Chapters 1-4 Economic Development PDF
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Michael P. Todaro and Stephen C. Smith
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This book examines economic development from a global perspective, covering theories, models, and case studies. It explores differences in living standards, country classifications, and the factors influencing economic success. The book also explores historical theories of growth and current models of development, along with the issues of poverty and inequality.
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ECONOMIC DEVELOPMENT THIRTEENTH EDITION MICHAEL P. TODARO STEPHEN C. SMITH New York University The George Washington University Harlow, England London New York Boston San Fran...
ECONOMIC DEVELOPMENT THIRTEENTH EDITION MICHAEL P. TODARO STEPHEN C. SMITH New York University The George Washington University Harlow, England London New York Boston San Francisco Toronto Sydney Dubai Singapore Hong Kong Tokyo Seoul Taipei New Delhi Cape Town São Paulo Mexico City Madrid Amsterdam Munich Paris Milan Contents Case Studies and Boxes xv Figures and Tables xvii Preface xxi 1 Introducing Economic Development: A Global Perspective 1 1.1 Introduction to Some of the World’s Biggest Questions 1 1.2 How Living Levels Differ Around the World 2 1.3 How Countries Are Classified by Their Average Levels of Development: A First Look 7 1.4 Economics and Development Studies 8 1.4.1 Wider Scope of Study 8 1.4.2 The Central Role of Women 10 1.5 The Meaning of Development: Amartya Sen’s “Capability” Approach 10 1.6 Happiness and Development 13 1.7 The Sustainable Development Goals: A Shared Development Mission 15 1.7.1 Seventeen Goals 15 1.7.2 The Millennium Development Goals, 2000–2015 16 1.7.3 Implementing the Sustainable Development Goals 19 1.8 Some Critical Questions for the Study of Development Economics 21 Case Study 1: Comparative Economic Development: Pakistan and Bangladesh 24 2 Comparative Economic Development 35 2.1 An Introduction 35 2.2 What is the Developing World? Classifying Levels of National Economic Development 37 2.2.1 Conventional Comparisons of Average National Income 37 2.2.2 Adjusting for Purchasing Power Parity 43 2.2.3 Other Common Country Classifications 45 2.3 Comparing Countries by Health and Education, and the Human Development Index 46 2.3.1 Comparing Health and Education Levels 46 2.3.2 Introducing the Human Development Index 46 2.3.3 Human Development Index Ranking: How Does it Differ from Income Rankings? 49 2.3.4 Human Development Index: Alternative Formulations 51 v vi Contents 2.4 Key Similarities and Differences Among Developing Countries 54 2.4.1 Levels of Income and Productivity 54 2.4.2 Human Capital Attainments 55 2.4.3 Inequality and Absolute Poverty 57 2.4.4 Population Growth and Age Structure 58 2.4.5 Rural Economy and Rural-to-Urban Migration 59 2.4.6 Social Fractionalisation 59 2.4.7 Level of Industrialisation and Manufactured Exports 61 2.4.8 Geography and Natural Resource Endowments 61 2.4.9 Extent of Financial and Other Market Development 62 2.4.10 Quality of Institutions and External Dependence 63 2.5 Are Living Standards of Developing and Developed Nations Converging? 67 2.5.1 The Great Divergence 67 2.5.2 Two Major Reasons to Expect Convergence 69 2.5.3 Perspectives on Income Convergence 70 2.6 Long-Run Causes of Comparative Development 74 2.7 Concluding Observations 82 Case Study 2: Institutions, Colonial Legacies, and Economic Development: Ghana and Côte d’Ivoire 84 Appendix 2.1 The Traditional Human Development Index (HDI) 102 Appendix 2.2 How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages 108 3 Classic Theories of Economic Growth and Development 116 3.1 Classic Theories of Economic Development: Four Approaches 116 3.2 Development as Growth and the Linear-Stages Theories 117 3.2.1 Rostow’s Stages of Growth 118 3.2.2 The Harrod-Domar Growth Model 118 3.2.3 Obstacles and Constraints 121 3.2.4 Necessary Versus Sufficient Conditions: Some Criticisms of the Stages Model 122 3.3 Structural-Change Models 122 3.3.1 The Lewis Theory of Economic Development 122 3.3.2 Structural Change and Patterns of Development 127 3.3.3 Conclusions and Implications 128 3.4 The International-Dependence Revolution 129 3.4.1 The Neocolonial Dependence Model 130 3.4.2 The False-Paradigm Model 131 3.4.3 The Dualistic-Development Thesis 131 3.4.4 Conclusions and Implications 132 3.5 The Neoclassical Counter-Revolution: Market Fundamentalism 133 3.5.1 Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches 133 3.5.2 Traditional Neoclassical Growth Theory 135 3.5.3 Conclusions and Implications 137 3.6 Classic Theories of Development: Reconciling the Differences 138 Case Study 3: Classic Schools of Thought in Context: South Korea and Argentina 140 Appendix 3.1 Components of Economic Growth 147 Contents vii Appendix 3.2 The Solow Neoclassical Growth Model 153 Appendix 3.3 Endogenous Growth Theory 158 4 Contemporary Models of Development and Underdevelopment 164 4.1 Underdevelopment as a Coordination Failure 165 4.2 Multiple Equilibria: A Diagrammatic Approach 168 4.3 Starting Economic Development: The Big Push 174 4.3.1 The Big Push: A Graphical Model 175 4.3.2 Other Cases in Which a Big Push May Be Necessary 180 4.3.3 