Economic_Development_Chapter_1_Full.pdf

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 S...

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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Living conditions are improving significantly in most, though not all, parts of the globe—if sometimes all too slowly and une- venly. The cumulative effect is that economic development has been giving rise to unprecedented global transformations. In this book we gain perspective on how much is yet to be achieved, and will appreciate how we have already come so far in reducing human misery—indeed, that is where many lessons are to be found on how to continue the progress of recent decades. 1.1 Introduction to Some of the World’s Biggest Questions The study of economic development raises some of the world’s biggest ques- tions. Why do living conditions differ so drastically for people across different countries and regions, with some so poor and others so rich? Why are there such disparities not only in income and wealth, but also in health, nutrition, education, freedom of choice, women’s autonomy, environmental quality, access to markets, security, and political voice? Why is output per worker many times higher in some countries than others? Why do workers in some countries have fairly secure, formal jobs with regular, predictable pay, while in other countries such jobs are extremely scarce and most work in informal settings with fluc- tuating and insecure earnings? Why are populations growing rapidly in some countries, while on the verge of shrinking in others? Why are public services so inefficient, insufficient, and corrupt in some countries and so effective in others? Why have some formerly poor countries made so much progress, and others so comparatively little? How have child illness and death rates fallen so much in the world, and what can be done in places where they remain far higher than average? How can we measure the impacts that government policies and nongovernmental organisation (NGO) programmes make in improving the well-being of the poor and vulnerable; and what lessons have we learned? And how did such great divergences across countries come about? How does history matter? 1 2 CHAPTER 1 Introducing Economic Development: A Global Perspective These are among the fundamental questions of development econom- ics. As Nobel Laureate Robert Lucas said of questions about disparities in income growth, “once one starts to think about them, it is hard to think about anything else.”1 This text examines what lies behind the headline numbers, to appreciate Development The process the historical sweep of development patterns, presenting the necessary ana- of improving the quality of all lytic tools and the most recent and reliable data—on challenges ranging from human lives and capabilities by raising people’s levels extreme poverty to international finance. This text examines key challenges of living, self-esteem, and faced by the spectrum of developing economies, from the least-developed freedom. countries to upper-middle-income nations striving to reach fully developed status. But, to begin, while significant progress in public health has occurred in almost all countries, even today the living standards of hundreds of millions of the world’s poorest people have benefited little, if at all, from the rising global prosperity. 1.2 How Living Levels Differ Around the World Average living conditions differ drastically, depending largely on where a per- son was born. We examine the evidence in detail throughout this text. Often, countries as a whole are divided into four groups based on their average levels of income or other standards of well-being, introduced in the following section. But first, to get a sense of the scope and individual meaning of these differences, Living standards consider brief vignettes of four “stylised strata” of living standards around the strata Stylized sets of world.2 material living conditions; the 4-strata schema was created At the “bottom,” more than one billion people live in extreme income pov- by Hans Rosling erty, or suffer acute multidimensional deprivations in areas such as nutrition, health, and primary education, or both. The World Bank estimated in 2017 that 768.5 million—nearly three-quarters-of-a-billion people—subsist below the extreme poverty income line of $1.90 per day adjusted for purchasing power (so it is actually like living on this amount in the United States).3 A typical person living in such extreme income poverty subsists on about $1.40 per day.4 Taking account of whether a family has multiple simultaneous deprivations in health, nutrition, basic education, type of cooking fuel, sanitation, drinking water, hous- ing materials, and a few very basic goods, in 2018 the United Nations estimated in its ‘Multidimensional Poverty Index’ that nearly 1.3 billion people live with acute deprivations. One of the poorest communities may live in a remote rural area in the eastern part