Economics of Development: Theory and Evidence PDF

Other books by A.P. Thirlwall Inﬂation, Saving and Growth in Developing Economies Regional Growth and Unemployment in the United Kingdom (with R. Dixon) Financing Economic Development Balance-of-Payments Theory and the United Kingdom Experience (Fourth Edition with H. Gibson) Nicholas Kaldor UK Industrialisation and Deindustrialisation (Third Edition with S. Bazen) The Performance and Prospects of the Paciﬁc Island Economies in the World Economy Economic Growth and the Balance-of-Payments Constraint (with J. McCombie) The Economics of Growth and Development: Selected Essays, vol. 1 Macroeconomic Issues from a Keynesian Perspective: Selected Essays, vol. 2 The Euro and ‘Regional’ Divergence in Europe The Nature of Economic Growth: An Alternative Framework for Understanding the Performance of Nations Trade, the Balance of Payments and Exchange Rate Policy in Developing Countries Essays on Balance of Payments Constrained Growth: Theory and Evidence (with J. McCombie) Trade Liberalisation and the Poverty of Nations (with P. Pacheco-López) Economic Growth in an Open Developing Economy: The Role of Structure and Demand Essays on Keynesian and Kaldorian Economics Edited works Keynes and International Monetary Relations Keynes and Laissez-Faire Keynes and the Bloomsbury Group (with D. Crabtree) Keynes as a Policy Adviser Keynes and Economic Development Keynes and the Role of the State (with D. Crabtree) European Factor Mobility: Trends and Consequences (with I. Gordon) The Essential Kaldor (with F. Targetti) Further Essays in Economic Theory and Policy, vol. 9, Collected Economic Papers of N. Kaldor (with F. Targetti) Causes of Growth and Stagnation in the World Economy (the Mattioli Lectures of N. Kaldor with F. Targetti) Economic Dynamics, Trade and Growth: Essays on Harrodian Themes (with G. Rampa and L. Stella) Other books by Penélope Pacheco-López Trade Liberalisation and the Poverty of Nations (with A.P. Thirlwall) Strategic Directions on Industrial Policy in Mongolia Greenland Faroe (Den) Islands (Den) Iceland United Kingdom Isle of Man Canada Ireland Netherlands Belgium Luxembourg France Switzerland Monaco United States Spain Bermuda Portugal Andorra Morocco Algeria The Bahamas Western Mexico Cayman Is. Sahara (UK) Mauritania Jamaica Cape Verde Mali Haiti Guatemala Senegal Burkina El Salvador The Gambia Faso Honduras Nicaragua Venezuela Guyana Guinea-Bissau Surinam Guinea Costa Rica French Guiana Colombia Sierra Leone Panama Liberia Togo Côte d’Ivoire Kiribati Ecuador Benin Ghana Peru Equatorial Guinea Samoa Brazil French Polynesia American Samoa (US) Bolivia Fiji Tonga Chile Paraguay Puerto Rico (US) Antigua and Uruguay Barbuda Dominican Argentina Republic Guardeloupe (Fr) US Virgin Dominica Islands (US) St Kitts Martinique (Fr) and Nevis Aruba Netherlands St Lucia (Neth) Antilles (Neth) Barbados Grenada St Vincent and the Grenadines Trinidad Venezuela and Tobago The world by income group (GNI/US$): Source: International Bank for Reconstruction and Development, the World Bank Low Income < $1025 Lower-middle Income $1026–$4035 Upper-middle Income $4036–$12,475 High Income > $12,476 No data Income group classified according to the 2015 GNI per capita, calculated using the World Bank Atlas method. Norway Finland Sweden Estonia Russian Federation Latvia Denmark Lithuania Germany Belarus Ukraine Kazakhstan Moldova Mongolia Georgia Azerbaijan Kyrgyz Uzbekistan Dem. People’s Rep. Turkey Turkmenistan Tajikistan Rep. of Korea Japan Greece Armenia Cyprus Syria Rep. of China Malta Lebanon Korea Iraq Iran Afghanistan Bhutan Israel Jordan Kuwait Arab Bahrain Pakistan Lao Libya Qatar Nepal Rep. of P.D.R. Egypt Saudi United Arab Arabia Emirates India Myanmar Vietnam Oman N. Mariana Islands (US) Niger Chad Eritrea Rep. of Yemen Bangladesh Thailand Philippines Sudan Cambodia Guam (US) Nigeria (Federated States of Central Micronesia Marshall Islands Ethiopia Brunei African Sri Lanka Malaysia Republic Palau Cameroon Somalia Maldives Uganda Congo Kenya Kiribati Gabon Rwanda Dem. Rep. Singapore Burundi Papua of Congo Tanzania Comoros Indonesia New Guinea Seychelles Solomon Islands Angola Zambia Mayotte Fiji Vanuatu Zimbabwe Malawi Mauritius Namibia Botswana Madagascar Reunion (Fr) Australia New Caledonia (Fr) Mozambique South Africa Swaziland Lesotho Germany Poland Czech Republic Slovak Republic Ukraine New Zealand Austria Hungary Slovenia Romania Croatia San Bosnia and Marino Herzegovina Serbia Montenegro Bulgaria Italy FYR Macedonia Albania Greece This is a Blank Page ECONOMICS OF DEVELOPMENT THEORY AND EVIDENCE TENTH EDITION A.P. Thirlwall Professor of Applied Economics, University of Kent, UK Penélope Pacheco-López Consultant to Development Agencies BLOOMSBURY ACADEMIC Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY, BLOOMSBURY ACADEMIC and the Diana logo are trademarks of Bloomsbury Publishing Plc First edition 1972 Second edition 1978 Third edition 1983 Fourth edition 1989 Fifth edition 1994 Sixth edition 1999 Seventh edition 2003 Eight edition 2006 Ninth edition 2011 Tenth edition 2017 Reprinted by Bloomsbury Academic, 2022 Copyright © A.P. Thirlwall 1972, 1978, 1983, 1989, 1994, 1999, 2003, 2006, 2011 © A.P. Thirlwall and P. Pacheco-López 2017 A.P. Thirlwall and Penélope Pacheco-López have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as Authors of this work. For legal purposes the Acknowledgements on pp. xxxv-xxxvii constitute an extension of this copyright page. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. Bloomsbury Publishing Plc does not have any control over, or responsibility for, any third-party websites referred to or in this book. All internet addresses given in this book were correct at the time of going to press. The author and publisher regret any inconvenience caused if addresses have changed or sites have ceased to exist, but can accept no responsibility for any such changes. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. ISBN: PB: 978-1-1375-7794-8 ePDF: 978-1-1375-7795-5 ePub: 978-1-3503-0613-4 Printed and bound in Great Britain To find out more about our authors and books visit www.bloomsbury.com and sign up for our newsletters. To Oliver from Mum and Dad This is a Blank Page A PERSONAL MESSAGE FROM THE AUTHORS The economic and social development of poor countries and redu cing divisions in the world economy between rich and poor are two of the greatest challenges facing mankind. Vast diﬀerences in income and wealth between countries and peoples are not only morally indefensible but also pose a grave threat to peace and stability in the world. John Maynard Keynes, the great English economist, once described what drew him to economics; he said, it was ‘its intellectual rigour com- bined with its potentiality for good’. He treated the subject of econom- ics as a moral science, the purpose of which is to understand economic (Courtesy of Spencer behaviour and thereby be able design policies to make the world a Scott of the University of more civilized place in which to live. It is this ‘potentiality for good’ that Kent photographic unit) attracts so many of today’s top economists to development economics. We have written this textbook on the economics of development so that students can apply their knowledge of economics to the plight of poor developing countries in the hope that they will better understand the divided world in which we