Why the Problem Cannot Be Solved by a Super-Entrepreneur 181 4.4 Further Problems of Multiple Equilibria 183 4.4.1 Inefficient Advantages of Incumbency 183 4.4.2 Behaviour and Norms 183 4.4.3 Linkages 184 4.4.4 Inequality, Multiple Equilibria, and Growth 185 4.5 Michael Kremer’s O-Ring Theory of Economic Development 186 4.5.1 The O-Ring Model 186 4.5.2 Implications of the O-Ring Theory 189 4.6 Economic Development as Self-Discovery 191 4.7 The Hausmann-Rodrik-Velasco Growth Diagnostics Framework 192 4.8 Conclusions 199 Case Study 4: China: Understanding a Development “Miracle” 202 5 Poverty, Inequality, and Development 220 5.1 Measuring Inequality 222 5.1.1 Size Distributions 222 5.1.2 Lorenz Curves 224 5.1.3 Gini Coefficients and Aggregate Measures of Inequality 226 5.1.4 The Ahluwalia-Chenery Welfare Index (ACWI) 228 5.2 Measuring Absolute Poverty 228 5.2.1 Income Poverty 228 5.2.2 Multidimensional Poverty Measurement 233 5.3 Poverty, Inequality, and Social Welfare 233 5.3.1 What is it About Extreme Inequality That’s So Harmful to Economic Development? 233 5.3.2 Dualistic Development and Shifting Lorenz Curves: Some Stylised Typologies 235 5.3.3 Kuznets’s Inverted-U Hypothesis 239 5.3.4 Growth and Inequality 243 5.4 Absolute Poverty: Extent and Magnitude 244 5.4.1 The Multidimensional Poverty Index (MPI) 246 5.5 Economic Characteristics of High-Poverty Groups 251 5.5.1 Children and Poverty 252 5.5.2 Women and Poverty 252 5.5.3 Ethnic Minorities, Indigenous Populations, and Poverty 255 5.6 Growth and Poverty 257 Case Studies and Boxes Case Studies 1 Comparative Economic Development: Pakistan and Bangladesh 24 2 Institutions, Colonial Legacies, and Economic Development: Ghana and Côte d’Ivoire 84 3 Classic Schools of Thought in Context: South Korea and Argentina 140 4 China: Understanding a Development “Miracle” 202 5 India: Complex Challenges and Compelling Opportunities 272 6 “Twins” Growing Apart: Burundi and Rwanda 332 7 Rural–Urban Migration and Urbanisation in Developing Countries: India and Botswana 377 8 Pathways Out of Poverty: Progresa/Oportunidades in Mexico 434 9 The Need to Improve Agricultural Extension for Women Farmers: Kenya and Uganda 489 10 A World of Contrasts on One Island: Haiti and the Dominican Republic 548 11 The Role of Development NGOs: BRAC and the Grameen Bank 599 12 Pioneers in Development Success through Trade and Industrialisation Strategy: South Korea and Taiwan in Comparative Perspective 676 13 Brazil: Meaningful Development or Middle-Income Trap? 737 14 The Roots of Divergence Among Developing Countries: Costa Rica, Guatemala, and Honduras 785 15 How Two African Success Stories Have Addressed Challenges: Botswana and Mauritius 836 Boxes 1.1 Development Policy: The Experience of Poverty: Voices of the Poor 4 1.2 Development Policy: Comparing Living Conditions Commonly Found Across Four Strata 6 1.3 Development Policy: The 17 Goals, and Where They are Examined in This Text 20 2.1 Development Policy: Differences Between the Current Human Development Index and the Traditional HDI 53 2.2 Findings: The Persistent Effects of Colonial Forced Labour on Poverty and Development 66 2.3 Findings: Instruments to Test Theories of Comparative Development: Inequality 79 2.4 Findings: Legacy of Colonial Land Tenure and Governance Systems 80 4.1 Development Policy: Synchronising Expectations: Resetting “Latin American Time” 171 4.2 Findings: Village Coordination and Monitoring for Better Health Outcomes 172 4.3 Findings: Three Country Case Study Applications of Growth Diagnostics 196 4.4 Findings: Inclusive Growth Diagnostics: The Case of Bangladesh 198 5.1 Development Policy: The Latin America Effect 242 5.2 Development Policy: Problems of Gender Relations in Developing Countries: Voices of the Poor 254 6.1 Findings: The 2017 Revised United Nations Population Projections 300 6.2 Findings: Social Norms and the Changing Patterns of Fertility in Bangladesh 308 6.3 Development Policy: Population Policy in China 321 6.4 Findings: Contraceptives Need and Use in Developing Countries, 2003 to 2012 327 7.1 Findings: The Emergence of Industrial Districts or Clusters in China 351 xv xvi Case Studies and Boxes 8.1 Development Policy: Health and Education: Voices of the Poor 391 8.2 Development Policy: Linkages Between Investments in Health and Education 392 8.3 Findings: Mothers’ Health Knowledge is Crucial for Raising Child Health 394 8.4 Findings: School Impact of a Low-Cost Health Intervention 395 8.5 Findings: Cash or Condition? Evidence from Malawi 405 8.6 Findings: Impacts of Tutor and Computer-Assisted Learning Programmes 415 8.7 Development Policy: Health Challenges Faced by Developing Countries 419 8.8 Development Policy: AIDS: Crisis and Response in Uganda 423 8.9 Findings: Applying Behavioural Economics to Improve Physical and Mental Health 428 9.1 Development Policy: Development Policy Issues: Famine in the Horn of Africa 454 9.2 Findings: Learning About Farming: The Diffusion of Pineapple Growing in Ghana 482 10.1 Development Policy: Autonomous Adaptation to Climate Change by Farmers in Africa 521 10.2 Development Policy: One of the World’s Poorest Countries Tries to Prepare for Climate Change: Niger 522 10.3 Findings: Elinor Ostrom’s Design Principles Derived from Studies of Long-Enduring Institutions for Governing Sustainable Resources 529 10.4 Development Policy: How Different Is Adaptation and Resilience Assistance from Development Assistance? 