Economic Development To-Date (PDF)

The Developed and Developing World Income GNI per capita, World Bank Atlas method, 2007 Greenland (Den)...

The Developed and Developing World Income GNI per capita, World Bank Atlas method, 2007 Greenland (Den) Low-income countries ($935 or less) Faeroe Lower-middle-income countries ($936–$3,705) Islands Iceland (Den) Upper-middle-income countries ($3,706–$11,455) Norw The Netherlands High-income countries ($11,456 or more) C a n a d a United no data Isle of Man (UK) Kingdom Denm Ireland Channel Islands (UK) Ge Belgium Luxembourg France Switzerl I Liechtenstein Andorra Spain U n i t e d S t a t e s Monaco Portugal Bermuda Gibraltar (UK) (UK) Tu British Virgin Islands (UK) Morocco The Bahamas Middle East & North Africa Algeria Mexico Dominican Republic $2,794 Former Spanish Cayman Islands (UK) Puerto Sahara Cuba Rico (US) US Virgin St. Kitts and Nevis Islands (US) Antigua and Barbuda Mauritania Belize Jamaica Haiti Cape Verde Guadeloupe (Fr) Mali N Guatemala Honduras Aruba Dominica Senegal (Neth) Martinique (Fr) The Gambia El Salvador St. Lucia Nicaragua Barbados Guinea-Bissau Burkina Faso Guinea Benin Panama Costa Rica Trinidad St. Vincent and the Grenadines Niger and Tobago Grenada Sierra Leone Côte Ghana Netherlands R.B. de d'Ivoire French Guiana Liberia Ca Antilles (Neth) Venezuela Guyana (Fr) Togo Colombia Equato Kiribati Latin America & Caribbean Ecuador Suriname São Tomé and Príncipe $5,540 Peru B r a z i l French Polynesia (Fr) Bolivia Brazil Paraguay $5,910 Uruguay Chile Argentina Source: Data from Atlas of Global Development, 2nd ed., pp. 10–11. © Collins Bartholomew Ltd., 2010.  Russian Federation Europe & Central Asia $7,560 $6,051 Sweden way Finland R u s s i a n F e d e r a t i o n Estonia Latvia nmark Lithuania Czech Republic Belarus Slovak Republic ermany Poland Slovenia m Ukraine Croatia Kazakhstan Austria Hungary Moldova Serbia rland Romania Bosnia and Herzegovina Mongolia Italy FYR Macedonia Montenegro Bulgaria Uzbekistan Georgia Kyrgyz Republic Albania Armenia Azerbaijan Dem. People's Greece Turkey Turkmenistan Rep. of Korea Tajikistan San Cyprus Syrian Rep. of Japan Marino Islamic Republic Korea Tunisia Lebanon Arab Rep. Malta Iraq of Iran Afghanistan C h i n a Israel Kuwait Jordan West Bank and Gaza Pakistan Bahrain Nepal Bhutan Libya Arab Rep. of Egypt Saudi Arabia United Arab China Qatar Bangladesh Emirates India Myanmar $2,360 Oman Lao P.D.R. Niger Chad Eritrea Rep. of Yemen India Thailand Vietnam N. Mariana Islands (US) East Asia & Pacific Sudan Djibouti $950 Cambodia Philippines Guam (US) $2,180 ria Central Ethiopia African Sri Lanka Brunei Darussalam Marshall Islands Palau ameroon Republic Somalia Malaysia orial Guinea Federated States of Micronesia Uganda Congo Kenya Maldives Gabon Rwanda Singapore Dem. Rep. Indonesia Nauru of Congo Burundi Papua New Solomon Islands Tuvalu Seychelles Guinea Tanzania Comoros South Asia Timor-Leste American Samoa (US) Angola Mayotte (Fr) $880 Zambia Malawi Fiji Vanuatu Samoa Zimbabwe Mozambique Madagascar Tonga Namibia Botswana Mauritius New Réunion (Fr) Caledonia A u s t r a l i a (Fr) Swaziland South Africa Lesotho Sub-Saharan Africa $952 New Zealand  i Economic Development ELEVENTH EDITION Michael P. Todaro New York University Stephen C. Smith The George Washington University Addison-Wesley Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Cover Designer: Anthony Gemmellaro Editor in Chief: Donna Battista Cover Art, clockwise from top, left: © David R. AVP/Executive Editor: David Alexander Frazier Photolibrary, Inc./Alamy; Editorial Project Manager: Lindsey Sloan BRAC/Shehzad Noorani; © image100/age Editorial Assistant: Megan Cadigan fotostock; © Ton Koene/age fotostock Director of Marketing: Patrice Jones Permissions Project Supervisor: Michael Joyce AVP/Executive Marketing Manager: Media Producer: Angela Lee Lori DeShazo Supplements Editor: Alison Eusden Marketing Assistant: Ian Gold Project Management, Composition, and Design: Managing Editor: Nancy H. Fenton Nesbitt Graphics, Inc. Senior Production Project Manager: Copyeditor: Bruce Emmer Kathryn Dinovo Printer/Binder: Courier, Westford Senior Manufacturing Buyer: Carol Melville Cover Printer: Lehigh-Phoenix Creative Director: Christy Mahon Color/Hagerstown Art Director, Cover: Anthony Gemmellaro Text Font: 10/12 Palatino Credits and acknowledgments borrowed from other sources and reproduced, with permis- sion, in this textbook appear on appropriate page within text. Copyright © 2012, 2009, 2006, 2003 Michael P. Todaro and Stephen C. Smith. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission to use material from this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 501 Boylston Street, Suite 900, Boston, MA 02116, fax your request to 617-671-3447, or e-mail at www.pearsoned.com/legal/permissions.htm. Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data Todaro, Michael P. Economic development / Michael P. Todaro, Stephen C. Smith. -- 11th ed. p. cm. Includes index. ISBN 978-0-13-801388-2 1. Economic development. 2. Developing countries--Economic policy. I. Smith, Stephen C. II. Title. HD82.T552 2012 338.9009172'4--dc22 2010054260 10 9 8 7 6 5 4 3 2 1 ISBN 10: 0-13-801388-8 ISBN 13: 978-0-13-801388-2  Contents Case Studies and Boxes xvii Preface xix Part One Principles and Concepts 1 1 Introducing Economic Development: A Global Perspective 2 1.1 How the Other Half Live 2 1.2 Economics and Development Studies 7 The Nature of Development Economics 7 Why Study Development Economics? Some Critical Questions 9 The Important Role of Values in Development Economics 12 Economies as Social Systems: The Need to Go Beyond Simple Economics 13 1.3 What Do We Mean by Development? 14 Traditional Economic Measures 14 The New Economic View of Development 14 Amartya Sen’s “Capability” Approach 16 Development and Happiness 19 Three Core Values of Development 20 The Central Role of Women 22 The Three Objectives of Development 22 1.4 The Millennium Development Goals 23 1.5 Conclusions 25 Case Study 1: Progress in the Struggle for More Meaningful Development: Brazil 28 2 Comparative Economic Development 37 2.1 Defining the Developing World 38 2.2 Basic Indicators of Development: Real Income, Health, and Education 44 Purchasing Power Parity 44 Indicators of Health and Education 45 2.3 Holistic Measures of Living Levels and Capabilities 47 The Traditional Human Development Index 47 The New Human Development Index 54 2.4 Characteristics of the Developing World: Diversity within Commonality 56 vii viii Contents Lower Levels of Living and Productivity 57 Lower Levels of Human Capital 59 Higher Levels of Inequality and Absolute Poverty 61 Higher Population Growth Rates 62 Greater Social Fractionalization 64 Larger Rural Populations but Rapid Rural-to-Urban Migration 65 Lower Levels of Industrialization and Manufactured Exports 66 Adverse Geography 67 Underdeveloped Markets 68 Lingering Colonial Impacts and Unequal International Relations 69 2.5 How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages 71 Physical and Human Resource Endowments 71 Relative Levels of Per Capita Income and GDP 72 Climatic Differences 72 Population Size, Distribution, and Growth 73 The Historical Role of International Migration 73 The Growth Stimulus of International Trade 76 Basic Scientific and Technological Research and Development Capabilities 76 Efficacy of Domestic Institutions 77 2.6 Are Living Standards of Developing and Developed Nations Converging? 