live and think about issues of develop- ment in whatever capacity they may subsequently work. We have been teaching and practising development economics for many years and have encountered thousands of students in diﬀerent parts of the world and from diﬀerent countries, many of whom have gone on to work in the development ﬁeld – as employees in international institutions and nongovernmental organizations concerned with economic and social development, or as teachers and researchers in poor countries. If new generations of students study- ing development economics are inspired to do the same, this volume will have achieved its purpose. We hope you will enjoy the book, and that when you reach the end, you will feel that the study of the economics of development has enriched your experience as an economist and as a citizen of the world. Wherever you live, we wish you good luck in your studies. Anthony Thirlwall and Penélope Pacheco-López This is a Blank Page xi BRIEF CONTENTS Part I Development and underdevelopment 1 The study of economic development 3 2 The development gap and the measurement of poverty 26 3 The characteristics of underdevelopment and structural change 59 4 Theories of economic growth: old and new 93 Part II Factors in the development process 5 The role of agriculture and surplus labour for industrialization 141 6 Capital accumulation, technical progress and techniques of production 184 7 Human capital: education, the role of women, nutrition and health 209 8 The role of institutions in economic development 243 9 The role of the state in economic development 257 Part III The perpetuation of underdevelopment 10 Dualism, centre–periphery models and the process of cumulative causation 283 11 Population and development 306 12 Development and the environment 326 Part IV Financing economic development 13 Financing development from domestic resources 365 14 Foreign assistance, aid, debt and development 415 Part V International trade, the balance of payments and development 15 Trade theory, trade policy and economic development 473 16 The balance of payments, international monetary assistance and development 533 This is a Blank Page xiii CONTENTS List of Figures xxi List of Tables xxiv List of Case Examples xxvii Preface xxix Universal Declaration of Human Rights xxxiv Acknowledgements xxxv Part I Development and underdevelopment 1 The study of economic development 3 Introduction4 Development economics as a subject 5 Academic interest in development 6 The new empirical development economics 11 A new international economic order 11 Sustainable Development Goals 14 Globalization and interdependence of the world economy 15 The meaning of development and the challenge of development economics 18 The perpetuation of underdevelopment 22 Summary23 Discussion questions 24 Websites24 2 The development gap and the measurement of poverty 26 Introduction27 The development gap and income distribution in the world economy 28 Measures of inequality and historical trends 28 International inequality (unweighted and population weighted) 32 Global (or world) inequality 34 The measurement and comparability of per capita income 36 Purchasing power parity (PPP) 36 Per capita income as an index of development 38 Measuring poverty 39 xiv CONTENTS Meeting the Sustainable Development Goal of poverty reduction 42 Tackling poverty from the ‘grass roots’ 42 Randomized control trials (RCTs) 47 Human Development Index (HDI) 48 Multidimensional Poverty Index (MPI) 50 Can poor countries ever catch up? 53 Summary57 Discussion questions 57 Notes58 Websites on poverty and income distribution 58 3 The characteristics of underdevelopment and structural change 59 Introduction60 The dominance of agriculture and petty services 60 Low level of capital accumulation 62 Rapid population growth 64 Exports dominated by primary commodities 65 The curse of natural resources 66 Weak institutional structures 68 Other dimensions of the development gap 69 Inequality: vertical and horizontal 73 Growth and distribution 77 Poverty-weighted growth rates 78 Stages of development and structural change 78 Rostow’s stages of growth 82 Diversification85 Industrialization and growth 85 Kaldor’s growth laws 88 Summary91 Discussion questions 92 Notes92 Websites on structural change and income distribution 92 4 Theories of economic growth: old and new 93 Introduction94 Classical growth theory 95 The Harrod–Domar growth model 103 Neoclassical growth theory 109 The production function approach to the analysis of growth 112 Production function studies of developing countries 121 ‘New’ (endogenous) growth theory and the macrodeterminants of growth 124 ‘Growth diagnostics’ and binding constraints on growth 133 Summary134 Discussion questions 135 Notes136 Websites on growth theory 137 CONTENTS xv Part II Factors in the development process 5 The role of agriculture and surplus labour for industrialization 141 Introduction142 The role of agriculture in development 142 Barriers to agricultural development 145 Land reform 147 The supply response of agriculture 150 Transforming traditional agriculture 151 The growth of the money economy 153 Finance for traditional agriculture 155 The interdependence of agriculture and industry 156 Economic development with unlimited supplies of labour 157 A model of the complementarity between agriculture and industry 161 Rural–urban migration and urban unemployment 163 Disguised unemployment: types and measurement 166 Incentives and the costs of labour transfer 172 Summary174 Appendix: the functioning of markets in agrarian societies 174 Discussion questions 181 Notes182 Websites on agriculture 183 6 Capital accumulation, technical progress and techniques of production 184 Introduction185 The role of capital in development 185 Technical progress 188 Capital- and labour-saving technical progress 189 How societies progress technologically 191 Learning193 Infrastructure investment 193 Technology and the developing countries 195 Techniques of production 197 The conflict between employment and output and employment and saving in the choice of techniques 200 Employment versus output 200 Employment versus saving 202 Future policy 206 Summary207 Discussion questions 208 Note208 Websites on technology and investment 208 7 Human capital: education, the role of women, nutrition and health 209 Introduction210 Education210 Estimating the rate of return to education 213 xvi CONTENTS Measuring the contribution of education to economic growth 217 The role of women in economic development 219 Women’s education 221 Women’s health 222 Mothers’ Index 223 Policies to reduce gender gap 225 Nutrition225 Water230 Health231 Killer diseases 232 Other diseases and health expenditure 236 The impact of ill health on growth and development 238 Summary240 Discussion questions 241 Notes241 Websites on education, women, nutrition and health 241 8 The role of institutions in economic development 243 Introduction244 The role of institutions 244 Measuring institutions and the debate on institutions versus geography 247 The role of democracy 251 Summary254 Discussion questions 255 Note256 Websites on institutions and market behaviour 256 9 The role of the state in economic development 257 Introduction258 The market mechanism and market failures 258 The role of the state 260 Corruption263 Failed states, conflict and violence 267 Development plans 268 The allocation of resources: the broad