of Africa, where many clusters of small houses contain groups of extended families. A majority of the food is grown by the people who consume it; and shelter and furnishings are often made by those who use it—theirs is nearly a Subsistence economy subsistence economy. There are few passable roads, particularly in the rainy An economy in which season. The younger children attend school irregularly and, all too often, when production is mainly for personal consumption and the they do get to school, the teacher is absent from the classroom. Some children standard of living yields little of primary-school age are still not even enrolled. Primary schools may be very more than basic necessities difficult to access, and many children have never seen a high school, let alone of life—food, shelter, and thought of attending one. There are no hospitals, electric wires, or improved clothing. water supplies. Water is collected in reused commercial buckets from a source  1.2 How Living Levels Differ Around the World 3 such as a spring or stream that is often contaminated; their walk to it in battered flip-flop sandals (if not bare feet) can be a kilometre or more, and it may take additional time waiting your turn. The children may be malnourished, suffering from conditions including kwashiorkor (protein deficiency). Food is cooked over an open fire in each mud house, the smoke escaping from a hole in the roof, and likely causing breathing problems. The food tends to be the same every meal, often lacking in protein and other vital nutrients. The floor may be rough mats over mud, on which the family sleeps. Parasites may gain entry to the house through the floor. When it rains, the roof may leak. It is a stark and difficult existence. In western Africa the geography, culture, and languages are different, but many of the conditions of poverty are strikingly similar. Such dire poverty can also still be found in areas of South Asia and elsewhere. More than three quarters of the extreme poor live in rural areas. A typical person in the second-lowest of the “strata” is not officially classified as extremely poor, though from the perspective of an average person in a rich country they would be viewed as very poor indeed. In fact, a typical family in this stratum may live on about twice that line, $3.80 per day per person. Close to 3 billion people may be thought of as living in this stratum. They are almost as likely to live in an urban area (or nearby lower-income peri-urban area) as in a rural area.5 However, their employment is probably informal, in companies not registered and without worker protections, or in their own small family enterprises. They get around with well-used but functioning bicycles. A major- ity of them no longer cook over open fires, but may use kerosene or some other improved energy source at least much of the time. They get their water from a tap, though it is typically outdoors and may be a considerable walk from their house; and in many cases the water is still unsafe without boiling and adding chlorine. The family usually has an improved floor, and often improved walls and roof, but the house is still somewhat subject to the elements. Their sleep is disrupted by seemingly constant noise. People in this strata likely suffer from one or more components of multidimensional poverty, though for at least 80% of them the number of their deprivations are not enough for them to be officially classified by the UN as “multidimensionally poor” (Chapter 5). Some of the “voices of the poor” are reported in Box 1.1. A typical family in the second-highest of the strata may live on about $15 per person per day. (More than three-quarters of the world lives on less than $15 a day; this family is considered solidly middle income by global standards.) More than two billion people may be thought of as living in this strata. Such families typically live in urban areas. But their jobs are usually not very stable and are often informal. They cook on manufactured burners using kerosene if not elec- tricity. They have a television in their house. They get around with a motorbike. The children are likely to survive early childhood. They probably attend some post-primary school, though they are unlikely to complete it. Most adults and many teenagers have a mobile phone, though there may be no smartphones. Their water is typically delivered through a tap to their house, though a majority do not have what people in the rich strata would consider full indoor plumb- ing. Their city is likely to exhibit very high inequality, with sharp contrasts in living conditions from one section of this sprawling metropolis to another. In a Latin American city, there would be a modern stretch of tall buildings and wide, 4 CHAPTER 1 Introducing Economic Development: A Global Perspective BOX 1.1 Development Policy: The Experience of Poverty: Voices of the Poor When one is poor, she has no say in public, she When food was in abundance, relatives used to feels inferior. She