78 2.7 Long-Run Causes of Comparative Development 83 2.8 Concluding Observations 91 Case Study 2: Comparative Economic Development: Pakistan and Bangladesh 94 3 Classic Theories of Economic Growth and Development 109 3.1 Classic Theories of Economic Development: Four Approaches 110 3.2 Development as Growth and the Linear-Stages Theories 110 Rostow’s Stages of Growth 111 The Harrod-Domar Growth Model 112 Obstacles and Constraints 114 Necessary versus Sufficient Conditions: Some Criticisms of the Stages Model 114 3.3 Structural-Change Models 115 The Lewis Theory of Development 115 Structural Change and Patterns of Development 120 Conclusions and Implications 121 3.4 The International-Dependence Revolution 122 The Neocolonial Dependence Model 122 The False-Paradigm Model 124 The Dualistic-Development Thesis 124 Conclusions and Implications 125 3.5 The Neoclassical Counterrevolution: Market Fundamentalism 126 Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches 126 Traditional Neoclassical Growth Theory 128 Conclusions and Implications 129 3.6 Classic Theories of Development: Reconciling the Differences 131 Case Study 3: Schools of Thought in Context: South Korea and Argentina 133  Contents ix Appendix 3.1 Components of Economic Growth 140 Appendix 3.2 The Solow Neoclassical Growth Model 146 Appendix 3.3 Endogenous Growth Theory 150 4 Contemporary Models of Development and Underdevelopment 155 4.1 Underdevelopment as a Coordination Failure 156 4.2 Multiple Equilibria: A Diagrammatic Approach 159 4.3 Starting Economic Development: The Big Push 163 The Big Push: A Graphical Model 165 Other Cases in Which a Big Push May Be Necessary 170 Why the Problem Cannot Be Solved by a Super-Entrepreneur 171 4.4 Further Problems of Multiple Equilibria 172 4.5 Michael Kremer’s O-Ring Theory of Economic Development 176 The O-Ring Model 176 Implications of the O-Ring Theory 179 4.6 Economic Development as Self-Discovery 180 4.7 The Hausmann-Rodrik-Velasco Growth Diagnostics Framework 182 4.8 Conclusions 185 Case Study 4: Understanding a Development Miracle: China 189 Part Two Problems and Policies: Domestic 201 5 Poverty, Inequality, and Development 202 5.1 Measuring Inequality and Poverty 204 Measuring Inequality 204 Measuring Absolute Poverty 211 5.2 Poverty, Inequality, and Social Welfare 219 What’s So Bad about Extreme Inequality? 219 Dualistic Development and Shifting Lorenz Curves: Some Stylized Typologies 221 Kuznets’s Inverted-U Hypothesis 224 Growth and Inequality 228 5.3 Absolute Poverty: Extent and Magnitude 229 Growth and Poverty 232 5.4 Economic Characteristics of High-Poverty Groups 235 Rural Poverty 236 Women and Poverty 237 Ethnic Minorities, Indigenous Populations, and Poverty 240 5.5 Policy Options on Income Inequality and Poverty: Some Basic Considerations 241 Areas of Intervention 241 Altering the Functional Distribution of Income through Relative Factor Prices 242 Modifying the Size Distribution through Increasing Assets of the Poor 244 x Contents Progressive Income and Wealth Taxes 245 Direct Transfer Payments and the Public Provision of Goods and Services 246 5.6 Summary and Conclusions: The Need for a Package of Policies 248 Case Study 5: Institutions, Inequality, and Incomes: Ghana and Côte d’Ivoire 250 Appendix 5.1 Appropriate Technology and Employment Generation: The Price Incentive Model 262 Appendix 5.2 The Ahluwalia-Chenery Welfare Index 265 6 Population Growth and Economic Development: Causes, Consequences, and Controversies 269 6.1 The Basic Issue: Population Growth and the Quality of Life 269 6.2 Population Growth: Past, Present, and Future 270 World Population Growth throughout History 270 Structure of the World’s Population 273 The Hidden Momentum of Population Growth 277 6.3 The Demographic Transition 278 6.4 The Causes of High Fertility in Developing Countries: The Malthusian and Household Models 281 The Malthusian Population Trap 281 Criticisms of the Malthusian Model 284 The Microeconomic Household Theory of Fertility 285 The Demand for Children in Developing Countries 288 Implications for Development and Fertility 289 6.5 The Consequences of High Fertility: Some Conflicting Perspectives 290 It’s Not a Real Problem 291 It’s a Deliberately Contrived False Issue 292 It’s a Desirable Phenomenon 292 It Is a Real Problem 294 Goals and Objectives: Toward a Consensus 297 6.6 Some Policy Approaches 298 What Developing Countries Can Do 298 What the Developed Countries Can Do 300 How Developed Countries Can Help Developing Countries with Their Population Programs 301 Case Study 6: Population, Poverty, and Development: China and India 303 7 Urbanization and Rural-Urban Migration: Theory and Policy 311 7.1 The Migration and Urbanization Dilemma 311 Urbanization: Trends and Projections 312 7.2 The Role of Cities 318 Industrial Districts 318 Efficient Urban Scale 322 7.3 The Urban Giantism Problem 323 First-City Bias 325 Causes of Urban Giantism 325 7.4 The Urban Informal Sector 327  Contents xi Policies for the Urban Informal Sector 329 Women in the Informal Sector 333 7.5 Migration and Development 334 7.6 Toward an Economic Theory of Rural-Urban Migration 337 A Verbal Description of the Todaro Model 337 A Diagrammatic Presentation 340 Five Policy Implications 342 7.7 Summary and Conclusions: A Comprehensive Migration and Employment Strategy 344 Case Study 7: Rural-Urban Migration and Urbanization in Developing Countries: India and Botswana 347 Appendix 7.1 A Mathematical Formulation of the Todaro Migration Model 356 8 Human Capital: Education and Health in Economic Development 359 8.1 The Central Roles of Education and Health 359 Education and Health as Joint Investments for Development 361 Improving Health and Education: Why Increasing Income Is Not Sufficient 362 8.2 Investing in Education and Health: The Human Capital Approach 365 8.3 Child Labor 368 8.4 The Gender Gap: Discrimination in Education and Health 373 Consequences of Gender Bias in Health and Education 375 8.5 Educational Systems and Development 377 The Political Economy of Educational Supply and Demand: The Relationship between Employment Opportunities and Educational Demands 377 Social versus Private Benefits and Costs 379 Distribution of Education 381 Education, Inequality, and Poverty 383 Education, Internal Migration, and the Brain Drain 386 8.6 Health Measurement and Distribution 386 8.7 Disease Burden 390 HIV/AIDS 393 Malaria 396 Parasitic Worms and Other “Neglected Tropical Diseases” 397 8.8 Health, Productivity, and Policy 399 Productivity 399 Health Systems Policy 400 Case Study 8: Pathways out of Poverty: Progresa/Oportunidades 404 9 Agricultural Transformation and Rural Development 416 9.1 The Imperative of Agricultural Progress and Rural Development 416 9.2 Agricultural Growth: Past Progress and Current Challenges 419 Trends in Agricultural Productivity 419 Market Failures and the Need for Government Policy 422 9.3 The Structure of Agrarian Systems in the Developing World 423 Three Systems of Agriculture 423 Peasant Agriculture in Latin America, Asia, and Africa 425 xii Contents Agrarian Patterns in Latin America: Progress and Remaining Poverty Challenges 427 Transforming Economies: Problems of Fragmentation and Subdivision of Peasant Land in Asia 429 Subsistence Agriculture and Extensive Cultivation in Africa 432 9.4 The Important Role of Women 433 9.5 The Microeconomics of Farmer Behavior and Agricultural Development 438 The Transition from Peasant Subsistence to Specialized Commercial Farming 438 Subsistence Farming: Risk Aversion, Uncertainty, and Survival 438 The Economics of Sharecropping and Interlocking Factor Markets 442 The Transition to Mixed or Diversified Farming 444 From Divergence to Specialization: Modern Commercial Farming 445 9.6 Core Requirements of a Strategy of Agricultural and Rural Development 447 Improving Small-Scale Agriculture 448 Conditions for Rural Development 450 Case