policy choices 270 Industry versus agriculture 271 The comparative cost doctrine 271 Present versus future consumption 272 Choice of techniques 273 Balanced versus unbalanced growth 274 Investment criteria 277 Summary278 Discussion questions 279 Notes280 Websites on government and corruption 280 CONTENTS xvii Part III The perpetuation of underdevelopment 10 Dualism, centre–periphery models and the process of cumulative causation 283 Introduction284 Dualism284 The process of cumulative causation 286 Regional inequalities 289 International inequality and centre–periphery models 291 Two models of ‘regional’ growth rate differences: Prebisch and Kaldor 292 The new economic geography 298 Theories of dependence and unequal exchange 300 Unequal exchange 302 Summary303 Discussion questions 304 Notes305 11 Population and development 306 Introduction307 Facts about world population 307 The determinants of fertility 309 Costs and benefits of population growth 313 Population and the growth of cities 317 Simon’s challenge 318 The ‘optimum’ population 320 A model of the low-level equilibrium trap 322 Summary324 Discussion questions 325 Note325 Websites on population 325 12 Development and the environment 326 Introduction327 A model of the environment and economic activity 327 The market-based approach to environmental analysis 330 Externalities331 Common property rights 334 The discount rate 336 The harvesting of renewable resources 337 Non-renewable resources 339 Other environmental values 340 Measuring environmental values 341 National income accounting 344 Risk and uncertainty 346 Economic growth and the environment 347 Sustainable development 348 Natural capital, equity and environmental values 350 Economic thought and the environment 352 Climate change, the Stern Review and predicting the future 353 xviii CONTENTS Climate change and the poor 356 International agencies, agreements and the environment 358 Summary360 Discussion questions 361 Notes362 Websites on the environment 362 Part IV Financing economic development 13 Financing development from domestic resources 365 Introduction366 Forms of saving 367 The prior savings approach 369 The capacity to save 370 The willingness to save 373 Financial systems and economic development 374 The informal financial sector 375 Monetization and money market integration 376 Developing a banking system 377 Rural financial intermediaries and microcredit 380 Development banks 384 Financial intermediaries 384 Financial liberalization 385 Fiscal policy and taxation 391 Tax reform in developing countries 397 Inflation, saving and growth 398 The Keynesian approach to the financing of development 398 Reconciling the prior saving and forced saving approaches to development 402 The quantity theory approach to the financing of development 403 The dangers of inflation 405 Inflation targeting 406 Inflation and growth: the empirical evidence 406 The inflationary experience 408 The structuralist–monetarist debate in Latin America 411 Summary412 Discussion questions 413 Notes414 Websites on banking and finance 414 14 Foreign assistance, aid, debt and development 415 Introduction416 The role of foreign borrowing 416 Dual-gap analysis and foreign borrowing 417 Models of capital imports and growth 420 Capital imports, domestic saving and the capital–output ratio 422 Types of international capital flows 423 The debate over international assistance to developing countries 424 The motives for official assistance 424 The critics of international aid 425 CONTENTS xix The macroeconomic impact of aid 427 The total net flow of financial resources to developing countries 432 Official development assistance (ODA) 433 Total net flow of financial resources from DAC countries 434 UK assistance to developing countries 435 The recipients of ODA 438 Aid tying 439 Remittances439 Multilateral assistance 441 World Bank activities 443 Structural adjustment lending 444 Poverty Reduction Strategy Papers (PRSPs) 447 Estimating the aid component of international assistance 449 The distribution of international assistance 452 Schemes for increasing the flow of revenue 453 Foreign direct investment (FDI) and multinational corporations 455 International debt and debt service problems 458 Optimal borrowing and sustainable debt 460 The debt crisis of the 1980s 461 Debt relief 463 Heavily Indebted Poor Country (HIPC) Initiative 463 Debt rescheduling 465 Debt service capping 466 Debt buybacks and debt swaps 467 Long-term solutions 468 Summary468 Discussion questions 469 Websites on aid, remittances, debt and FDI 470 Part V International trade, the balance of payments and development 15 Trade theory, trade policy and economic development 473 Introduction474 Trade and growth 474 The gains from trade 477 The static gains from trade 477 The dynamic gains from trade 480 Trade as a vent for surplus 481 Theory of customs unions and free trade areas 482 Free trade enthusiasm in the modern era 486 Measurement and process of trade liberalization 487 Models of export-led growth 490 What you export matters 493 Trade liberalization and export growth 494 Trade liberalization, import growth and the balance of payments 495 Trade liberalization and economic performance 497 Trade liberalization, poverty and domestic inequality 498 Trade liberalization and international inequality 504 xx CONTENTS Disadvantages of free trade for development 504 Theory of protection: tariffs versus subsidies 506 Effective protection 509 Import substitution versus export promotion 510 The Prebisch doctrine: an alternative approach to trade in developing countries 511 Technical progress and the terms of trade 512 The income elasticity of demand for products and the balance of payments 513 Recent trends in the terms of trade 514 Fair trade not free trade: trade policies towards developing countries 518 Trade strategy for development 520 International commodity agreements 523 Trade versus aid 527 Summary530 Discussion questions 531 Note531 Websites on trade 531 16 The balance of payments, international monetary assistance and development 533 Introduction534 Balance of payments constrained growth 534 The terms of trade 537 The exchange rate and devaluation 538 The IMF supply-side approach to devaluation 540 The growth of world income and structural change 541 Application of the balance of payments constrained growth model 541 Capital ﬂows 543 Exchange rate systems for developing countries 546 The international monetary system and developing countries 553 How the IMF works 555 IMF lending 556 Criticisms of the IMF 559 The results of IMF programmes 562 Special Drawing Rights (SDRs) and developing countries 563 Summary566 Discussion questions 566 Websites on balance of payments and IMF 567 References and Further Reading 568 Name Index 604 Subject Index 611 xxi LIST OF FIGURES 2.1 Lorenz curve diagram 31 2.2 Distribution of world income (percentage of total, with quintiles of population ranked by income) 35 3.1 The law of diminishing returns 61 3.2 Natural resources and economic growth 67 3.3 The distribution of the labour force (%) 80 3.4 The distribution of output (%) 80 3.5 Association between growth of industry and growth of GDP 86 4.1 Ricardo’s model of the economy 100 4.2 Adjustment of gw and gn107 4.3 The ‘labour-intensive’ form of the neoclassical production function 110 4.4 Equilibrium capital–labour ratio and output per head 111 4.5 The production function 114 4.6 Production