 486Poverty and the Environment 486Growth versus the Environment 487Rural Development and the Environment 487Urban Development and the Environment 488The Global Environment and Economy 488The Nature and Pace of Greenhouse Gas-Induced Climate Change 489Natural Resource-Based Livelihoods as a Pathway out of Poverty:
Promise and Limitations 489
Contents xxi
The Scope of Environmental Degradation: An Overview 490
Rural Development and the Environment: A Tale of Two Villages 491
Global Warming and Climate Change 494
Traditional Economic Models of the Environment 497Privately Owned Resources 497Common Property Resources 499Public Goods and Bads: Regional Environmental Degradation and the
Free-Rider Problem 501 c
Limitations of the Public-Good Framework 503Urban Development and the Environment 503
The Ecology of Urban Slums 503Industrialization and Urban Air Pollution 505Problems of Congestion, Clean Water, and Sanitation 508 :~
The Need for Policy Reform 509The Local and Global Costs of Rain Forest Destruction 510Policy Options in Developing and Developed Countries 512
s What Less Developed Countries Can Do 512How Developed Countries Can Help LDCs 514What Developed Countries Can Dt> for the Global Environment 515
O Case Study: Economic Growth and Environmental Sustainability:The Philippines 517
11 Development Policymaking and the Roles of Market,State, and Civil Society 530The Planning Mystique 531
The Nature of Development Planning 532Basic Concepts 532Planning in Mixed Developing Economies '" 532
The Rationale for Development Planning 533
The Planning Process: Some Basic Models 535
Aggregate Growth Models: Projecting Macro Variables * 535
Multisector Models and Sectoral Projections 538Project Appraisal and Social Cost-Benefit Analysis 539
Conclusions: Planning Models and Plan Consistency 542Problems of Plan Implementation and Plan Failure 543
Theory versus Practice 543Reasons for Plan Failure 544
Government Failure and the Resurgent Preference for Markets over Planning 545
The Market Economy 546Sociocultural Preconditions and Economic Requirements 546Role and Limitations of the Market in LDCs 549
xxii Contents
The Washington Consensus on the State Role in Development andIts Limitations 551
Toward a New Consensus 552Development Political Economy: Theories of Policy Formulation
and Reform 554Understanding Voting Patterns on Policy Reform 556Institutions and Path Dependency 557Democracy versus Autocracy: Which Facilitates Faster Growth? 558Development Roles of NGOs and the Broader Citizen Sector 560
Trends in Governance and Reform 566Tackling the Problem of Corruption 566Decentralization 568Development Participation 570 ' ; i
Development Policy and the State: Concluding Observations 572
Case Study: The Role of Development NGOs: The BRAC Model 574
Part Three Problems and Policies: International and Macro 587
12 International Trade Theory and Development Strategy 588Globalization: An Introduction 588
International Trade and Finance: Some Key Issues 591
Five Basic Questions about Trade and Development 594
Importance of Exports to Different Developing Nations 595
Demand Elasticities and Export Earnings Instability 597
The Terms of Trade and the Prebisch- Singer Thesis 598
The Traditional Theory of International Trade 599Comparative Advantage 599Relative Factor Endowments and International Specialization:
The Neoclassical Model 600
Trade Theory and Development: The Traditional Arguments 605
The Critique of Traditional Free-Trade Theory in the Contextof Developing-Country Experience 606
Fixed Resources, Full Employment, and the International Immobility ofCapital and Skilled Labor 607
Fixed, Freely Available Technology and Consumer Sovereignty 610Internal Factor Mobility, Perfect Competition, and Uncertainty: Increasing Returns,
Imperfect Competition, and Issues in Specialization 611The Absence of National Governments in Trading Relations 613Balanced Trade and International Price Adjustments 614Trade Gains Accruing to Nationals 614
Some Conclusions on Trade Theory and Economic Development Strategy 615
Contents xxiii
Traditional Trade Strategies for Development:Export Promotion versus Import Substitution 618
Export Promotion: Looking Outward and Seeing Trade Barriers 620Import Substitution: Looking Inward but Still Paying Outward 623The IS Industrialization Strategy and Results 626Foreign-Exchange Rates, Exchange Controls, and the Devaluation Decision 631
Trade Optimists and Trade Pessimists: Summarizing the Traditional Debate 635Trade Pessimist Arguments 635 o
Trade Optimist Arguments 636The Industrialization Strategy Approach to Export Policy 637
Reconciling the Arguments: The Data and the Consensus 640
South-South Trade and Economic Integration: Looking Outwardand Inward ~ 641
Economic.Integration: Theory and Practice 641Regional Trading Blocs and the Globalization of Trade 643
Trade Policies of Developed Countries: The Need for Reform 645• Xase Study: A Development Success Story: Taiwan 649
13 Balance of Payments, Developing-Country Debt,and the Macroeconomic Stabilization Controversy 667The Balance of Payments Account 668
General Considerations 668A Hypothetical Illustration: Deficits and Debts 670
Financing and Reducing Payments Deficits 671Some Initial Policy Issues 671Trends in LDC Balance of Payments 673
The Debt Crisis of the 1980s 674Background and Analysis 674Origins of the Debt Crisis 676
Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization „Policies, and Their Critics 679
The IMF Stabilization Program 679Tactics for Debt Relief 681
"Odious Debt" and Its Prevention 688
Resolution and Continued Vulnerabilities 689
• Case Study: Trade, Capital Flows, and Development Strategy: South Korea 693
Appendix 13.1: A Brief History and Analysis of the InternationalMonetary Fund and the World Bank 704
14 Foreign Finance, Investment, and Aid: Controversiesand Opportunities 714The International Flow of Financial Resources 714
xxiv Contents
Private Foreign Direct Investment and the Multinational Corporation 715Multinational Corporations: Size, Patterns, and Trends 716Private Foreign Investment: Some Pros and Cons for Development 719Private Portfolio Investment: Boon or Bane for LDCs? 725
The Role and Growth of Remittances 726
Foreign Aid: The Development Assistance Debate 728Conceptual and Measurement Problems 728Amounts and Allocations: Public Aid 730Why Donors Give Aid 731Why LDC Recipients Accept Aid 735The Role of Nongovernmental Organizations in Aid and Evaluation 736The Effects of Aid 737
El Case Study: African Success Story at Risk: Botswana - ^ 739
15 Finance and Fiscal Policy for Development 750The Role of the Financial System 751
The Bumpy Road to Macroeconomic Stability 752
Differences between MDC and LDC Financial Systems 753The Role of Central Banks 756""The Role of Development Banking 758Informal Finance 760
Microfinance Institutions 761
i Reforming Financial Systems 764Financial Liberalization, Real Interest Rates, Savings, and Investment 764Financial Policy and the Role of the State 765Debate on the Role of Stock Markets 767
Fiscal Policy for Development 769
Macrostability and Resource Mobilization 769Taxation: Direct and Indirect 769
Public Administration: The Scarcest Resource 774
State-Owned Enterprises 776Improving the Performance of SOEs 777Privatization: Theory and Experience 778
Military Expenditures and Economic Development 780
0 Case Study: Privatization—What, When, and to Whom? Chile and Poland 784
16 Some Critical Issues for the Twenty-First Century 798Global Interdependence and the Growth of Developing-World Markets 798
The Global Environment and the Developing World 799Rain Forest Preservation as a Public Good: Who Should Pay? 801Searching for Global Solutions: The 1992,1997, and 2002 Summits
and Follow-Ups 803