Study 9: The Need to Improve Agricultural Extension for Women Farmers: Kenya 453 10 The Environment and Development 465 10.1 Environment and Development: The Basic Issues 465 Economics and the Environment 465 Sustainable Development and Environmental Accounting 467 Population, Resources, and the Environment 468 Poverty and the Environment 469 Growth versus the Environment 469 Rural Development and the Environment 470 Urban Development and the Environment 470 The Global Environment and Economy 471 The Nature and Pace of Greenhouse Gas–Induced Climate Change 471 Natural Resource–Based Livelihoods as a Pathway out of Poverty: Promise and Limitations 471 The Scope of Domestic-Origin Environmental Degradation: An Overview 472 10.2 Rural Development and the Environment: A Tale of Two Villages 473 A Village in Sub-Saharan Africa 474 A Settlement Near the Amazon 474 Environmental Deterioration in Villages 475 10.3 Global Warming and Climate Change: Scope, Mitigation, and Adaptation 476 Scope of the Problem 476 Mitigation 478 Adaptation 479 10.4 Economic Models of Environment Issues 481 Privately Owned Resources 481 Common Property Resources 483 Public Goods and Bads: Regional Environmental Degradation and the Free-Rider Problem 486 Limitations of the Public-Good Framework 488 10.5 Urban Development and the Environment 488 Environmental Problems of Urban Slums 488 Industrialization and Urban Air Pollution 489 Problems of Congestion, Clean Water, and Sanitation 492 10.6 The Local and Global Costs of Rain Forest Destruction 493  Contents xiii 10.7 Policy Options in Developing and Developed Countries 496 What Developing Countries Can Do 496 How Developed Countries Can Help Developing Countries 498 What Developed Countries Can Do for the Global Environment 500 Case Study 10: A World of Contrasts on One Island: Haiti and the Dominican Republic 502 11 Development Policymaking and the Roles of Market, State, and Civil Society 511 11.1 A Question of Balance 511 11.2 Development Planning: Concepts and Rationale 512 The Planning Mystique 512 The Nature of Development Planning 513 Planning in Mixed Developing Economies 513 The Rationale for Development Planning 514 11.3 The Development Planning Process: Some Basic Models 516 Three Stages of Planning 516 Aggregate Growth Models: Projecting Macro Variables 517 Multisector Models and Sectoral Projections 519 Project Appraisal and Social Cost-Benefit Analysis 520 11.4 Government Failure and the Resurgent Preference for Markets over Planning 524 Problems of Plan Implementation and Plan Failure 524 The 1980s Policy Shift toward Free Markets 526 11.5 The Market Economy 528 Sociocultural Preconditions and Economic Requirements 528 11.6 The Washington Consensus on the Role of the State in Development and Its Subsequent Evolution 530 Toward a New Consensus 531 11.7 Development Political Economy: Theories of Policy Formulation and Reform 533 Understanding Voting Patterns on Policy Reform 534 Institutions and Path Dependency 536 Democracy versus Autocracy: Which Facilitates Faster Growth? 537 11.8 Development Roles of NGOs and the Broader Citizen Sector 539 11.9 Trends in Governance and Reform 546 Tackling the Problem of Corruption 546 Decentralization 547 Development Participation 549 Case Study 11: The Role of Development NGOs: The BRAC Model 552 Part Three Problems and Policies: International and Macro 563 12 International Trade Theory and Development Strategy 564 12.1 Economic Globalization: An Introduction 564 12.2 International Trade: Some Key Issues 567 Five Basic Questions about Trade and Development 569 Importance of Exports to Different Developing Nations 571 xiv Contents Demand Elasticities and Export Earnings Instability 572 The Terms of Trade and the Prebisch-Singer Hypothesis 573 12.3 The Traditional Theory of International Trade 575 Comparative Advantage 575 Relative Factor Endowments and International Specialization: The Neoclassical Model 576 Trade Theory and Development: The Traditional Arguments 581 12.4 The Critique of Traditional Free-Trade Theory in the Context of Developing-Country Experience 582 Fixed Resources, Full Employment, and the International Immobility of Capital and Skilled Labor 583 Fixed, Freely Available Technology and Consumer Sovereignty 586 Internal Factor Mobility, Perfect Competition, and Uncertainty: Increasing Returns, Imperfect Competition and Issues in Specialization 586 The Absence of National Governments in Trading Relations 589 Balanced Trade and International Price Adjustments 590 Trade Gains Accruing to Nationals 590 Some Conclusions on Trade Theory and Economic Development Strategy 591 12.5 Traditional Trade Strategies for Development: Export Promotion versus Import Substitution 593 Export Promotion: Looking Outward and Seeing Trade Barriers 595 Expanding Exports of Manufactured Goods 597 Import Substitution: Looking Inward but Still Paying Outward 599 The IS Industrialization Strategy and Results 602 Foreign-Exchange Rates, Exchange Controls, and the Devaluation Decision 607 Trade Optimists and Trade Pessimists: Summarizing the Traditional Debate 611 12.6 The Industrialization Strategy Approach to Export Policy 613 12.7 South-South Trade and Economic Integration 617 Economic Integration: Theory and Practice 617 Regional Trading Blocs and the Globalization of Trade 619 12.8 Trade Policies of Developed Countries: The Need for Reform and Resistance to New Protectionist Pressures 620 Case Study 12: A Pioneer in Development Success through Trade: Taiwan 624 13 Balance of Payments, Debt, Financial Crises, and Stabilization Policies 638 13.1 International Finance and Investment: Key Issues 638 13.2 The Balance of Payments Account 639 General Considerations 639 A Hypothetical Illustration: Deficits and Debts 642 13.3 The Issue of Payments Deficits 644 Some Initial Policy Issues 644 Trends in the Balance of Payments 648 13.4 Accumulation of Debt and Emergence of the Debt Crisis 650 Background and Analysis 650 Origins of the 1980s Debt Crisis 652  Contents xv 13.5 Attempts at Alleviation: Macroeconomic Instability, Classic IMF Stabilization Policies, and Their Critics 654 The IMF Stabilization Program 654 Tactics for Debt Relief 656 13.6 “Odious Debt” and Its Prevention 661 13.7 Resolution of 1980s–1990s Debt Crises and Continued Vulnerabilities 662 13.8 The Global Financial Crisis and the Developing Countries 664 Causes of the Crisis and Challenges to Lasting Recovery 664 Economic Impacts on Developing Countries 666 Differing Impacts across Developing Regions 670 Prospects for Recovery and Stability 672 Opportunities as Well as Dangers? 