has no food, so there is famine share it. These days of hunger, however, not even in her house; no clothing, and no progress in her relatives would help you by giving you some food. family. —Young man in Nichimishi, Zambia —A poor woman from Uganda We have to line up for hours before it is our turn For a poor person, everything is terrible—illness, to draw water. humiliation, shame. We are cripples; we are —Participant in a discussion group from Mbwadzulu Village (Mangochi), Malawi afraid of everything; we depend on everyone. No one needs us. We are like garbage that everyone [Poverty is]... low salaries and lack of jobs. And wants to get rid of. it’s also not having medicine, food, and clothes. —A blind woman from Tiraspol, Moldova —Participant in a discussion group in Brazil Life in the area is so precarious that the youth Don’t ask me what poverty is because you have and every able person have to migrate to the met it outside my house. Look at the house and towns or join the army at the war front in order count the number of holes. Look at the utensils to escape the hazards of hunger escalating over and the clothes I am wearing. Look at everything here. and write what you see. What you see is poverty. —Participant in a discussion group in —Poor man in Kenya rural Ethiopia tree-lined boulevards perhaps along the edge of a well-maintained beach; just a few hundred meters back and up the side of a steep hill, squalid slum dwellings are pressed together. There, a slum-dwelling family struggles to keep food on the table. Most employment opportunities are precarious. Government assistance has recently helped this family keep the children in school longer. But lessons learned on the streets, where violent drug gangs hold sway, seem to be making a deeper impression. In sharp contrast, a wealthy family lives in a multi-room complex in a modern building. Their children attend university, perhaps in North America, and they enjoy annual vacations abroad, luxury automobiles, and designer clothing, and may give little thought to the struggling, deprived family cramped tightly into a small self-built dwelling, perhaps living on a hill that they can see from their seafront building. Finally, close to a billion people live on the highest stratum, which most other people in the world consider rich. Most are certainly not millionaires, let alone ultra-rich; but they live very comfortably. A family in this stratum living in North America, Western Europe, or Japan might live on an income of perhaps $75 per person per day. They work in formal jobs, generally with at least some protec- tions. They may have a comfortable suburban house that has a small yard with a garden, and two cars. The dwelling would have many comfortable features, including often a separate bedroom for each child. They enjoy central air condi- tioning and/or central heating, as prompted by the climate. Full indoor plumb- ing is taken for granted. The house would be filled with numerous consumer goods, including high-speed internet connections to go with their smartphones, laptops, and home entertainment centres, along with an array of appliances  1.2 How Living Levels Differ Around the World 5 including stoves, refrigerators, dishwashers, and microwaves. They have access to fresh food year round (though they may eat fast foods instead). Both children would probably be healthy—except for a growing incidence of obesity and the problems it brings—and generally get good medical care if they need it. They would be attending school, where most would expect to complete their sec- ondary education and, more likely than not, gain at least some post-secondary education; choose from a variety of careers to which they might be attracted; and live to an average age of close to 80 years. Many may feel their status is precarious, and are aware of the gulf between their life and that of the very rich; but most still work in formal jobs, generally with some protections. Although their lives would have ups and downs, and living standards do not always rise across generations, they face very little danger of falling below their stratum. Many times, people born on one of these strata spend their lives on it, albeit typically making some progress within that general level. People at the lowest or second-lowest strata probably have some awareness of what life is like on the higher strata, from TV at the village centre if not at home, and wistfully think of attaining it, but it is generally viewed as out of reach. Sometimes, truly transformative progress is highly visible and takes form in the course of a single person’s life. Many of the clearest examples of this are found in China. Imagine a couple born in an obscure zhuang (rural area) in pop- ulous central Sichuan Province. They grew up in the 1960s, going to school for six years and becoming rice farmers like their parents. The rice grew well, but memories of famine were still sharp in their commune, where life was also hard during the