CHAPTER 1 Introducing Economic Development: A Global Perspective 7
on the plight of the half or more of the world’s population for whom low levels
of living are a fact of life. However, as we shall soon discover, the process in
developing countries cannot be analyzed realistically without also considering Developing countries
the role of economically developed nations in directly or indirectly promoting Countries of Asia, Africa, the
Middle East, Latin America,
or retarding that development. Perhaps even more important to students in the eastern Europe, and the for-
developed nations is that as our earth shrinks with the spread of modern trans- mer Soviet Union, that are
port and communications, the futures of all peoples on this small planet are be- presently characterized by
coming increasingly interdependent. What happens to the health and eco- low levels of living and other
development deficits. Used in
nomic welfare of the poor rural family and many others in the developing the development literature as
regions of Asia, Africa, the Middle East, or Latin America will in one way or a synonym for less developed
another, directly or indirectly, affect the health and economic welfare of fami- countries.
lies in Europe and North America, and vice versa. The steady loss of tropical
forests contributes to global warming; new diseases spread much more rapidly
thanks to increased human mobility; economic interdependence steadily
grows. It is within this context of a common future for all humankind in the
rapidly shrinking world of the twenty-first century that we now commence our
study of economic development.
1.2 Economics and Development Studies
The study of economic development is one of the newest, most exciting, and
most challenging branches of the broader disciplines of economics and polit-
ical economy. Although one could claim that Adam Smith was the first “de-
velopment economist” and that his Wealth of Nations, published in 1776, was
the first treatise on economic development, the systematic study of the prob-
lems and processes of economic development in Africa, Asia, and Latin
America has emerged only over the past five decades or so. Although devel-
opment economics often draws on relevant principles and concepts from other
branches of economics in either a standard or modified form, for the most part it
is a field of study that is rapidly evolving its own distinctive analytical and
methodological identity.2
The Nature of Development Economics
Traditional economics is concerned primarily with the efficient, least-cost allo- Traditional economics An
cation of scarce productive resources and with the optimal growth of these approach to economics that
emphasizes utility, profit max-
resources over time so as to produce an ever-expanding range of goods and imization, market efficiency,
services. Traditional neoclassical economics deals with an advanced capitalist and determination of equilib-
world of perfect markets; consumer sovereignty; automatic price adjustments; rium.
decisions made on the basis of marginal, private-profit, and utility calculations;
and equilibrium outcomes in all product and resource markets. It assumes eco-
nomic “rationality” and a purely materialistic, individualistic, self-interested
orientation toward economic decision making.
Political economy goes beyond traditional economics to study, among other Political economy The
things, the social and institutional processes through which certain groups attempt to merge economic
analysis with practical
of economic and political elites influence the allocation of scarce productive politics—to view economic
resources now and in the future, either for their own benefit exclusively or for activity in its political context.
that of the larger population as well. Political economy is therefore concerned
8 PART ONE Principles and Concepts
with the relationship between politics and economics, with a special emphasis
on the role of power in economic decision making.
Development economics Development economics has an even greater scope. In addition to being
The study of how economies concerned with the efficient allocation of existing scarce (or idle) productive
are transformed from stagna-
tion to growth and from low-
resources and with their sustained growth over time, it must also deal with
income to high-income status, the economic, social, political, and institutional mechanisms, both public and
and overcome problems of private, necessary to bring about rapid (at least by historical standards) and
absolute poverty. large-scale improvements in levels of living for the peoples of Africa, Asia, Latin
More developed countries America, and the formerly socialist transition economies. Unlike the more
(MDCs) The now economi- developed countries (MDCs), in the less developed countries, most com-
cally advanced capitalist modity and resource markets are highly imperfect, consumers and producers
countries of western Europe, have limited information, major structural changes are taking place in both
North America, Australia,
New Zealand, and Japan. the society and the economy, the potential for multiple equilibria rather than
a single equilibrium is more common, and disequilibrium situations often
Less developed countries prevail (prices do not equate supply and demand). In many cases, economic
A synonym for developing
countries.
calculations are dominated by political and social priorities such as unifying
the nation, replacing foreign advisers with local decision makers, resolving
tribal or ethnic conflicts, or preserving religious and cultural traditions. At
the individual level, family, clan, religious, or tribal considerations may
take precedence over private, self-interested utility or profit-maximizing
calculations.