673 Case Study 13: Trade, Capital Flows, and Development Strategy: South Korea 675 14 Foreign Finance, Investment, and Aid: Controversies and Opportunities 684 14.1 The International Flow of Financial Resources 684 14.2 Private Foreign Direct Investment and the Multinational Corporation 685 Private Foreign Investment: Some Pros and Cons for Development 688 Private Portfolio Investment: Benefits and Risks 694 14.3 The Role and Growth of Remittances 695 14.4 Foreign Aid: The Development Assistance Debate 697 Conceptual and Measurement Problems 697 Amounts and Allocations: Public Aid 699 Why Donors Give Aid 701 Why Recipient Countries Accept Aid 705 The Role of Nongovernmental Organizations in Aid 706 The Effects of Aid 707 14.5 Conflict and Development 708 The Scope of Violent Conflict and Conflict Risks 708 The Consequences of Armed Conflict 708 The Causes of Armed Conflict and Risks of Conflict 712 The Resolution and Prevention of Armed Conflict 713 Case Study 14: African Success Story at Risk: Botswana 718 15 Finance and Fiscal Policy for Development 729 15.1 The Role of the Financial System in Economic Development 730 Differences between Developed and Developing Financial Systems 731 15.2 The Role of Central Banks and Alternative Arrangements 734 The Role of Development Banking 738 15.3 Informal Finance and the Rise of Microfinance 739 Traditional Informal Finance 739 Microfinance Institutions 741 xvi Contents 15.4 Reforming Financial Systems 746 Financial Liberalization, Real Interest Rates, Savings, and Investment 746 Financial Policy and the Role of the State 747 Debate on the Role of Stock Markets 749 15.5 Fiscal Policy for Development 751 Macrostability and Resource Mobilization 751 Taxation: Direct and Indirect 751 15.6 State-Owned Enterprises and Privatization 756 Improving the Performance of SOEs 757 Privatization: Theory and Experience 758 15.7 Public Administration: The Scarcest Resource 761 Case Study 15: Making Microfinance Work for the Poor: The Grameen Bank of Bangladesh 763 Glossary 773 Name Index 787 Subject Index 797  Case Studies and Boxes Case Studies 1 Progress in the Struggle for More Meaningful Development: Brazil 28 2 Comparative Economic Development: Pakistan and Bangladesh 94 3 Schools of Thought in Context: South Korea and Argentina 133 4 Understanding a Development Miracle: China 189 5 Institutions, Inequality, and Incomes: Ghana and Côte d’Ivoire 250 6 Population, Poverty, and Development: China and India 303 7 Rural-Urban Migration and Urbanization in Developing Countries: India and Botswana 347 8 Pathways out of Poverty: Progresa/Oportunidades 404 9 The Need to Improve Agricultural Extension for Women Farmers: Kenya 453 10 A World of Contrasts on One Island: Haiti and the Dominican Republic 502 11 The Role of Development NGOs: The BRAC Model 552 12 A Pioneer in Development Success through Trade: Taiwan 624 13 Trade, Capital Flows, and Development Strategy: South Korea 675 14 African Success Story at Risk: Botswana 718 15 Making Microfinance Work for the Poor: The Grameen Bank of Bangladesh 763 Boxes 1.1 The Experience of Poverty: Voices of the Poor 6 2.1 Computing the NHDI: The Case of China 55 2.2 FINDINGS Instruments to Test Theories of Comparative Development: Inequality 88 2.3 FINDINGS Legacy of Colonial Land Tenure Systems 89 4.1 Synchronizing Expectations: Resetting “Latin American Time” 163 4.2 FINDINGS Three Country Case Study Applications of Growth Diagnostics 185 5.1 Problems of Gender Relations in Developing Countries: Voices of the Poor 239 7.1 FINDINGS The Emergence of Industrial Districts or Clusters in China 320 8.1 Health and Education: Voices of the Poor 361 8.2 Linkages between Investments in Health and Education 362 8.3 FINDINGS School Impact of a Low-Cost Health Intervention 364 8.4 FINDINGS Impacts of Tutor and Computer-Assisted Learning Programs 384 8.5 Health Challenges Faced by Developing Countries 390 8.6 AIDS: Crisis and Response to Uganda 395 9.1 FINDINGS Learning about Farming: The Diffusion of Pineapple Growing in Ghana 446 10.1 FINDINGS Autonomous Adaptation to Climate Change by Farmers in Africa 480 10.2 FINDINGS Elinor Ostrom’s Design Principles Derived from Studies of Long-Enduring Institutions for Governing Sustainable Resources 485 11.1 Some Problems of Government Intervention in Developing Countries 527 xvii xviii Case Studies and Boxes Boxes (Continued) 11.2 The New Consensus 532 11.3 FINDINGS Reducing Teacher Absenteeism in an NGO School 545 12.1 FINDINGS Four Centuries of Evidence on the Prebisch-Singer Hypothesis 574 13.1 The History and Role of the International Monetary Fund 641 13.2 The History and Role of the World Bank 645 13.3 Mexico: Crisis, Debt Reduction, and the Struggle for Renewed Growth 659 14.1 Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries 692 15.1 FINDINGS The Financial Lives of the Poor 740 15.2 FINDINGS: Combining Microfinance with Training 744 15.3 Privatization—What, When, and to Whom? Chile and Poland 760  Preface Economic Development, Eleventh Edition, presents the latest thinking in eco- nomic development with the clear and comprehensive approach that has been so well received in both the developed and developing worlds. The pace and scope of economic development continues its rapid, uneven, and sometimes unexpected evolution. This text explains the unprecedented progress that has been made in many parts of the developing world—but fully confronts the enormous problems and challenges that remain to be addressed in the years ahead. The text shows the wide diversity across the developing world, and the dif- fering positions in the global economy held by developing countries. The princi- ples of development economics are key to understanding how we got to where we are, and why many development problems are so difficult to solve; and to the de- sign of successful economic development policy and programs as we look ahead. The field of economic development is versatile and has much to contribute regarding these differing scenarios. Thus the text also underlines common features exhibited by a majority of developing nations using the insights of the study of economic development. The few countries that have essentially completed the transformation to become developed economies such as South Korea are also ex- amined as potential models for other developing countries to follow. Both theory and empirical analysis in development economics have made major strides, and the Eleventh Edition brings these ideas and findings to stu- dents. Legitimate controversies are actively debated in development economics, and so the text presents contending theories and interpretations of evidence, with three goals. The first goal is to ensure that students understand real condi- tions and institutions across the developing world. The second, is to help stu- dents develop analytic skills while broadening their perspectives of the wide scope of the field. The third, is to provide students with the resources to draw independent conclusions as they confront development problems, their some- times ambiguous evidence, and real-life development policy choices—ulti- mately to play an informed role in the struggle for economic development and poverty alleviation. New to This Edition Global crisis. A major new section of the text addresses potential longer-term impacts of the recent global financial crisis on economic development, exam- ining conditions that caused the crisis, its aftermath, and possible broader implications and potential differences for developing nations and regions. xix xx Preface Violent conflict. The Eleventh Edition provides an entirely new major section on the causes and consequences of violent conflict, postconflict recovery and development, and prevention of conflict through an improved under- standing of its major causes. In the last several years, substantial advances have been made in theory, empirical studies, and policy analysis regarding civil war and civil conflict, one of the leading obstacles to human develop- ment and economic growth. The section examines what has been learned about consequences for people and for economic development, causes and prevention of violent conflict, and strategies for postconflict recovery, recon- struction, and sustained development. Findings boxes. A new textbook feature reports empirical findings in boxes that are wide-ranging in both methods and topics. They address both specific policy concerns—such as improving child health, education, and microfinance design—and a broader understanding of the sources of dis- parities in the world’s economies that can inform the strategy of economic development. And with these findings, they illustrate methods ranging from the use of instruments; randomized control trials; painstaking