function diagram 114 4.7 The effect of increasing returns 115 4.8 Kaldor’s technical progress function 127 5.1 Marginal product of successive units of labour added to the land 158 5.2 Industrial/capitalist sector 159 5.3 Industrial terms of trade and agricultural growth rate 162 5.4 Industrial terms of trade and industrial growth rate 162 5.5 Growth equilibrium and disequilibrium 163 5.6 Disguised unemployment 167 5.7 The dynamic surplus 169 5.8 Effect of labour withdrawal 170 5.9 Maximum sustainable labour 171 5.10 The possibility of negative marginal product 172 5.11 Backward-bending supply curve 172 5.12 The social valuation of labour 173 6.1 Capital-saving technical progress 189 6.2 Labour-saving technical progress 190 6.3 Neutral technical progress 190 6.4 Optimal choice of technique 197 6.5 Different wages: same technique 198 6.6 Efficiency frontier 201 xxii LIST OF FIGURES 6.7 Employment versus saving 203 6.8 Preserving the level of saving through taxation 206 7.1 Relation between productivity and energy intake 227 7.2 People affected by HIV/AIDS (all ages), 1990–2014 235 9.1 Welfare maximization 259 9.2 Functions of the state 266 9.3 Induced decision-making 276 10.1 Region A 287 10.2 Region B 287 10.3 Convergent–divergent growth 296 10.4 The theory of unequal exchange 302 11.1 Average annual rate of population change by major area, estimates, 2000–15, and projection, 2015–2100 309 11.2 Past and projected fertility 310 11.3 Fertility rate and female literacy, 2010 311 11.4 Population momentum 312 11.5 Maximization of average product 320 11.6 The ‘optimum’ population 321 11.7 Low-level equilibrium trap 323 11.8 Leibenstein’s approach 324 12.1 A simple model of the relationship between the economy and the environment 329 12.2 Marginal benefits and environmental costs of a dam 332 12.3 Taxation, marginal benefits and costs of a dam 333 12.4 Relation between the growth and stock of a renewable resource 338 12.5 Economic rent and the use of a non-renewable resource 339 12.6 An overview of economic valuation methodologies 342 12.7 Global genuine savings, 1990–2014 346 12.8 Greenhouse gasses by economic sector, 2014 354 13.1 The Keynesian absolute income hypothesis 370 13.2 Financial access gap between high- and low-income countries, 2009 378 13.3 The McKinnon–Shaw argument 386 13.4 Inflation tax 403 13.5 Inflation and per capita income growth, 1960–92 (pooled annual observations, 127 countries) 407 13.6 Effects of different inflation rates on growth 407 14.1 The magnitude of flows to developing countries 432 14.2 Official development assistance (ODA), 1960–2014 434 14.3 Ratio of ODA to GNI, 1960–2014 434 14.4 Debt–export ratio and growth 461 15.1 The relation between export growth and GDP growth across 124 countries, 2000–14475 15.2 Gains from trade 479 15.3 Gains and losses within a customs union 483 15.4 The share of world trade in world output, 1960–2014 486 15.5 The trade-off between growth and the balance of payments 496 15.6 Welfare gains and losses from protection 507 LIST OF FIGURES xxiii 15.7 Tariffs and subsidies 508 15.8 Movements in the terms of trade 512 15.9 Nominal and real price indices of non-food primary commodities, 1862–1999 516 15.10 Keynes’ commod control scheme 524 15.11 Price compensation and export earnings 527 xxiv LIST OF TABLES 1.1 Millennium Development Goals and Targets 13 1.2 Sustainable Development Goals 14 2.1 List of low-income and lower middle-income countries 29 2.2 Population and income per capita, 2014 30 2.3 A comparison of Gini ratios 33 2.4 Absolute poverty and poverty rates, 1990 and 2012 41 2.5 Poverty gap at $1.90 a day (2011 PPP) (%) 41 2.6 Human Development Index and its components, 2013 49 2.7 Multidimensional Poverty Index and its components, 2014 52 2.8 Hypothetical household data 53 2.9 Countries with more than 50% of the population living in multidimensional poverty 54 3.1 Distribution of employment, by sector (percentage) 61 3.2 Savings and investment as a percentage of GDP, 2014 63 3.3 Population growth (average % per annum) 65 3.4 Primary commodities as a percentage of total exports, 2014 65 3.5 The Gini ratio for high and low inequality countries, 2013 75 3.6 The shares of output in GDP by region 81 4.1 Contribution of factor inputs and total productivity growth to economic growth in 68 developing countries, 1960–87 121 4.2 Growth of output and total factor productivity in the East Asian ‘tigers’, 1966–90 (%) 122 4.3 Sources of growth in China, 1953–94 (%) 122 4.4 Sources of growth by region of the world, 1960–94 123 4.5 The macrodeterminants of growth 128 5.1 Agricultural productivity, 2013 145 A5.1 Land concentration and farm size in Asia and Latin America 176 6.1 Capital–labour substitution possibilities 201 7.1 Education for All 2000–15: goals and their assessment 211 7.2 Participation in education, 2010 and 2013 212 7.3 Public spending on education, by region and income level, 1999 and 2012 213 7.4 Summary statistics of the returns to schooling 215 7.5 Average returns to schooling (latest period for each country) 215 7.6 Average returns to schooling by levels 216 L I S T O F TA B L E S xxv 7.7 Returns to schooling and average years of schooling by period 216 7.8 Contrasting enrolment in primary and secondary schools between female and male pupils, 1990 and 2013 222 7.9 Maternal mortality ratio (number of deaths due to pregnancy-related causes per 100,000 live births) 223 7.10 Mothers’ Index rankings, 2015 224 7.11 Gender Inequality Index rankings, 2013 224 7.12 Comparing malaria, TB and HIV/AIDS 232 7.13 The post-2015 global TB strategy 234 7.14 Regional HIV/AIDS data, 2014 235 7.15 Health indicators 237 7.16 Leading causes of DALYs, 2012 239 9.1 Transparency International’s Corruption Perceptions Index, 2015 264 9.2 Consumption benefits with different investment ratios over different planning horizons 273 11.1 Population statistics 308 11.2 Total fertility rate (births per woman), 1990 and 2014 312 12.1 Key environmental indicators data 328 12.2 Energy use and CO2 emissions, 2006 355 13.1 Investment and savings as a percentage of GDP 368 13.2 Interest sensitivity of saving 374 13.3 Tax effort indices estimated over 1985–95 394 13.4 Inflation 409 14.1 Estimates of investment–savings and import–export gaps assuming a 5% growth of GDP, 2015–20 ($ million) 420 14.2 Total flow of financial resources from DAC countries to developing countries and multilateral organizations, by type of flow 433 14.3 ODA and total net flow of financial resources from DAC countries to developing countries and multilateral agencies, 2014 435 14.4 Total net flow of financial resources from the UK to developing countries and multilateral agencies, 2014 437 14.5 The recipients of aid, 2013 438 14.6 Estimates and projections for remittance flows to developing countries 440 14.7 Concessional and non-concessional flows by multilateral organizations, US$ million, at current prices and exchange rates 441 14.8 Distribution of World Bank lending, 2014 444 14.9 Grant element in loans at different discount rates 450 14.10 DAC members’ ODA terms, 2014 452 14.11 FDI net inflows to top ten developing countries, 2014 456 14.12 Balance of payments effects of private foreign investment 458 14.13 The debt burden of developing countries, 2014 459 15.1 World market shares of manufactured exports by region and income level, 2013 475 15.2 Income inequality in selected developing countries measured