Thus development economics, to a greater extent than traditional neo-
classical economics or even political economy, must be concerned with the
economic, cultural, and political requirements for effecting rapid structural
and institutional transformations of entire societies in a manner that will
most efficiently bring the fruits of economic progress to the broadest seg-
ments of their populations. It must focus on the mechanisms that keep fami-
lies, regions, and even entire nations in poverty traps, in which past poverty
causes future poverty, and on the most effective strategies for breaking out
of these traps. Consequently, a larger government role and some degree of
coordinated economic decision making directed toward transforming the
economy are usually viewed as essential components of development eco-
nomics. Yet this must somehow be achieved despite the fact that both gov-
ernments and markets typically function less well in the developing world.
In recent years, activities of nongovernmental organizations, both national
and international, have grown rapidly and are also receiving increasing at-
tention (see Chapter 11).
Because of the heterogeneity of the developing world and the complexity
of the development process, development economics must be eclectic, at-
tempting to combine relevant concepts and theories from traditional economic
analysis with new models and broader multidisciplinary approaches derived
from studying the historical and contemporary development experience of
Africa, Asia, and Latin America. Development economics is a field on the crest
of a breaking wave, with new theories and new data constantly emerging.
These theories and statistics sometimes confirm and sometimes challenge tra-
ditional ways of viewing the world. The ultimate purpose of development
economics, however, remains unchanged: to help us understand developing
economies in order to help improve the material lives of the majority of the
global population.
CHAPTER 1 Introducing Economic Development: A Global Perspective 9
Why Study Development Economics? Some Critical Questions
An introductory course in development economics should help students gain a
better understanding of a number of critical questions about the economies of
developing nations. The following is a sample list of such questions followed
by the chapters (in parentheses) in which they are discussed. They illustrate the
kinds of issues faced by almost every developing nation and, indeed, every de-
velopment economist.
1. What is the real meaning of development? (Chapter 1)
2. What can be learned from the historical record of economic progress in the
now developed world? Are the initial conditions similar or different for
contemporary developing countries from what the developed countries
faced on the eve of their industrialization? (Chapter 2)
3. What are economic institutions, and how do they shape problems of under-
development and prospects for successful development? (Chapter 2)
4. How can the extremes between rich and poor be so very great? Figure 1.1
illustrates this disparity. (Chapters 2, 3, 4, and 5)
5. What are the sources of national and international economic growth? Who
benefits from such growth and why? Why do some countries make rapid
progress toward development while many others remain poor? (Chapters
2, 3, and 4)
6. Which are the most influential theories of development, and are they com-
patible? Is underdevelopment an internally (domestically) or externally
(internationally) induced phenomenon? (Chapters 2, 3, and 4)
7. What constraints most hold back accelerated growth, depending on local
conditions? (Chapter 4)
8. How can improvements in the role and status of women have an especially
beneficial impact on development prospects? (Chapters 5, 6, 7, 8, 9, and 10)
9. What are the causes of extreme poverty, and what policies have been most
effective for improving the lives of the poorest of the poor? (Chapters 5, 6,
7, 8, 9, 10, and 11)
10. Is rapid population growth threatening the economic progress of develop-
ing nations? Do large families make economic sense in an environment of
widespread poverty and financial insecurity? (Chapter 6)
11. Why is there so much unemployment and underemployment in the devel-
oping world, especially in the cities, and why do people continue to mi-
grate to the cities from rural areas even when their chances of finding a
conventional job are very slim? (Chapter 7)
12. Wealthier societies are also healthier ones because they have more re-
sources for improving nutrition and health care. But does better health
also help spur successful development? (Chapter 8)
13. What is the impact of poor public health on the prospects for develop-
ment, and what is needed to address these problems? (Chapter 8)
10 PART ONE Principles and Concepts
FIGURE 1.1 World Income Distribution
Regional percentage of the population
for each 20% of income
Richest
World income distributed by
percentiles of the population, 2000
1 2 3 4 5 6
Richest
Poorest
1 High-income OECD
Poorest
Per capita 2 Eastern and central Europe
income and CIS
(a) 3 Latin America and the Caribbean
4 East Asia and the Pacific
5 South Asia
(b) 6 Sub-Saharan Africa
Part (a) shows world income distribution by percentile. The huge share controlled by the top percentiles
gives the graph its “champagne glass shape.” Part (b) shows the regional shares of global income. For
example, a large majority of people in the top 20% of the global income distribution live in the rich coun-
tries. Most of those in the bottom 60% live in sub-Saharan Africa and Asia. OECD is the Organization for
Economic Cooperation and Development. CIS is the Commonwealth of Independent States.