de- sign, implementation, and robust analysis of survey data; growth diagnos- tics; and systematically applied qualitative research. The Findings boxes in this edition are listed on pages xvii–xviii. As economic development re- search findings are published and become influential, they will be re- ported on the textbook Web site between editions. New comparative case studies. Two new full-length end-of-chapter compara- tive case studies are introduced to address current topics and findings and to broaden geographic coverage. An in-depth comparison of Ghana and Côte d’Ivoire appears at the end of Chapter 5, examining themes of the origins of comparative development and of the analysis of poverty causes and remedies. (The updated Grameen case is moved to Chapter 15.) An in-depth comparative study of Haiti and the Dominican Republic is intro- duced at the end of Chapter 10, demonstrating the influence of environ- ment on development and vice versa, but revealing how environmental degradation stems from deeper causes. All the other case studies have been updated to reflect current conditions and status. New measures. Measurement is an ever-present issue in the field of eco- nomic development. The United Nations Development Program released its Multidimensional Poverty Index in August 2010 and its New Human Development Index in November 2010. The text examines the index for- mulas, explains how they differ from earlier indexes, reports on findings, and reviews issues surrounding the active debate on these measures. Applications of contemporary models to new topics. Insights from multiple- equilibria models (explained in detail in Chapter 4) are used to help explain the staying power of violent ethnic conflict and the persistence of harmful cultural practices such as female genital mutilation. The way these insights have helped inspire strategies for ending these practices are explained. Expanded glossary, with definitions in margins where terms are first used. Each key term is defined in the text at the spot where it is first used. Each of these definitions are also collected alphabetically in the Glossary near the end of the book.  Preface xxi Updated statistics. Change continues to be very rapid in the developing world. Throughout the text, data and statistics have been updated to reflect the most recent available information. Additional updates. Other updates include an expanded section on microfi- nance, including new designs, potential benefits, successes to date, and some limitations; Amartya Sen’s latest thinking on capability; new evidence on the extent and limits of convergence; expanded coverage of China and the stub- born chronic poverty among hundreds of millions of people despite other- wise impressive global progress; a streamlined Malthus trap model presenta- tion; development implications of new and proposed environmental agreements for developing countries; and growing challenges of adaptation to climate change with examples of efforts that are already underway; as well as topics such as trends in central banking in developing economies. The end-of-chapter case studies have been updated. Convenient numbered subsections. The introduction of numbered subsections facilitates a tailored course design and extended class focus on selected topics. The text features a 15-chapter structure, convenient for use in a comprehensive course. But the chapters are now subdivided, usually into six to ten numbered subsections in each chapter. This makes it more straightforward to assign topical areas for a class session. It also makes it convenient to use the text for courses with different emphases. Audience and Suggested Ways to Use the Text Flexibility. This book is designed for use in courses in economics and other social sciences that focus on the economies of Africa, Asia, and Latin America, as well as developing Europe and the Middle East. It is written for students who have had some basic training in economics and for those with little for- mal economics background. Essential concepts of economics that are rele- vant to understanding development problems are highlighted in boldface and explained at appropriate points throughout the text, with glossary terms defined in the margins as well as collected together at the end of the book in a detailed Glossary. Thus the book should be of special value in un- dergraduate development courses that attract students from a variety of dis- ciplines. Yet the material is sufficiently broad in scope and rigorous in cover- age to satisfy any undergraduate and some graduate economics requirements in the field of development. This text has been widely used both in courses taking relatively qualitative and more quantitative approaches to the study of economic development and emphasizing a variety of themes, including human development. Courses with a qualitative focus. For qualitatively oriented courses, with an institutional focus and using fewer economic models, one or more chap- ters or subsections may be omitted, while placing primary emphasis on Chapters 1, 2, 5, 6, 8, and 9, plus parts of Chapters 7 and 10, and other se- lected sections, according to topics covered. The text is structured so that the limited number of graphical models found in those chapters may be omitted without losing the thread, while the intuition behind the models is explained in detail. xxii Preface Courses with a more analytic focus. These courses would focus more on the growth and development theories in Chapter 3 (including appendixes such as 3.3 on endogenous growth) and Chapter 4, and highlight and develop some of the core models of the text, including poverty and inequality meas- urement and analysis in Chapter 5, microeconomics of fertility and relation- ships between population growth and economic growth in Chapter 6, mi- gration models in Chapter 7, human capital theory including the child labor model and empirics in Chapter 8, sharecropping models in Chapter 9, envi- ronmental economics models in Chapter 10, tools such as net present benefit analysis and multisector models along with political economy analysis in Chapter 11, and trade models in Chapter 12. It could also expand on mate- rial briefly touched on in some of the Findings boxes and subsections into treatments of methods topics such as use of instrumental variables, random- ization, and growth empirics including origins of comparative develop- ment and analysis of convergence (which is examined in Chapter 2). End- notes and sources suggest possible directions to take. The text emphasizes in-depth institutional background reading accompanying the models that help students to appreciate their importance. Courses emphasizing human development and poverty alleviation. The Eleventh Edition can be used for a course with a human development focus. This would typically include the sections on Amartya Sen’s capability ap- proach and Millennium Development Goals in Chapter 1, the new section on conflict in Chapter 14, the discussion of microfinance institutions in Chapter 15, and a close and in-depth examination of Chapters 2 and 5. Sections on population in Chapter 6; diseases of poverty and problems of illiteracy, low schooling, and child labor in Chapter 8; problems facing people in traditional agriculture in Chapter 9; relationships between poverty and environmental degradation in Chapter 10; and roles of NGOs in Chapter 11 would be likely highlights of this course. Courses emphasizing macro and international topics. International and macro aspects of economic development could emphasize section 2.7 on long-run growth and sources of comparative development; Chapter 3 on theories of growth (including the three detailed appendixes to that chapter); Chapter 4 on growth and multiple-equilibrium models; and Chapters 12 through 15 on international trade, international finance, debt and financial crises, di- rect foreign investment, aid, central banking, and domestic finance. The book also covers other aspects of the international context for develop- ment, including the new section on financial crisis, implications of the rapid pace of globalization and the rise of China, the continuing struggle for more progress in sub-Saharan Africa, and controversies over debt relief and foreign aid. Broad two-semester course using supplemental readings. Many of the chapters contain enough material for several class sessions, when their topics are covered in an in-depth manner, making the text also suitable for a yearlong course or high-credit option. The endnotes and sources offer many starting points for such extensions.  