Cultural Revolution. Their one daughter, let’s call her Xiaoling, went to school for ten years. Much of the rice they and their commune grew went to the state at a price that never seemed high enough. After reforms in 1980, farmers were given rights to keep and sell more of their rice. Seeing the opportunity, they grew enough to meet government quotas and sold more of it. Many neighbours also raised vegetables to sell in a booming city 100 kilometres up the river and other towns. Living standards improved, though then their incomes stagnated for some years. But they heard about peasants moving first to cities in the south and recently to closer cities—making more money by becoming factory workers. When their daughter was 17, farmers from the village where the mother grew up were evicted from their land because it was close to lakes created by an immense dam project. Some were resettled, but others went to Shenzhen, Guangzhou, or Chongqing. Xiaoling talked with her family, saying she too wanted to move there for a while to earn more money. She found a city that had already grown to several million people, quickly finding a factory job. She lived in a dormitory, and conditions were often harsh, but she could send some money home and save toward a better life. She watched the city grow at double digits, becoming one of the developing world’s new megacities, adding territories and people to reach over 15 million people. After a few years, Xiaoling opened a humble business, selling cosmetics and costume jewellery to the thousands of women from the countryside arriving every day. She has had five proposals of marriage, with parents of single men near where she grew up offering gifts, even an enormous house. She knows that many people still live in deep poverty and finds inequal- ity in the city startling. For now she plans to stay, where she sees opportunities for her growing business and a life she never imagined having in her village.6 Box 1.2 illustrates some typical differences across the four strata of living conditions.7 6 CHAPTER 1 Introducing Economic Development: A Global Perspective BOX 1.2 Development Policy: Comparing Living Conditions Commonly Found Across Four Strata Lowest Stratum: Extreme Poverty Second-Highest Stratum Cooking: Open fire, smoke exits through hole Cooking: Manufactured burners with in the roof improved fuel if not electric plates Food and nutrition: Food insecure, majority of Food and nutrition: Usually food secure; but food grown by family; often malnourished many vulnerable to fall into food insecurity and among the 800 million people classified Clothing: Inexpensive, though new when as hungry purchased, and worn or less-expensive shoes Clothing: Used, worn, may be inadequate; and sneakers; expensive clothes as social flip-flops or in many cases still bare feet expectations rise Education: Majority now able to attend Education: Children finish primary school; primary school, but may not complete it some finish secondary school Housing: Self-constructed, natural or found Housing: Modest but better constructed, if materials, often mud; thatch roof, dirt floors not comfortable with mats Furnishings: Electricity, purchased tables, Furnishings: Any pallet or bed, table, chair, or chairs, beds; fans or even a room AC, space shelf is self-constructed; no electricity heater, a television Water: hand-carried in buckets from public, Water: Piped directly to house site; may need often unsanitary sources treating Sanitation: Pit latrine or open defecation Sanitation: Toilets, but many lack what the Transportation: On foot top stratum considers full indoor plumbing Transportation: Motor bike Second-Lowest Stratum Highest (“Rich”) Stratum Cooking: Basic, but typically use kerosene or some other improved energy source Cooking: Modern appliances including mod- Food and nutrition: May be food insecure or ern range, microwave, dishwasher vulnerable to falling into food insecurity Food and nutrition: Rich and diverse diet, Clothing: Inexpensive, often used clothing, though obesity may bring other health risks not well fitting, perhaps inadequate for Clothing: Well-fitting, perhaps designer the weather; worn shoes and rubber-soled clothing; multiple, relatively new, comforta- shoes ble dress and sports shoes Education: Children finish primary school; Education: Children complete high school; on average attend a couple years longer on average attend at least one year of Housing: Partly and perhaps fully self- post-secondary education constructed; improved floor, corrugated tin roof Housing: Modern, manufactured, profession- Furnishings: Basic tables and seating; fans if ally constructed electricity; power connection may be illegal Furnishings: House filled with consumer goods and improvised and durables, wifi, home entertainment centres Water: From a tap, typically outdoors Water: Safe water at taps throughout the house and perhaps a 50-metre-plus walk; needs Sanitation: Hygienic, modern bathroom self-treating with chlorine