542 11.1 Development Policy: The Former Washington Consensus and East Asia 576 11.2 Development Policy: The New Consensus 578 11.3 Findings: Reducing Teacher Absenteeism in an NGO School 592 12.1 Findings: Four Centuries of Evidence on the Prebisch-Singer Hypothesis 627 12.2 Findings: Exporting and the Performance of Artisan Rug Makers in Egypt 671 13.1 Development Policy: The History and Role of the International Monetary Fund 701 13.2 Development Policy: The History and Role of the World Bank 705 13.3 Development Policy: Mexico: Crisis, Debt Reduction, and the Struggle for Renewed Growth 719 13.4 Development Policy: “Odious Debt” and its Prevention 723 14.1 Development Policy: Seven Key Disputed Issues About the Role and Impact of Multinational Corporations in Developing Countries 758 15.1 Findings: The Financial Lives of the Poor 812 15.2 Findings: Combining Microfinance with Training 816 15.3 Development Policy: Privatisation: What, When, and to Whom? Chile and Poland 833 Figures and Tables Figures 1.1 Income and Happiness: Comparing Countries 14 2.1 Nations of the World, Classified by GNI Per Capita 40 2.2 Income Comparisons for Selected Countries, 2017 42 2.3 Improvements in Human Development Since 1990, by Region 52 2.4 Under-5 Mortality Rates, 1990 and 2017 56 2.5 The growth of real output per person since 1750 68 2.6 Relative Country Convergence 1970–1994 and 1994–2017 71 2.7 Relative Country Convergence: World, Developing Countries, and OECD 72 2.8 Growth Convergence versus Absolute Income Convergence 73 2.9 Schematic Representation of Leading Theories of Comparative Development 75 A2.1.1 Human Development Disparities Within Selected Countries 107 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labour Economy 124 3.2 The Lewis Model Modified by Labour-Saving Capital Accumulation: Employment Implications 126 A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier 149 A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier 150 A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier 151 A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier 152 A3.2.1 Equilibrium in the Solow Growth Model 154 A3.2.2 The Long-Run Effect of Changing the Savings Rate in the Solow Model 156 4.1 Multiple Equilibria 169 4.2 The Big Push 176 4.3 Hausmann-Rodrik-Velasco Growth Diagnostics Decision Tree 193 5.1 The Lorenz Curve 224 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality 225 5.3 Estimating the Gini Coefficient 226 5.4 Four Possible Lorenz Curves 227 5.5 Measuring the Total Poverty Gap 229 5.6 Improved Income Distribution under the Traditional-Sector Enrichment Growth Typology 236 5.7 Worsened Income Distribution under the Modern-Sector Enrichment Growth Typology 237 5.8 Crossing Lorenz Curves in the Modern-Sector Enlargement Growth Typology 238 5.9 The “Inverted-U” Kuznets Curve 239 5.10 Kuznets Curve with Latin American Countries Identified 242 5.11 Plot of Inequality Data for Selected Countries 243 xvii xviii Figures and Tables 5.12 Global and Regional Poverty Trends, 1981–2010 245 5.13 Functional Income Distribution in a Market Economy: An Illustration 260 A5.1.1Choice of Techniques: The Price Incentive Model 281 6.1 World Population Growth, 1950–2050 295 6.2 World Population Distribution by Region, 2010 and 2050: The Big Story: Africa’s Steadily Growing Share of World Population 297 6.3 Map with Country Sizes Proportional to Their Fraction of World Population 297 6.4 Population Pyramids: Low-, Middle-, and High-Income Countries, 1965; and 2016 301 6.5 The Demographic Transition in Western Europe 304 6.6 The Malthusian Population Trap 305 6.7 How Technological and Social Progress Allows Nations to Avoid the Population Trap 307 6.8 Microeconomic Theory of Fertility: An Illustration 312 7.1 Changes in Urban and Rural Population by Major Areas Between 2011 and 2050 (In Millions) 342 7.2 Relationship Between Urbanisation and Per Capita GDP, 2010, with Comparison to Relationship in 1960 343 7.3 Proportion of Urban Population by Region, 1970–1995 343 7.4 Megacities: Cities with 10 Million or More Inhabitants 345 7.5 Total Population in Millions by City Size Class, 1970, 1990, 2011, and 2025 346 7.6 Estimated and Projected Urban and Rural Population of the More- and Less-Developed Regions, 1950–2050 347 7.7 Politics and Urban Concentration 357 7.8 Components of Migration in Selected Countries 365 7.9 The Harris-Todaro Migration Model 368 8.1 Age-Earnings Profiles by Level of Education: Venezuela 397 8.2 Financial Trade-Offs in the Decision to Continue in School 398 8.3 Private Versus Social Benefits and Costs of Education: An Illustration 400 8.4 Child Labour as a Bad Equilibrium 403 8.5 Youth Literacy Rate, 2016 408 8.6 Estimated Percentage of Women “Missing” 410 8.7 Lorenz Curves for Education in India 414 8.8 Children’s Likelihood to Die in Selected Countries 417 8.9 Proportion of Children Under Five Who Are Underweight, by Household Wealth, Around 2008 418 8.10 Proportion of Children Under Five Who are Underweight, 1990 and 2018 421 8.11 Wages, Education, and Height of Males in Brazil and the United States 431 9.1 As Countries Develop, the Shares