Preface xxiii Guiding Approaches and Organization The text’s guiding approaches are the following: 1. It teaches economic development within the context of a major set of prob- lems, such as poverty, inequality, population growth, the impact of very rapid urbanization and expansion of megacities, persistent public health challenges, environmental decay, and regions experiencing rural stagnation, along with the twin challenges of government failure and market failure. Formal models and concepts are used to elucidate real-world development problems rather than being presented in isolation from these problems. 2. It adopts a problem- and policy-oriented approach because a central objective of the development economics course is to foster a student’s ability to un- derstand contemporary economic problems of developing countries and to reach independent and informed judgments and policy conclusions about their possible resolution. 3. It simultaneously uses the best available data from Africa, Asia, Latin America, and developing Europe and the Middle East, as well as appropriate theoretical tools to illuminate common developing-country problems. These problems differ in incidence, scope, magnitude, and emphasis when we deal with such diverse countries as India, Pakistan, Bangladesh, China, the Philippines, Kenya, Botswana, Nigeria, Ghana, Côte d’Ivoire, Argentina, Brazil, Chile, Mexico, Haiti, and the Dominican Republic. Still, a majority face some similar development problems: persistent poverty and large income and asset inequalities, population pressures, low levels of education and health, inadequacies of financial markets, and recurrent challenges in international trade and instability, to name a few. 4. It focuses on a wide range of developing countries not only as independent nation-states but also in their growing relationships to one another as well as in their interactions with rich nations in a globalizing economy. 5. Relatedly, the text views development in both domestic and international contexts, stressing the increasing interdependence of the world economy in ar- eas such as food, energy, natural resources, technology, information, and financial flows. 6. It recognizes the necessity of treating the problems of development from an institutional and structural as well as a market perspective, with appropriate modifications of received general economic principles, theories, and poli- cies. It thus attempts to combine relevant theory with realistic institutional analyses. Enormous strides have been made in the study of these aspects of economic development in recent years, which are reflected in this edition. 7. It considers the economic, social, and institutional problems of underde- velopment as closely interrelated and requiring coordinated approaches to their solution at the local, national, and international levels. 8. The book is organized into three parts. Part One focuses on the nature and meaning of development and underdevelopment and its various manifes- tations in developing nations. After examining the historical growth xxiv Preface experience of the developed countries and the long-run experience of the developing countries, we review four classic and contemporary theories of economic development, while introducing basic theories of economic growth. Part Two focuses on major domestic development problems and policies, and Part Three on development problems and policies in interna- tional, macro, and financial spheres. Topics of analysis include economic growth, poverty and income distribution, population, migration, urban- ization, technology, agricultural and rural development, education, health, the environment, international trade and finance, debt, financial crises, do- mestic financial markets, direct foreign investment, foreign aid, violent conflict, and the roles of market, state, and nongovernmental organizations in economic development. All three parts of the book raise fundamental ques- tions, including what kind of development is most desirable and how de- veloping nations can best achieve their economic and social objectives. 9. As part of the text’s commitment to its comprehensive approach, it covers some topics not found in other texts on economic development, including growth diagnostics, industrialization strategy, innovative policies for poverty reduction, the capability approach to well-being, the central role of women, child labor, the crucial role of health, new thinking on the role of cities, the economic character and comparative advantage of nongovernmental organi- zations in economic development, emerging issues in environment and de- velopment, financial crises, violent conflict, and microfinance. 10. A unique feature of this book is the in-depth case studies and comparative case studies appearing at the end of each chapter. Each chapter’s case study reflects and illustrates specific issues analyzed in that chapter. In-chapter boxes provide shorter case examples. Comments on the text are always welcome; these can be sent directly to Stephen Smith at [email protected]. Supplementary Materials The Eleventh Edition comes with a comprehensive Companion Website with content by Abbas Grammy of California State University, Bakersfield. Avail- able at www.pearsonhighered.com/todaro_smith, this site offers an online Stu- dent Study Guide for each chapter that includes multiple-choice quizzes and sets of graphing and quantitative exercises. In addition, Internet exercises al- low students to explore the countries highlighted in the end-of-chapter case studies in more depth. A Recommended Readings section provides links to and questions about additional development resources. The Web site also links to material for the instructor, including PowerPoint slides for each chapter, which have been expanded and fully updated for this edition by Professor Meenakshi Rishi of Seattle University. The text is further supplemented with an Instructor’s Manual by Pareena G. Lawrence of the University of Minnesota, Morris. It has been thoroughly revised and updated to reflect changes to the Eleventh Edition. Both the PowerPoint slides and the Instructor’s Manual can also be downloaded from the Instructor’s Resource Center at www.pearsonhighered.com/irc.  