by the Gini ratio 502 15.3 Changes in the real terms of trade for commodities (annual average percentage growth rates) 515 xxvi L I S T O F TA B L E S 16.1 Estimates of extended version of dynamic Harrod foreign trade multiplier, 1970–90 (annual percentage average) 544 16.2 Types of exchange rate regime 546 16.3 Countries classified by exchange rate regime, 2014 551 16.4 IMF’s non-concessional lending facilities 557 16.5 IMF concessional lending facilities to low-income countries 558 xxvii LIST OF CASE EXAMPLES 1.1 Costa Rica: developing in the right way 21 2.1 The voices of the poor 43 2.2 Poor people’s exposure to risk 45 2.3 Calculating the HDI for Costa Rica 51 3.1 The interrelationship between savings, investment and growth 64 3.2 The importance of jobs 70 3.3 Inequalities between groups can fuel conflict and tension 76 3.4 Structural change as the driver of growth: China, South Korea and Indonesia compared 87 3.5 Testing Kaldor’s growth laws across African countries 88 4.1 Findings of the Commission on Growth and Development 134 5.1 Raising agricultural productivity in Africa 149 5.2 The World Bank tackles low productivity in agriculture 149 6.1 Main messages from World Development Report 2005 on investment 187 6.2 Bridging the technology divide 196 7.1 Primary education in India 212 7.2 Women and work 221 7.3 Food and Agricultural Organization (FAO) mission statement 227 7.4 Childhood stunting 229 7.5 Two success stories against AIDS: Senegal and Rwanda 236 8.1 Institutions and African economies 253 9.1 Rwanda on the road to recovery 268 10.1 Regional disparities in per capita income in India 290 11.1 Reducing fertility in Bangladesh 311 11.2 The challenge of population growth in the Philippines 314 11.3 Population concern 316 12.1 The tragedy of the commons: southern bluefin tuna 336 12.2 International funding of environmental projects: the Green Climate Fund 358 13.1 Vietnam’s bank on wheels 379 13.2 A randomized control trial of microfinance in Hyderabad, India 383 13.3 BRAC 383 13.4 A meta-analysis of financial liberalization and economic growth 391 14.1 The impact of aid on economic growth in Sierra Leone 426 14.2 Sector-wide development cooperation, mid-1990s 431 xxviii LIST OF CASE EXAMPLES 14.3 DfID mission statement 436 14.4 Rethinking conditionality 437 14.5 The IMF and the World Bank: What’s the difference? 445 14.6 Poverty reduction strategy in IMF-supported programmes 448 14.7 How debt relief fits into a poverty reduction strategy: Uganda’s Poverty Action Fund 465 15.1 Trade liberalization in eight countries 489 15.2 Impact of trade liberalization in Africa 499 15.3 Unfair trade in cotton 518 16.1 Application of the balance of payments constrained growth model to 17 Latin American countries, 1977–2002 542 16.2 The 1997 East Asian financial crisis: a cautionary tale 549 xxix PREFACE The first edition of this book was published in 1972 and was entitled Growth and Development: with Special Reference to Developing Economies. After eight editions, in 2011, the title of the ninth edition was changed to Economics of Development: Theory and Evidence to reflect more accurately the contents of the book, which elaborates the theory of economic development, combined with empirical evidence on the functioning of developing countries in the world economy with respect to the important mainsprings of growth and development, such as capital formation, technical progress, institutions, national and international finance, trade, and particularly export performance. This new edition of the book, now jointly with Dr Penélope Pacheco-López, who has worked in many international economic organizations, gives the opportunity to substantially revise the content of the book, to update statistics, and rewrite chapters to include new theor etical ideas and institutional material in order to improve the exposition to aid students and teachers alike. But the purpose of the book remains the same: to introduce students to the exciting and challenging subject of development economics, which draws on several branches of economics in order to elucidate and understand the development diﬃculties facing the economies of the world’s poor developing countries. This does not mean that the book provides a recipe or blue- print for development: far from it. There can be no general recipes of this nature, and even if there were, they would have to include more than economic ingredients. The book combines description and analysis, with an emphasis on the elaboration of simple and useful theoretical economic models for an understanding of the issues that comprise the subject matter of development economics. We make no apology for the use of conventional eco- nomic theory. We concur with Theodore Schultz (1980), Nobel Prize-winning economist, who has said of development economics: This branch of economics has suﬀered from several intellectual mistakes. The major mistake has been the presumption that standard economic theory is inadequate for understanding low income countries and that a separate economic theory is needed. Models developed for this purpose were widely acclaimed until it became evident that they were at best intellectual curiosities. The reaction of some economists was to turn to cultural and social explanations for the alleged poor economic performance of low income countries. Quite understandably, cultural and behavioral scholars are uneasy about this use of their studies. Fortunately, the intellectual tide has begun to turn. Increasing numbers of economists have come to realize that standard economic theory is just as applicable to the scarcity problems that confront low income countries as to the corresponding problems of high income countries. xxx PR EFACE This is not to say, of course, that all standard theory is useful and relevant for an understanding of the development process; in particular, the relevance of static equilibrium theory may be ques- tioned. Nor is it possible to ignore non-economic factors in the growth and development process. The fact is, however, that the desire for material improvement in developing countries is very strong, and, in the ﬁnal analysis, growth and development must be considered an economic process, in the important practical sense that it is unlikely to proceed very far in the absence of an increase in the quantity and quality of the resources available for production. The book lays particular emphasis on the economic obstacles to development and the economic means by which developing countries may raise their rate of growth of output and living standards in order to reduce poverty. For those new to the book, or for those using the ninth edition, we outline the main contents of each chapter and the changes introduced into this tenth edition. Part I Development and underdevelopment comprises four major chapters that provide a basis for understanding the nature of poverty and underdevelopment in low-income countries, and the theories of economic growth and development that have been put forward over time. This part constitutes important background for the rest of the book. Chapter 1 addresses the subject of development economics, the meaning of development and the challenge of development economics. The globalization and interdependence of the world economy is emphasized, and there is discussion of the call for a new international order, including the new Sustainable Development Goals, agreed