of GDP and Labour in Agriculture Tend to Decline, But With Many Idiosyncrasies 451 9.2 Cereal Yields by World Region, 1960–2005 452 9.3 World Prices for Agricultural Commodities, 1974–2012 456 9.4 Agriculture’s Contribution to Growth and the Rural Share in Poverty in Three Types of Countries 460 9.5 Small-Farmer Attitudes Toward Risk: Why It Is Sometimes Rational to Resist Innovation and Change 476 9.6 Crop Yield Probability Densities of Two Different Farming Techniques 477 9.7 Incentives Under Sharecropping 478 10.1 Hypothetical Income-Pollution Relationship: Environmental Kuznets Curves 508 10.2 Static Efficiency in Resource Allocation 524 10.3 Efficient Resource Allocation Over Time 525 10.4 Common Property Resources and Misallocation 526 Figures and Tables xix 10.5 Public Goods, Private Goods, and the Free-Rider Problem 530 10.6 Pollution Externalities: Private Versus Social Costs and the Role of Taxation 533 10.7 Increasing Pollution Externalities with Economic Growth 534 10.8 The Earth at Night, Reflecting Inequality of Energy Use Across High-, Middle-, and Low-Income Countries; and Concentration of Economic Activity Along Seacoasts 546 11.1 Global Trends in Governance, 1947–2017 581 11.2 Typology of Goods 587 11.3 Sector Overlap and Sector Extension: Contingency-Based Shifts in Organisational Comparative Advantage, with the NGO example 591 11.4 Corruption as a Regressive Tax: The Case of Ecuador 594 11.5 The Association Between Rule of Law and Per Capita Income 595 12.1 Trade with Variable Factor Proportions and Different Factor Endowments 631 12.2 The Vent-for-Surplus Theory of Trade 638 12.3 Import Substitution and the Theory of Protection 653 12.4 Free-Market and Controlled Rates of Foreign Exchange 660 13.1 The Mechanics of Petrodollar Recycling 713 13.2 Global Imbalances 722 13.3 Debt Service Ratios for Selected HIPC Countries, 2002 and 2012 724 13.4 International Reserves (Index 2000 = 100, Three-Month Moving Average) 726 13.5 Indices of Commodity Prices (Total and Non-Fuel), 2000–2013 730 14.1 FDI Inflows, Global and By Group of Economies, 1980–2017 (Billions of Dollars) 751 14.2 Trend in Annual Growth Rates of FDI Inflows, by Groups of Economies, 1970–2017 (Per Cent) 752 14.3 Developing Economies: Sources of External Finance, 2009–2018 (Billions of Dollars) 753 14.4 Sources of External Financing for Developing Countries, 1990–2008 763 14.5 Global Trends in Armed Conflict, 1946–2017 776 15.1 The Effects of Interest-Rate Ceilings on Credit Allocation 819 Tables 1.1 The 17 Sustainable Development Goals 17 1.2 Global Ambitions: Selected Targets of the Sustainable Development Goals 18 2.1 Classification of Economies by Country Code, Region, and Income, 2018 38 2.2 Comparison of Per Capita GNI in Selected Developing Countries, Canada, the United Kingdom, and the United States, Using Official Exchange-Rate and Purchasing Power Parity Conversions, 2017 44 2.3 Commonality and Diversity: Some Basic Indicators of Health and Education 47 2.4 2018 Human Development Index and its Components for Selected Countries 50 2.5 HDI for Countries with Similar Income Levels 51 2.6 The 12 Most- and Least-Populated Countries and Their Per Capita Income, 2017 55 2.7 Primary School Enrolment and Pupil–Teacher Ratios, 2017 56 2.8 Crude Birth Rates Around the World, 2018 58 A2.1.1 2009 Traditional Human Development Index for 24 Selected Countries (2007 Data) 105 A2.1.2 2009 Human Development Index Variations for Similar Incomes (2007 Data) 106 5.1 Typical Size Distribution of Personal Income in a Developing Country by Income Shares—Quintiles and Deciles 223 5.2 Selected Income Distribution Estimates 241 5.3 Income and Inequality in Selected Countries 244 5.4 Income Poverty Incidence in Selected Countries 246 5.5 Multidimensional Poverty Index for Selected Countries 250 5.6 Indigenous Poverty in Latin America 256 xx Figures and Tables A5.2.1 Income Distribution and Growth in 12 Selected Countries 287 6.1 Estimated World Population Growth 294 6.2 Births Per Woman: Fertility Rate for Selected Countries, 1990 and 2017 298 6.3 Basic Comparisons between Burundi and Rwanda 334 8.1 Returns to Investment in Education by Level, Regional Averages (%) 398 8.2 Some Major Neglected Tropical Diseases 427 9.1 Average Annual Growth Rates of Agriculture, by Region (%) 451 9.2 Labour and Land Productivity in Developed and Developing Countries 461 9.3 Changes in Farm Size and Land Distribution 463 12.1 Structure of Merchandise Exports: Selected Countries, 2017 624 13.1 A Schematic Balance-of-Payments Account 699 13.2 Credits and Debits in the Balance-of-Payments Account 700 13.3 A Hypothetical Traditional Balance-of-Payments Table for a Developing Nation 703 13.4 Before and After the 1980s Debt Crisis: Current Account Balances and Capital Account Net Financial Transfers of Developing Countries, 1978–1990 (Billions of Dollars) 703 13.5 Developing Country Payments Balance on Current Account, 1980–2018 (Billions of Dollars) 709 14.1 Major Remittance-Receiving Developing Countries, by Level and GDP Share, 2018 764 14.2 Official Development Assistance Net Disbursement from Major Donor Countries, 1985, 2002, 2008 and 2016 767 14.3 Official Development Assistance (ODA) by Region, 2017 767 14.4 Key Indicators foe Costa Rica, Guatemala and Honduras 786 15.1 