or boiling plumbing Sanitation: Latrine Transportation: A car per each adult; or in Transportation: Bicycle high density each person is assured reliable transportation alternatives  1.3 How Countries Are Classified by Their Average Levels of Development: A First Look 7 1.3 How Countries Are Classified by Their Average Levels of Development: A First Look Countries are often classified by levels of income and human development, as we examine in detail in the next chapter. They are also grouped by levels of pov- erty, quality of governance, and many other dimensions, as we will see later in the text. We introduce these comparisons with differences in countries’ average incomes—the most common way to do so (though income is usually an inade- quate measure of well-being). The World Bank classifies countries according to four ranges of aver- age national income: Low, Lower-Middle, Upper-Middle, and High. There has been strong income growth in average incomes in a majority of low- and middle-income countries over the last several decades, and many low-income countries have been reclassified as middle-income countries. But, once again, a typical country may have people living at very different income levels, or living standards strata. Of the world population of about 7.7 billion people in 2018, about 16% live in high-income countries (HICs). These countries have Gross national Gross national income (GNI) income (GNI) per capita of at least $12,056. This is less than would be thought The total domestic and foreign output claimed by residents of as “upper income” in many HICs such as Japan, the United Kingdom, and of a country, consisting of the United States, with average incomes several times this level. Some coun- gross domestic product (GDP) tries included on the World Bank HIC list had average income that was only plus factor incomes earned barely enough to reach the HIC threshold, such as Chile, Equatorial Guinea, by foreign residents, minus income earned in the domestic and Hungary. But the average person in an HIC lives very well by global economy by nonresidents. standards.8 After unprecedented growth in China, India, and Indonesia—each formerly a Low-Income Country (LIC)—more than 60% of the world’s people now Low-Income Country (LIC) live in “middle-income countries.” To be classified as upper-middle income In the World Bank classification, countries with (UMCs) in 2018, a country needed GNI per capita between $3,896–$12,055. a GNI per capita of less than Lower-middle income countries (LMCs) have annual per capita GNI between $996 in 2018. $996–$3,895.9 About three-quarters-of-a-billion people—roughly 10% of the world’s Upper-middle income countries (UMCs) In the population—live in LICs, with GNI per capita below $1,026. A majority of these World Bank classification, countries are located in sub-Saharan Africa, where population is growing fastest. countries with a GNI per Keep in mind that many people who live in a LIC are not poor; many who live capita between $3,896 and in a LMC are poor; and some who live in a UIC have incomes more typical of $12,055 in 2018. those in UMCs. Lower-middle income The United Nation’s designation of “least-developed countries” is similar to countries (LMCs) In the LICs; for inclusion, a country has to meet criteria of low education and health, World Bank classification, countries with a GNI per and high economic vulnerability, as well as low income. Just over a billion peo- capita incomes between $996 ple live in these 49 countries. Conditions in some of them, such as Afghanistan, and $3,895 in 2018. Congo, Somalia, South Sudan, and Yemen, are bleak. But in most countries in this group, great progress has been made, as life expectancy, school enrolments, and average incomes have risen substantially. At the opposite end are the highest-income developed countries that are members of the Organization for Economic Cooperation and Development (OECD), primarily in West Europe and North America, plus Australia, New Zealand, Japan, and South Korea. 8 CHAPTER 1 Introducing Economic Development: A Global Perspective As recently as 1990, over half of the global population lived in low-income countries. The biggest factor in this sharp improvement is rapid income growth in China, which became a LMC in 1999, and India, which did so in 2007. China passed the next threshold to join the UMC group in 2010. Several other countries have also joined the middle-income country groups since the 1990s.10 Averages tell only part of the story. For example, each country has significant income inequality, though some are far more starkly unequal than others. We cover income inequality in depth in Chapter 5. Recognizing that well-being cannot be measured by income alone, the United Nations Development Programme (UNDP) classifies countries taking account of their health and education attainments in addition to income, in its Human Development Index (HDI). We review how the HDI is calculated in the next chapter. For now, we