Preface xxv Acknowledgments Our gratitude to the many individuals who have helped shape this new edition cannot adequately be conveyed in a few sentences. However, we must record our immense indebtedness to the hundreds of former students and contempo- rary colleagues who took the time and trouble during the past several years to write or speak to us about the ways in which this text could be further im- proved. We are likewise indebted to a great number of friends (far too many to mention individually) in both the developing world and the developed world who have directly and indirectly helped shape our ideas about development economics and how an economic development text should be structured. The authors would like to thank colleagues and students in both developing and developed countries for their probing and challenging questions. We are also very appreciative of the advice, criticisms, and suggestions of the many reviewers, both in the United States and abroad, who provided detailed and insightful comments for the Eighth, Ninth, Tenth, and Eleventh Editions: U.S. Reviewers William A. Amponsah, GEORGIA SOUTHERN UNIVERSITY Erol Balkan, HAMILTON COLLEGE Karna Basu, HUNTER COLLEGE, CITY UNIVERSITY OF NEW YORK Valerie R. Bencivenga, UNIVERSITY OF TEXAS, AUSTIN Sylvain H. Boko, WAKE FOREST UNIVERSITY Michaël Bonnal, UNIVERISTY OF TENNESSEE AT CHATTANOOGA Milica Z. Bookman, ST. JOSEPH’S UNIVERSITY Lisa Daniels, WASHINGTON COLLEGE Fernando De Paolis, MONTEREY INSTITUTE Luc D’Haese, UNIVERSITY OF GHENT Quentin Duroy, DENISON UNIVERSITY Can Erbil, BRANDEIS UNIVERSITY Yilma Gebremariam, SOUTHERN CONNECTICUT STATE UNIVERSITY Abbas P. Grammy, CALIFORNIA STATE UNIVERSITY, BAKERSFIELD Caren Grown, AMERICAN UNIVERSITY Kwabena Gyimah-Brempong, UNIVERSITY OF SOUTH FLORIDA Bradley Hansen, MARY WASHINGTON COLLEGE John R. Hanson II, TEXAS A&M UNIVERSITY Seid Hassan, MURRAY STATE UNIVERSITY Jeffrey James, TILBURG UNIVERSITY Barbara John, UNIVERSITY OF DAYTON Pareena G. Lawrence, UNIVERSITY OF MINNESOTA, MORRIS Tung Liu, BALL STATE UNIVERSITY John McPeak, SYRACUSE UNIVERSITY Michael A. McPherson, UNIVERSITY OF NORTH TEXAS Daniel L. Millimet, SOUTHERN METHODIST UNIVERSITY Camille Soltau Nelson, TEXAS A&M UNIVERSITY Thomas Osang, SOUTHERN METHODIST UNIVERSITY Elliott Parker, UNIVERSITY OF NEVADA, RENO Julia Paxton, OHIO UNIVERSITY xxvi Preface Meenakshi Rishi, SEATTLE UNIVERSITY James Robinson, UNIVERSITY OF CALIFORNIA, BERKELEY Andreas Savvides, OKLAHOMA STATE UNIVERSITY Rodrigo R. Soares, UNIVERSITY OF MARYLAND Michael Twomey, UNIVERSITY OF MICHIGAN, DEARBORN Wally Tyner, PURDUE UNIVERSITY Nora Underwood, UNIVERSITY OF CALIFORNIA, DAVIS Jogindar Uppal, STATE UNIVERSITY OF NEW YORK Evert Van Der Heide, CALVIN COLLEGE Adel Varghese, ST. LOUIS UNIVERSITY Sharmila Vishwasrao, FLORIDA ATLANTIC UNIVERSITY Bill Watkins, CALIFORNIA LUTHERAN UNIVERSITY Jonathan B. Wight, UNIVERSITY OF RICHMOND Lester A. Zeager, EAST CAROLINA UNIVERSITY U.K. Reviewers Arild Angelsen, AGRICULTURAL UNIVERSITY OF NORWAY David Barlow, NEWCASTLE UNIVERSITY Sonia Bhalotra, UNIVERSITY OF BRISTOL Bernard Carolan, UNIVERSITY OF STAFFORDSHIRE Matthew Cole, UNIVERSITY OF BIRMINGHAM Alex Cunliffe, UNIVERSITY OF PLYMOUTH Chris Dent, UNIVERSITY OF HULL Sanjit Dhami, UNIVERSITY OF NEWCASTLE Subrata Ghatak, KINGSTON UNIVERSITY Gregg Huff, UNIVERSITY OF GLASGOW Diana Hunt, SUSSEX UNIVERSITY Michael King, TRINITY COLLEGE DUBLIN Dorothy Manning, UNIVERSITY OF NORTHUMBRIA Mahmood Meeskoub, UNIVERSITY OF LEEDS Paul Mosley, UNIVERSITY OF SHEFFIELD Bibhas Saha, UNIVERSITY OF EAST ANGLIA Colin Simmons, UNIVERSITY OF SALFORD Pritam Singh, OXFORD BROOKES UNIVERSITY Shinder Thandi, UNIVERSITY OF COVENTRY Paul Vandenberg, UNIVERSITY OF BRISTOL Their input has strengthened the book in many ways and has been much appreciated. Our thanks also go to the staff at Addison-Wesley in both the United States and the United Kingdom, particularly David Alexander, Lindsey Sloan, Kathryn Dinovo, Alison Eusden, Kate Brewin, Denise Clinton, Mary Sanger, Bruce Emmer, and Pauline Gillett. Finally, to his lovely wife, Donna Renée, Michael Todaro wishes to express great thanks for typing the entire First Edition manuscript and for providing the spiritual and intellectual inspiration to persevere under difficult circum- stances. He reaffirms here his eternal devotion to her for always being there to help him maintain a proper perspective on life and living and, through her  Preface xxvii own creative and artistic talents, to inspire him to think in original and some- times unconventional ways about the global problems of human development. Stephen Smith would like to thank his wonderful wife, Renee, and his chil- dren, Martin and Helena, for putting up with the many working Saturdays that went into the revision of this text. Michael P. Todaro Stephen C. Smith PA R T O N E Principles and Concepts 1 Introducing Economic Development: A Global Perspective We have a collective responsibility to uphold the principles of human dignity, equality and equity at the global level. As leaders we have a duty therefore to all the world’s people, especially the most vulnerable and, in particular, the children of the world, to whom the future belongs. —United Nations, Millennium Declaration, September 8, 2000 Development can be seen... as a process of expanding the real freedoms that people enjoy. —Amartya Sen, Nobel laureate in economics Globalization offers incredible opportunities. Yet exclusion, grinding poverty, and environmental damage create dangers. The ones that suffer most are those who have the least to start with—indigenous peoples, women in developing countries, the rural poor, Africans, and their children. —Robert Zoellick, president, World Bank, 2007 Under necessaries, therefore, I comprehend, not only those things which nature, but those things which the established rules of decency, have rendered necessary to the lowest rank of people. —Adam Smith, The Wealth of Nations 1.1 How the Other Half Live As people throughout the world awake each morning to face a new day, they do so under very different circumstances. Some live in comfortable homes with many rooms. They have more than enough to eat, are well clothed and healthy, and have a reasonable degree of financial security. Others, and these constitute a majority of the earth’s nearly 7 billion people, are much less fortunate. They may have inade- quate food and shelter, especially if they are among the poorest third. Their health is often poor, they may not know how to read or write, they may be unemployed, and their prospects for a better life are uncertain at best. Over 40% of the world’s Absolute poverty A situa- population lives on less than $2 per day, part of a condition of absolute poverty. tion of being unable to meet An examination of these global differences in living standards is revealing. the minimum levels of income, food, clothing, healthcare, If, for example, we looked first at an average family in North America, we shelter, and other essentials. would probably find a “nuclear” family of four with an annual income of over $50,000. They would live in a comfortable suburban house with a small 2  CHAPTER 1 Introducing Economic Development: A Global Perspective 3 garden and two cars. The dwelling would have many comfortable features, including a separate bedroom for each of the two children. It would be filled with numerous consumer goods, electronics, and electrical appliances, many of which were manufactured outside North America in countries as far away as South Korea and China. Examples might include computer hard disks made in Malaysia, DVD players manufactured in Thailand, garments assem- bled in Guatemala, and mountain bikes made in China. There would always be three meals a day and plenty of processed snack foods, and many of the food products would also be imported from overseas: coffee from Brazil, Kenya, or Colombia; canned fish and fruit from Peru and Australia; and ba- nanas and other tropical fruits from Central America. Both children would be healthy and attending school. They could expect to complete their secondary education and probably go to a university, choose from a variety of careers to which they are attracted, and