Growth of Developing Country Stock Markets 822 15.2 Comparative Average Levels of Tax Revenue, as a Percentage of GDP 825 15.3 Comparative Composition of Tax Revenue, as a Percentage of GDP 828 Preface Economic Development, Thirteenth 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 develop- ing world in their extent of economic development and other characteristics; and the differing positions in the global economy that are held by developing countries. The field of economic development is versatile and has much to contribute regarding these differing scenarios. Thus, the text also underlines common fea- tures that are exhibited by a majority of developing nations, using the insights of the study of economic development. The still relatively small number of coun- tries that have essentially completed the transformation to become developed economies, such as South Korea and Singapore, are also examined as potential models for other developing countries to follow. Both theory and empirical anal- ysis in development economics have made major strides, and the Thirteenth Edition brings these ideas and findings to students. Development economics provides critical insights into how we got to where we are, how great progress has been made in recent years, and why many devel- opment problems remain so difficult to solve. The principles of development economics are also key to the design of successful economic development policy and programs as we look ahead. At the same time, international development is an interdisciplinary subject, in which approaches and insights from anthro- pology, finance, geography, health sciences, political science, psychology, and sociology have had significant influence on the subject, and are considered throughout the text. Some approaches that began as explicit critiques and alter- natives to what were then limits to development economics have become central to its study. For example, behavioural economics and experimental research now play central roles in the field. 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 conditions and institutions across the developing world. The second is to help students develop analytic skills while broadening their perspectives of the wide scope xxi xxii Preface of the field. The third is to provide students with the resources to draw inde- pendent conclusions as they confront development problems, their sometimes ambiguous evidence, and real-life development policy choices—ultimately, to play an informed role in the struggle for economic development and ending extreme poverty. Approach and Organisation of the Text The text’s guiding approaches are the following: 1. To adopt a problem- and policy-oriented approach, because a central objec- tive of the development economics course is to foster a student’s ability to understand contemporary economic challenges of developing countries and to reach independent and informed judgements and policy conclusions about their possible resolution. 2. To teach economic development within the context of problems and potential solutions. These include challenges of absolute poverty, extreme inequalities, coordination failures, credit constraints, rapid population growth, impacts of very rapid urbanisation, persistent public health challenges, environ- mental degradation (from both domestic and climate change sources), rural stagnation, vulnerability to debt burdens and financial crises, recurrent chal- lenges in international trade and instability, low tax revenues, inadequacies of financial markets, civil conflict, and twin challenges of government failure and market failure. When formal models are presented they are used to elucidate real-world development problems. 3. To use the best available data from Africa, Asia, Latin America, and devel- oping Europe and the Middle East, and appropriate theoretical tools both to illuminate common developing-country problems, and to highlight the wide range of development levels and differing challenges across groups of countries. 4. To take a wide-angle view of developing countries, not only as independent nation states, but also in their growing relationships with one another, as well as in their interactions with rich nations in a globalising economy. 5. To consider development in both domestic and international contexts, stressing the increasing interdependence of the world economy in areas such as food, energy, natural resources, technology, information, and financial flows. 6. To provide at least a basic familiarity with research methods. The prob- lem of identifying causality is introduced by way of presenting examples of important research that also serve to build on major themes. There is no assumption that students have taken econometrics or, for that matter, basic regression analysis, but the findings boxes and other material in the text serve as a perfect entrée for instructors with students with sufficient back- ground to examine techniques introduced intuitively, including randomised controlled trials, use of instrumental variables, regression discontinuity design, differencing, and time series methods. These are all introduced in ways in which instructors may ignore the underlying econometric analysis, or build on it in supplemental course components. Preface xxiii 7. To treat 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 policies. It thus attempts to com- bine relevant theory with realistic institutional analyses. Enormous strides have been made in the study of these aspects of economic development in recent years, which is reflected in this thirteenth edition. 