in 2015. Chapter 2 portrays the magnitude of the development gap between rich and poor coun- tries in the world economy and discusses the measurement of poverty, including the Human Development Index (HDI) of the UN Development Programme (UNDP) and the Multidimensional Poverty Index (MPI) of the Oxford Poverty and Human Development Initiative. There is also a new section on randomized control trials (RCTs) for understanding the best way to reduce poverty. There is a discussion of the World Bank’s approach to tackling poverty based on the ideas of empowering the poor and extending their capabilities, as discussed in its World Development Report 2000/2001. New research is also reviewed on whether the global and international distribu- tion of income is widening or narrowing. Chapter 3 outlines the characteristics of underdevelopment and gives quantitative evidence of various dimensions of the development gap with respect to employment and unemployment, hunger and the distribution of income within countries. The major characteristics of underdevel- opment identiﬁed include the dominance of low-productivity agriculture and lack of industrial ization, low levels of capital accumulation, rapid population growth, an export trade dominated by primary products, the ‘curse of natural resources’ and weak governance and institutions. These topics are discussed more fully in later chapters. The process of structural change is also addressed, as is the notion of industrialization as the engine of growth. Chapter 4 introduces students to various economic growth theories. There are sections on clas- sical growth theory (Adam Smith, Malthus, Ricardo and Marx), the Harrod–Domar growth model, neoclassical growth theory, and the ‘new’ endogenous growth theory that now dominates the liter- ature on the applied economics of growth, with its stress on the importance of physical and human capital formation and research and development eﬀort as the prime determinants of growth. Many empirical studies are surveyed, with regard to the production function approach to understanding the growth process and the macrodeterminants of growth approach using ‘new’ growth theory. There is also discussion of the work of Hausmann, Rodrik and others on growth accelerations, and the concept of ‘growth diagnostics’ and binding constraints on growth. If you ﬁnd the technical details too diﬃcult, you should proceed straight to Chapter 5, but you will be missing a lot. PR EFACE xxxi Part II Factors in the development process contains five chapters: the role of agriculture and surplus labour in developing countries; the role of capital accumulation and technical pro- gress for growth; a new chapter on human capital – education, gender, nutrition and health; the importance of institutions conducive to development; and the role of the state in economic development. Chapter 5 deals with the diﬀerent contributions that agriculture makes to the development process, one of which is a source of cheap labour for industry. Particular attention is paid to the inﬂuential Lewis model of economic development with unlimited supplies of labour. There is explicit treatment, following on from Lewis, of the interaction and complementarity between agriculture and industry, with a number of interesting insights into the importance of demand expansion from agriculture as a stimulus to industrial growth and of achieving an equilibrium terms of trade between the two sectors. There is also a discussion of barriers to raising agricultural productivity, highlighted by the World Bank’s World Development Report 2008: Agriculture for Development. There is an Appendix on how markets function in the rural agricultural sector, and how the land, labour and credit markets interlock, based on uncertainty of agricultural output and the risk aversion of agents. Chapter 6 explores the role of capital accumulation and technical progress in the development process. The choice of appropriate techniques of production is also explored, and the potential conﬂicts involved in moving towards the use of more labour-intensive techniques – between employment and output and between employment and saving. The role played by multinational corporations in dictating technological choice is also examined. Chapter 7 is a new chapter on the role of education, women, nutrition and health in the devel- opment process. An educated, skilled and healthy workforce of men and women is vital in the production process to absorb new technology and for working efficiency. Chapter 8 discusses the role of institutions in the development process. The importance of property rights and the rule of law is particularly emphasized, and the various institutions for regulating markets and providing social insurance. The important work of Rodrik on democracy is reviewed, and also the pioneering work of Acemoglu, Johnson and Robinson on the relation- ship between institutional development in colonized countries in the past and institutions today, and the debate on the importance of institutions versus geography in explaining diﬀerences in economic development. Chapter 9 explores the role of the state in economic development and its role in resource allocation compared to reliance on the market mechanism. Market imperfections, market failure and corruption are highlighted, as are the limited capabilities of the state, drawing on the exten- sive analysis contained in the World Bank’s World Development Report 1997. Some of the broader issues of development strategy are also considered, including the case for planning. There is a revised section on failed states, conflict and violence. Part III The perpetuation of underdevelopment comprises three chapters that focus on factors that can perpetuate underdevelopment, including poverty itself (causing a vicious circle), rapid population growth and the impact of development on the environment. Chapter 10 explores dualism and Myrdal’s concept of the process of circular and cumula- tive causation, and describes the mechanisms by which economic divisions between regions and between countries tend to be perpetuated and widened. It includes the early centre–periphery models of Prebisch and Kaldor, together with discussion of the new economic geography pioneered by Krugman. The views of Marxist writers, including Emmanuel’s model of unequal exchange, are also presented. xxxii PR EFACE Chapter 11 discusses population and development and attempts to evaluate the debate on whether population expansion is a growth-inducing or growth-retarding force. The costs and benefits of population growth are examined, together with the different ways an optimum popu- lation may be defined. The facts on population growth are clearly outlined, with a discussion of the determinants of fertility. Chapter 12, written by our colleague Professor Iain Fraser, discusses how environmental issues may be incorporated into social cost–beneﬁt analysis, and the new and important concept of sus- tainable development, which is the subject of the World Bank’s World Development Reports 1992, 2002 and 2010. There are sections on the Stern Review on climate change, the impact of climate change on the poor, and the outcome of the climate change conference in Paris in December, 2015. Part IV Financing economic development covers domestic and foreign resources. Chapter 13 deals with the ﬁnancing of development from domestic resources. There