live to an average age of 78 years. This family, which is typical of families in many rich nations, appears to have a reasonably good life. The parents have the opportunity and the neces- sary education or training to secure regular employment; to shelter, clothe, feed, and educate their children; and to save some money for later life. Against these “economic” benefits, there are always “noneconomic” costs. The competitive pressures to “succeed” financially are very strong, and during in- flationary or recessionary times, the mental strain and physical pressure of trying to provide for a family at levels that the community regards as desir- able can take its toll on the health of both parents. Their ability to relax, to en- joy the simple pleasures of a country stroll, to breathe clean air and drink pure water, and to see a crimson sunset is constantly at risk with the onslaught of economic progress and environmental decay. But on the whole, theirs is an economic status and lifestyle toward which many millions of less fortunate people throughout the world seem to be aspiring. Now let us examine a typical “extended” family in a poor rural area of South Asia. The household is likely to consist of eight or more people, including parents, several children, two grandparents, and some aunts and uncles. They have a combined real per capita annual income, in money and in “kind” (mean- ing that they consume a share of the food they grow), of $300. Together they live in a poorly constructed one- or two-room house as tenant farmers on a large agricultural estate owned by an absentee landlord who lives in the nearby city. The father, mother, uncle, and older children must work all day on the land. The adults cannot read or write; the younger children attend school irregularly and cannot expect to proceed beyond a basic primary education. All too often, when they do get to school, the teacher is absent. They often eat only one or two meals a day; the food rarely changes, and the meals are rarely sufficient to alleviate the children’s persistent hunger pains. The house has no electricity, sanitation, or fresh water supply. Sickness occurs often, but qualified doctors and medical practitioners are far away in the cities, attending to the needs of wealthier fami- lies. The work is hard, the sun is hot, and aspirations for a better life are contin- ually being snuffed out. In this part of the world, the only relief from the daily struggle for physical survival lies in the spiritual traditions of the people. Shifting to another part of the world, suppose we were to visit a large city situated along the coast of South America. We would immediately be struck by the sharp contrasts in living conditions from one section of this sprawling 4 PART ONE Principles and Concepts metropolis to another. There is a modern stretch of tall buildings and wide, tree-lined boulevards along the edge of a gleaming white beach; just a few hundred meters back and up the side of a steep hill, squalid shanties are pressed together in precarious balance. If we were to examine two representative families—one a wealthy and well-connected family and the other of peasant background or born in the slums we would no doubt also be struck by the wide disparities in their indi- vidual living conditions. The wealthy family lives in a multiroom complex on the top floor of a modern building overlooking the sea, while the peasant fam- ily is cramped tightly into a small makeshift dwelling in a shantytown, or favela (squatters’ slum), on the hill behind that seafront building. For illustrative purposes, let us assume that it is a typical Saturday evening at an hour when the families should be preparing for dinner. In the penthouse apartment of the wealthy family, a servant is setting the table with expensive imported china, high-quality silverware, and fine linen. Russian caviar, French hors d’œuvres, and Italian wine will constitute the first of several courses. The family’s eldest son is home from his university in North America, and the other two children are on vacation from their boarding schools in France and Switzerland. The father is a prominent surgeon trained in the United States. His clientele consists of wealthy local and foreign dignitaries and businesspeo- ple. In addition to his practice, he owns a considerable amount of land in the countryside. Annual vacations abroad, imported luxury automobiles, and the finest food and clothing are commonplace amenities for this fortunate family in the penthouse apartment. And what about the poor family living in the dirt-floored shack on the side of the hill? They too can view the sea, but somehow it seems neither scenic nor relaxing. The stench of open sewers makes such enjoyment rather remote. There is no dinner table being set; in fact, there is usually too little to eat. Most of the four children spend their time out on the streets begging for money, shin- ing shoes, or occasionally even trying to steal purses from unsuspecting people who stroll along the boulevard. The father migrated to the city from the rural hinterland, and the rest of the family recently followed. He has had part-time jobs over the years, but nothing permanent. Government assistance has re- cently helped this family keep the children in school longer. But lessons learned on the streets, where violent drug gangs hold sway, seem to be making a deeper impression. One could easily be disturbed by the sharp contrast between these two ways of life. However, had we looked at almost any other major city in Latin America, Asia, and Africa, we would have seen much the same contrast (al- though the extent of inequality might have been less pronounced). Now imagine that you are in a remote rural area in the eastern part of Africa, where many small clusters of tiny huts dot a dry and barren land. Each cluster contains a group of extended families, all participating in and sharing Subsistence economy An the work. There is little money income here because most food, clothing, shel- economy in which production ter, and worldly goods are made and consumed by the people themselves— is mainly for personal con- theirs is a subsistence economy. There are few passable roads, few schools, sumption and the standard of and no hospitals, electric wires, or water supplies. In many respects, it is as living yields little more than basic necessities of life—food, stark and difficult an existence as that of the people in that Latin American shelter, and clothing. favela across the ocean. Yet perhaps it is not as psychologically troubling because  CHAPTER 1 Introducing Economic Development: A Global Perspective 5 there is no luxurious penthouse by the sea to emphasize the relative deprivation of the very poor. With the exception of population growth and problems of the increasingly fragile environment, life here seems to be almost eternal and un- changing—but not for much longer. A new road is being built that will pass near this village. No doubt it will bring with it the means for prolonging life through improved medical care. But it will also bring more information about the world outside, along with the gadgets of modern civilization. The possibilities of a “better” life will be promoted, and the opportunities for such a life will become feasible. Aspirations will be raised, but so will frustrations as people understand the depth of some of their depriva- tions more clearly. In short, the development process has been set in motion. Development The process Before long, exportable fruits and vegetables will probably be grown in this re- of improving the quality of all human lives and capabilities gion. They may even end up on the dinner tab