8. To consider the economic, social, and institutional problems of underdevel- opment as closely interrelated and requiring coordinated approaches to their solution at the local, national, and international levels. 9. To cover some topics that are not found in other texts on economic devel- opment but that are important from our broader perspective, as part of the text’s commitment to its comprehensive approach. These unique features include growth diagnostics, industrialisation strategy, innovative policies for poverty reduction, the capability approach to well-being, the central role of women, child labour, the crucial role of health, new thinking on the role of cities, the economic character and comparative advantage of non- governmental organisations in economic development, emerging issues in environment and development, financial crises, violent conflict, and microfinance. 10. The in-depth case studies and comparative case studies appearing at the end of each chapter remain features unique to this text. Each chapter’s case study reflects and illustrates specific issues analysed in that chapter in the context of national development or specific policies. At the same time, there are common threads: the quality of institutions is considered in most of the country cases, as are indicators of poverty, inequality, and human development. 11. Boxes are used in a consistent way for two purposes. Findings boxes report on specific research findings; they serve as a vehicle to introduce students to research methods in development economics, as well as to show the con- nection between individual studies and the broader picture of economic development. Policy boxes describe major actors in development policy, including the World Bank and the IMF, and present less formal but essential approaches to policy analysis, covering topics ranging from growth diag- nostics to family planning. 12. To provide balanced coverage of differing and even explicitly opposed per- spectives wherever evidence, interpretations, and analytical frameworks are in contention. Audience and Suggested Ways to Use the Text in Courses with Different Emphases Flexibility. This text provides an introduction to development economics and international development. It is designed for use in courses in econom- ics 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 xxiv Preface and for those with little formal economics background beyond principles (first micro- and macroeconomics courses). Essential concepts of economics that are relevant to understanding development problems are highlighted in boldface and explained at appropriate points throughout the text, with glossary terms defined in the margins and also collected together at the end of the book in a detailed glossary. Thus, the text should be of special value in undergraduate development courses that attract students from a variety of disciplines. It provides in-depth coverage of new institutional economic analysis and describes features of developing economies that cannot be taken for granted with a majority of students. Yet the material is sufficiently broad in scope and rigorous in coverage to satisfy any undergraduate and some graduate economics requirements in the field of development. For example, foundational models and empirical methods are introduced in several chapters and in about a dozen findings boxes. This text has been widely used, in courses taking both relatively qualitative and more quantitative approaches to the study of economic development and emphasising a variety of themes, including human development. The text features a 15-chapter structure, convenient for use in a comprehen- sive course and corresponding well to a 15-week semester but with enough breadth to easily form the basis for a two-semester sequence. The chapters are now further subdivided, making it easier to use the text in targeted ways. To give one example, some instructors have paired the sections on informal finance and microfinance (15.3) with Chapter 5 on poverty. Similarly, some have paired civil conflict (14.5) with poverty. With further subdivisions of sections, additional selections and orderings are possible. 