is discus- sion of the theory of ﬁnancial liberalization, together with critiques and empirical evidence of the relation between real interest rates, saving, investment and growth. There is new material on the ﬁnancial system in developing countries and the relationship between ﬁnancial development and economic development. Fiscal policy and taxation are also discussed, together with the topic of forced saving through inﬂation. New research is reported on the relation between inﬂation and growth, and the impact of inﬂation targeting. Chapter 14 discusses the ﬁnance of development from external resources. All the statistics relating to foreign resource inﬂows have been updated, including the importance of remittances from abroad. The whole aid debate is reviewed, and the impact of aid on development. There are sections on the macroeconomic impact of aid and the critics of aid. Structural adjustment lending by the World Bank and the role of foreign direct investment in the development process are examined. The debt-servicing problems created by foreign borrowing are thoroughly surveyed, and there is extensive discussion of international debt and the concept of optimal borrowing. Part V Trade, the balance of payments and development contains two chapters. Chapter 15 discusses trade theory, trade policy and economic development. The static and dynamic gains from trade are thoroughly explored (including the theory of customs unions and free trade areas), as are the ways in which the present pattern of trade works to the relative dis- advantage of poor countries. The tendency of the terms of trade to deteriorate and for balance of payments diﬃculties to arise are stressed. There are sections on the theory and practice of trade lib- eralization, and the impact that trade liberalization has had on export growth, import growth, the balance of payments, economic growth, domestic income inequality and international inequality. What trade policies poor countries should pursue are also examined, and the a rguments given for various forms of protection. Chapter 16 explores the important concept of balance of payments constrained growth and the various policy responses to this constraint at the national and international level. The latter involves a consideration of the extensive facilities aﬀorded by the International Monetary Fund (IMF) for balance of payments support. Some of the criticisms levelled at the IMF are also consid- ered. There is an analysis of the diﬀerent types of exchange rate systems that developing countries can adopt, and lessons to be drawn from the ﬁnancial crisis in East Asia in 1997. The chapter ends with a discussion of Special Drawing Rights as a potential form of international assistance to developing countries. This new edition continues to provide the addresses of websites, chapter by chapter, to guide students to relevant information and data on the internet. When the next edition of this book becomes due in 2022, the facts pertaining to developing countries will again be out of date, and PR EFACE xxxiii no doubt there will have been new institutional changes and innovations in thinking about devel- opment strategy. To keep abreast with what is going on, students are encouraged to consult pub- lications such as the World Bank’s World Development Report, the IMF’s Finance & Development (a quarterly magazine published in several diﬀerent languages), The Human Development Report (published by the UN Development Programme) and The Least Developed Countries Report and Trade and Development Report (published by the UN Conference on Trade and Development), as well as journals such as World Development, Journal of Development Studies, Journal of Development Economics, Journal of International Development, Economic Development and Cultural Change, Oxford Development Studies and the World Bank Economic Review. Please visit the book’s website, www.palgravehighered.com/Thirlwall-Econ-Of-Dev-10e, which contains PowerPoint slides for lecturers, as well as web links to additional resources and videos. Also, visit the authors’ websites: www.kent.ac.uk/economics/staff/profiles/tony-thirlwall.html and www.kent.ac.uk/economics/staff/profiles/penelope-pacheco-lopez.html. Reference Schultz, T.W. (1980) ‘The Economics of Being Poor’, Journal of Political Economy, 88: 639–51. xxxiv UNIVERSAL DECLARATION OF HUMAN RIGHTS On 10 December 1948, the General Assembly of the United Nations adopted and proclaimed the Universal Declaration of Human Rights. Since then, it has been translated into more than 350 languages worldwide and more than 100 African languages. There are 30 Articles, but we would like to highlight this one in particular: Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and the necessary social services and the right to security in the event of unemployment, sickness, disability, widow- hood, old age or other lack of livelihood in circumstances beyond his control. (Article 25) xxxv ACKNOWLEDGEMENTS There are a number of individuals who work at and with Palgrave without whose help this tenth edition of Economics of Development would not have been possible. Kirsty Reade, economics publisher, and Aléta Bezuidenhout, associate editor for economics, have been a constant source of help and advice throughout the writing and production process. Georgia Walters, senior pro- duction editor, prepared the manuscript for copy-editing and supervised the final production. Maggie Lythgoe did a superb job in copy-editing the manuscript and preparing it for typesetting, correcting our English grammar on the way. Jon Peacock undertook the Herculean task of obtain- ing permissions from publishers and international organizations to use third-party material. To all those above, our sincere thanks. Finally, we give photographic and other acknowledgements. Photographic acknowledgements 1. Gunnar Myrdal, UN photo 2. Muhammad Yunus, Getty Images 3. Robert Solow, photo by Donna Coveney/MIT, reproduced by kind permission of Professor Solow 4. Amartya Sen, reproduced by kind permission of Stephanie Mitchell/Harvard University 5. Dani Rodrik, reproduced by kind permission of Pinar Dogan and Professor Rodrik 6. Hans Singer, Gary Edwards/Institute of Development Studies 7. Raúl Prebisch, reproduced by kind permission of Dr Eliana Diaz Prebisch 8. Nicholas Kaldor, reproduced by kind permission of the Estate of Professor Kaldor 9. Walt Rostow, Time & Life Pictures/Getty Images 10. Adam Smith, Time & Life Pictures/Getty Images 11. Thomas Malthus, Getty Images 12. Karl Marx, Getty Images 13. Arthur Lewis, Getty Images 14. David Ricardo, Getty Images 15. Roy Harrod, Getty Images 16. Joseph Stiglitz, AFP/Getty Images 17. Paul Krugman, Getty Images 18. Albert Hirschman, reproduction by kind permission of Katia Hirschman Salomon 19. Angus Deaton, reproduction by kind permission of Professor Deaton and Princeton University 20. Elinor Ostrom, Chris Meyer/Trustees of Indiana University xxxvi ACKNOWLEDGEMENTS Other acknowledgements Unless stated otherwise below, all third-party material has been used under a Creative Commons Attribution 3.0 IGO license (https://creativecommons.org/licenses/by/3.0/igo/ legalcode), a Creative Commons Attribution-NoDerivs 4.0 licence (https://creativecommons.org/ licenses/by-sa/4.0/legalcode), or an Open Government Licence v3.0 (http://www.nationalarchives. gov.uk/doc/open-government-licence/version/3/). Table A5.1 Land