Source: From Human Development Report, 2005, p. 37. Reprinted with permission from the United Nations
Development Programme.
14. Do educational systems in developing countries really promote economic
development, or are they simply a mechanism to enable certain select
groups or classes of people to maintain positions of wealth, power, and in-
fluence? (Chapter 8)
15. As more than half the people in developing countries still reside in rural
areas, how can agricultural and rural development best be promoted? Are
higher agricultural prices sufficient to stimulate food production, or are ru-
ral institutional changes (land redistribution, roads, transport, education,
credit, etc.) also needed? (Chapter 9)
16. What do we mean by “environmentally sustainable development”? Are there
serious economic costs of pursuing sustainable development as opposed to
CHAPTER 1 Introducing Economic Development: A Global Perspective 11
simple output growth, and who bears the major responsibility for global en-
vironmental damage—the rich North or the poor South? (Chapter 10)
17. Are free markets and economic privatization the answer to development
problems, or do governments in developing countries still have major roles
to play in their economies? (Chapter 11)
18. Why do so many developing countries select such poor development poli-
cies, and what can be done to improve these choices? (Chapter 11)
19. Is expanded international trade desirable from the point of view of the de-
velopment of poor nations? Who gains from trade, and how are the advan-
tages distributed among nations? (Chapter 12)
20. When and under what conditions, if any, should governments in develop-
ing countries adopt a policy of foreign-exchange control, raise tariffs, or
set quotas on the importation of certain “nonessential” goods in order to
promote their own industrialization or to ameliorate chronic balance of
payments problems? What has been the impact of International Monetary
Fund “stabilization programs” and World Bank “structural adjustment”
lending on the balance of payments and growth prospects of heavily in-
debted less developed countries? (Chapters 12 and 13)
21. What is meant by globalization, and how is it affecting the developing Globalization The increas-
countries? (Chapters 12, 13, and 14) ing integration of national
economies into expanding
22. Should exports of primary products such as agricultural commodities be international markets.
promoted, or should all developing countries attempt to industrialize by
developing their own manufacturing industries as rapidly as possible?
(Chapter 13)
23. How did so many developing nations get into such serious foreign-debt
problems, and what are the implications of debt problems for economic
development? How do financial crises affect development? (Chapter 13)
24. What is the impact of foreign economic aid from rich countries? Should de-
veloping countries continue to seek such aid, and if so, under what conditions
and for what purposes? Should developed countries continue to offer such
aid, and if so, under what conditions and for what purposes? (Chapter 14)
25. Should multinational corporations be encouraged to invest in the
economies of poor nations, and if so, under what conditions? How have
the emergence of the “global factory” and the globalization of trade and
finance influenced international economic relations? (Chapter 14)
26. What is the role of financial and fiscal policy in promoting development?
Do large military expenditures stimulate or retard economic growth?
(Chapter 15)
27. What is microfinance, and what are its potential and limitations for reduc-
ing poverty and spurring grassroots development? (Chapter 15)
The following chapters analyze and explore these and many related ques-
tions. The answers are often more complex than one might think. Remember
that the ultimate purpose of any course in economics, including development