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 selected 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. Courses with a more analytic and methods focus. These courses would focus more on the growth and development theories in Chapter 3 (including appendices 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 measurement and analysis in Chapter 5, microeconomics of fer- tility and relationships between population growth and economic growth in Chapter 6, migration models in Chapter 7, human capital theory, including the child labour model and empirics in Chapter 8, sharecropping models in Chapter 9, environmental economics models in Chapter 10, tools such as Preface xxv net present benefit analysis in Chapters 8 and 11; and multisector models along with political economy analysis in Chapter 11, and trade models in Chapter 12. Courses that also have an empirical methods focus. Regarding empirical methods, these courses would expand on material introduced in some of the findings boxes and subsections into more detailed treatments of methods topics, including randomised controlled trials (Boxes 4.2, 8.4, 8.5, 8.6, 8.9, 11.3, 12.2, and 15.2, Case Study 8), use of instrumental variables (Box 2.3 and Section 2.7), regression discontinuity (Boxes 2.2, 2.4), differencing (Box 9.2), and time series methods (Box 12.1). The introduction of several of the studies provides an excellent jumping-off point to using supplementary materials for examining methods in detail. Courses emphasizing human development and poverty alleviation. The thirteenth edition can be used for a course with a human development focus. This would typically include the sections on Amartya Sen’s capabilities approach, the new section on the Sustainable Development Goals and the history of the MDGs in Chapter 1; a close and in-depth examination of the section on societal conflict in Chapter 14, the discussion of informal financial arrangements including ROSCAs, microfinance institutions in Chapter 15; and a close and in-depth examination of Chapters 2 and 5. Sections on pop- ulation policy in Chapter 6; diseases of poverty and problems of illiteracy, low schooling, and child labour in Chapter 8; problems facing people in traditional agriculture in Chapter 9; relationships between poverty and envi- ronmental degradation in Chapter 10; and roles of nongovernmental organ- isations (NGOs) in Chapter 11; the section on societal conflict in Chapter 14; and discussion of informal financial arrangements including ROSCAs, microfinance institutions in Chapter 15, as be likely highlights of this course. Courses emphasising macro and international topics. International and macro aspects of economic development could emphasise Sections 2.6 and 2.7 on convergence, and 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 to 15 on international trade, international finance, debt and financial crises, direct foreign investment, aid, central banking, and domestic finance. The text also covers other aspects of the international context for development, including the in-depth cases on the 1980s debt crisis and the 2000s financial crisis in Chapter 13; implications of the rapid pace of globalisation and the rise of China (Chapter 12 and case studies of China (Chapter 4), India (Chapter 5), and Brazil (Chapter 13); the continuing struggle for more progress in sub-Saharan Africa, and controversies over debt relief and foreign aid (Chapter 14). Broad two-semester course using supplemental readings. Many of the chapters contain enough material for several class sessions, when their top- ics are covered in an in-depth manner, making the text also suitable for a year-long course or high-credit option. The endnotes and sources offer many starting points for such extensions. xxvi Preface Summary of Key Material New or Expanded for This Edition In addition to a thorough updating and reporting the most recently available data, the Thirteenth Edition includes significant new material, including: A new presentation of the Sustainable Development Goals, which also pro- vides a brief history of the MDGs, and progress and challenges in imple- mentation (Section 1.7). How levels of living differ around the world, with an exploration of the household level—as distinct from country averages, inspired by the late Hans Rosling (Section 1.2). Newly added graphs and statistics on the great divergence in incomes over 250 years, and new evidence of a recent shift toward (re-)convergence (Section 2.5). Expanded section on growth diagnostics, including new material on growth diagnostics in practice, with an example of “inclusive” growth diagnostics applied to Bangladesh (Section 4.7 and Box 4.4). New material on how insights from behavioural economics and findings using experimental behavioural economics methods have been used to better understand and address poverty, physical health, and mental health problems (Section 5.8.6 and Box 8.9). A new section on labour that features material on characteristics of inclusive development in addition to the subsection on the functional distribution of income (Section 5.7). A new section discussing policy for still-developing middle-income coun- tries facing population declines (Section 6.6.4). A new section on agricultural extension that also serves to introduce the case study on extension for women farmers in Kenya and Uganda (Section 9.2.3 and Case Study 9) An expanded section on adaptation to climate change, which also considers the extent to which adaptation and resilience assistance differs from conven- tional development assistance (Section 10.2.3 and Box 10.4). The section on the new firm-level international trade approach features experimental findings on the effects of exporting on firm performance (Section 12.6.2 and Box 12.2). A restructuring of the presentation of much of Chapter 13 on debt and finan- cial crises as case studies of major events that draw out more general prin- ciples (Sections 13.4 and 13.5). The introduction of ROSCAs as a potentially beneficial financial arrange- ment is set out in a short subsection (Section 15.3.2). Case studies and findings boxes are described in the next section. Preface xxvii In-Depth End of Chapter Case Studies There is a strong focus on in-depth case studies, with new end of chapter cases and major updates of existing studies. A majority of them are comparative case studies. The end of chapter Case Studies has been one of the most popular features of the text. These cases apply the general findings in development economics as discussed in the chapter to interpreting experiences in specific countries, and in some cases specific programs. The cases address important country topics and development experiences. Three in-depth cases look at the economic development successes and challenges of a single major developing country: China, India, and Brazil. Single-Country Case Studies The Case Study on China (Chapter 4, pages 202–214) has been substantially expanded in scope to provide a comprehensive view of the major argued sources of success and serious challenges going for- ward advanced in the scholarly literature. There is an entirely new full length case study of economic development in India (Chapter 5, pages 272–279), that offers a similarly comprehensive examination of major sources of success and challenges going forward. The case study of Brazil (Chapter 13, pages 737–744) has been extensively revised and updated and now provides, among other things, consideration of the potential for middle-income traps and elements for escaping them. In addition, there is one specialized single-country case study, on the Progresa-Oportunidades-Prospera program in Mexico, which has been updated for this edition. Comparative cases The country comparative cases have received strong inter- est and active in-class use. This feature is now expanded further, so that there are 11 comparative studies (at the ends of Chapters 1, 2, 3, 6, 7, 9, 10, 11, 12, 14, and 15). Nine major end of chapter cases assess successes and challenges in overall national economic development experiences in two countries selected for the relevance of addressing them in comparative perspective and in the context of the chapter. There is a new comparative case study on Burundi and Rwanda (Chapter 6, pages 332–336), which has particular emphasis on demography, as well as institutions. The updated Pakistan and Bangladesh comparative study now follows the first chapter (Chapter 1, pages 24–30); and the updated Ghana and Côte d’Ivoire case now follows the second chapter (Chapter 2, pages 84–91). The Chapter 3 case is South Korea and Argentina (pages 140–143). The Domin- ican Republic and Haiti – two countries on one island – are examined in com- parative perspective with a special emphasis on environment and development (Chapter 10, pages 548–552). What had been separate case studies of South Korea and Taiwan are integrated into one comparative case, allowing ready examination of differences as well as similarities between these two pioneer- ing experiences; this new comparative case appears at the end of Chapter 12 (pages 676–688). The 3-way comparative study of Costa Rica, Guatemala, and Honduras, new to the previous edition, is updated and found at the end of Chapter 14 (pages 785–791). xxviii Preface The textbook concludes on an optimistic note, with a new comparative case study of Mauritius and Botswana, two of Africa’s most remarkable success stories, examining how they are managing to overcome successive challenges that stymied other countries (Chapter 15, pages 836–844). Sector Cases Two comparative cases focus on specific sectors. The first sector case examines agricultural extension, which is newly comparative, addressing Uganda as well as Kenya (Chapter 9, pages 489–495). The other sector case is a comparison within one country, Bangladesh, that brings together and syn- thesizes the roles of two differently structured and focused major NGOs that have made important innovations and have been widely influential, BRAC and Grameen (Chapter 11, pages 599–608). Finally, note that the case on the one-child policy in China is now found in streamlined form in Box 6.3. A brief summary of the case study of family plan- ning policy in India is now found in a section of the new Chapter 5 case study on economic development of India. Supplementary Materials The Thirteenth Edition comes with PowerPoint slides for each chapter, which have been fully updated for this edition. The text is further supplemented with an Instructor’s Manual by Chris Marme of Augustana College. It has been thoroughly revised and updated to reflect changes to the Thirteenth Edition. Both the PowerPoint slides and the Instructor’s Manual can also be downloaded from the Instructor’s Resource Center at go.pearson.com/uk/he/resources. Acknowledgements 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 Eleventh, Twelfth, and Thirteenth Editions. Our thanks also go to the staff at Pearson. Their input has strengthened the book in many ways and has been much appreciated. Preface xxix 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 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 children, 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 Publisher’s acknowledgements Text credits: 2 Elsevier: Robert E. 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