concentration and farm size in Asia and Latin America is from Otsuka K, Chuma H and Hayami Y. “Land and Labor Contracts in Agrarian Economies: Theories and Facts”. Journal of Economic Literature Vol. 30, No. 4 (Dec., 1992), pp. 1965-2018, with permission from the American Economic Association. Case Example 11.1 Reducing fertility in Bangladesh, with permission from the Centre for Global Development, Washington DC. Case Example 15.2 Impact of trade liberalization in Africa, with permission from Christian Aid. Please refer to www.christianaid.org.uk for more up to date information regarding the issues concerned. Case example 6.2 Bridging the technology divide; Case example 7.2 Women and work; Figure 13.2 Financial access gap between high- and low-income countries, 2009; Case example 13.1 Vietnam’s bank on wheels; Case example 14.6 Poverty reduction strategy in IMF-supported programmes; Table 16.3 Countries classified by exchange rate regime, 2014; Table 16.4 IMF’s non-concessional lending facilities; and Table 16.5 IMF concessional lending facilities to low income countries, all with permission from the International Monetary Fund. Case example 13.4 A meta-analysis of financial liberalization and economic growth, with per- mission from Robert Lensink. Table 13.3 Tax effort indices estimated over 1985–95, with permission from Marcelo Piancastelli. Table 14.2 Total flow of financial resources from DAC countries to developing countries and multilateral organizations, by type of flow; Table 14.3 ODA and total net flow of finan- cial resources from DAC countries; Table 14.4 Total net flow of financial resources from the UK to developing countries and multilateral agencies, 2014; Table 14.7 Concessional and non-concessional flows by multilateral organisations; Table 14.8 Distribution of World Bank lending, 2014; Table 14.10 DAC members’ ODA terms, 2007 (all http://www.oecd.org/dac/stats/ statisticsonresourceflowstodevelopingcountries.htm); and Table 14.9 Grant element in loans at different discount rates, all with permission from the Organisation for Economic Co-operation and Development. Case example 10.1 Regional disparities in per capita income in India, with permission from Taylor & Francis Ltd. Table 1.2: Sustainable Development Goals, from Global Sustainable Development Report, UN Department of Economic and Social Affairs © 2015 United Nations; Table 3.3 Population growth ACKNOWLEDGEMENTS xxxvii from Population Division 2015 World Population Prospects by UN Department of Economic and Social Affairs, available at https://esa.un.org/unpd/wpp/ 2015, © 2015 United Nations; Figure 7.2 People affected by HIV/AIDS (all ages), 1990–2014 UNAIDS © 2015 United Nations Case exam- ple 7.5 Two success stories against AIDS: Senegal and Rwanda UNAIDS © 2015 United Nations; Table 7.14 Regional HIV/AIDS data, 2014 UNAIDS © 2015 United Nations; Figure 11.1 Average annual rate of population change from Population Division 2015 World Population Prospects, UN Department of Economic and Social Affairs © 2015 United Nations; Table 12.1: Key environ- mental indicators data from UNEP Yearbook. United Nations Environment Programme © 2012 United Nations; Table 12.2: Energy use and CO2 emissions, 2006 from Trade and Development Report 2009 by UNCTAD © 2009 United Nations; Case example 15.1 Trade liberalization in eight countries © 2015 United Nations; and Table 15.3 Changes in the real terms of trade for com- modities © 2003 United Nations, all with permission from the United Nations. Table 7.1 Education for All 2000–15: goals and their assessment; and Table 7.3 Public spending on education, by region and income level, with permission from the United Nations Educational, Scientific and Cultural Organization (UNESCO). Case example 7.4 Childhood stunting; Table 7.13 The post-2015 global TB strategy; and Table 7.16 Leading causes of DALYs, 2012, with permission from the World Health Organization. This is a Blank Page I DEVELOPMENT AND UNDERDEVELOPMENT This is a Blank Page 3 1 THE STUDY OF ECONOMIC DEVELOPMENT Introduction Development economics as a subject Academic interest in development The new empirical development economics A new international economic order Sustainable Development Goals Globalization and interdependence of the world economy The meaning of development and the challenge of development economics The perpetuation of underdevelopment Summary Discussion questions Websites 4 DEVELOPMENT AND UNDERDEVELOPMENT Introduction We ask the reader (especially the young student) to consider, behind a veil of ignorance (Rawls, 1972), what sort of world they would prefer to have been born into. A world in which nearly a billion people live on less than $1.90 a day (the official World Bank poverty line), with only a 5% chance of living a luxurious lifestyle or in a fairer world that provides a decent living standard for everyone wherever they are born – whether in Norway, the richest country, or Burundi, the poorest? Whatever answer you give, you will have shown an interest in development economics, which seeks to understand and explain why some countries are poor and others rich, and how to reduce poverty in poor countries to give everyone on the planet a minimum standard of life and freedom from hunger and fear of the future. Development economics, as it is understood and taught today, is a relatively new subdiscipline of economics dating from the early years after the Second World War; but, in fact, the economic progress of nations has always been at the heart of economic enquiry, at least since the time of the great classical economists of the late eighteenth century and the first half of the nineteenth century – Adam Smith, Thomas Malthus, David Ricardo, John Stuart Mill and Karl Marx. These writers were all concerned with understanding the growth and development process of coun- tries and the factors determining the distribution of income between classes of people. Modern development economics has, in many ways, revived the old interests of the classical economists concerning the importance of saving, investment, capital accumulation, trade, and the mobiliza- tion of surplus labour for structural change out of agriculture into manufacturing industry and service activities. In this chapter we start by considering development economics as a subject – and academic interest in development issues – and why there has been a revival of development econom- ics in the past 70 years, with many of the world’s best economists researching and writing on development matters. One of the major contributory factors has been the poorer countries of the world calling for a fairer deal from the functioning of the world economy, which they view as being biased against them. This demand for a new international economic order has been endorsed by all the major multilateral agencies established after the Second World War to over- see international relations and a smoother functioning of the world economy after the economic chaos of the prewar era: the United Nations (UN) and its several affiliates, the World Bank for Reconstruction and Development and the International Monetary Fund (IMF). We shall discuss what a new international economic order might consist of, and the components of the new Sustainable Development Goals laid down in 2015, to be achieved by 2030, which replaced the Millennium Development Goals 20

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