Principles of Microeconomics Chapter 19 Economic Development

Chapter 19 Economic Development Start Up Being Poor in a Poor Country You are four years old . You live with your family in the vicinity of , the capital of . You are poor . Very poor . You and your father , mother , four brothers and sisters , and grandmother live in a shack with a dirt floor . It commands a rather nice view of the Gulf of Guinea to the south , but the amenities end there . Drinking water , which you are learning to help fetch , is badly you are sick much of the time . As for sanitation , there is not any in your neighborhood . You are also hungry . You think of the gnawing feeling in your stomach , the slight dizziness you always feel , as normal . Your newest brother , who was born last month , just died of cholera . Your mother tried to get him to the clinic , but it was closed when your brother needed it . Your father usual optimism has talks of going east to to find work . He has given up finding a job here . Your father worked in the peanut fields in the eastern part of the country for several years , but he lost his job . After some very tough years marked by ethnic violence , your family came to the city . You were born shortly after have never known your father to have a regular job . Your mother has had better luck finding work as a maid for some of the wealthy people , with real homes , across town . You will be old enough to start school next year and are looking forward to that . Your parents say you will be fed there . But if you are like your older brothers and sisters , you will not go to school for more than a couple of years . Your family will need you to earn some money in the , running errands , hustling . You have no reason to think your life will ever get any better . Your own family fortunes seem to have declined , not risen , all your life . You can not know it , but you are not alone . The World Bank estimated that in 2005 about billion people , about a quarter of the population of developing countries , were poor , defined as living on less than a day , the international poverty line . You are on the poor end even of that group , but there are plenty of others who live pretty much the way you do . In this chapter , we will take a look at the economies of poor countries . We will see that malnutrition , inadequate health care , high infant mortality , high unemployment , and low levels of education prevail in much of the world . But , we will also see that overall , and especially in some countries , great strides in improving living standards have been made . In 1980 , about half of the population of developing countries , or billion people , were poor . Poverty reduction in East Asia has been phenomenal , with the poverty rate falling from around 80 to less than 20 over the last 25 years . Declines in the poverty rate , at about 50 , have been minimal in Africa over that period . Chen and Martin 657

Principles of 658 , The Developing World Is Poorer than We Thought , but No Less Successful in the Fight against Poverty , World Bank Policy Research Working Paper 4703 , August , 2008 . In 2000 , eight Millennium Development Goals were adopted by the international community . They are ( to eradicate extreme poverty and hunger , to achieve universal primary education , to promote gender equality , to reduce child mortality , to improve maternal health , to combat , malaria , and other diseases , to ensure environmental sustainability , and ( to develop a global partnership for development . The United Nations monitors progress on these goals , which have been concretely specified ( between 1990 and 2015 , halve the proportion of people whose income is less than a day , reduce the mortality rate by , halt and begin to reverse the spread of ) The United Nations most recent annual goals report notes that not only have governments been supportive of the goals , but so have many private foundations . As might be expected , it appears that some of the goals will be reached by their target dates , mostly 2015 , while other goals are less likely to be achieved . Some that are likely to be achieved are the of the absolute poverty rate , the increase in primary school enrollment , reductions in deaths from measles and AIDS , the increase in access to safe drinking water , and the reduction in the use of substances . Goals that are likely to be missed are reaching the absolute poverty reduction goal in Africa , improvements in gender parity and job security , and improvements in conditions in Nations , The Millennium Development Goals Report 2008 ( New York United Nations , 2008 ) The challenge of economic development is to find ways to achieve sustained economic growth in poor countries and to improve the living conditions of most of the world people . It is an enormous task , one often marked by failure . But there have been successes . With those successes have come lessons that can guide us as we face what surely must be the most urgent of global tasks economic development .

The Nature and Challenge of Economic Development Learning Objectives . Define a developing country and discuss how incomes are compared across countries . State and explain the general characteristics of countries . Discuss what is meant by economic development . Throughout most of history , poverty has been the human condition . For most people life was , in the words of English philosopher Thomas Hobbes , solitary , poor , nasty , brutish , and Only within the past 200 years have a handful or so of countries been able to break the chains of economic deprivation and poverty . Consider these facts ( United Nations Development Program , 2007 ) Over a third of the world people live in countries in which total per capita income in 2005 was less than 610 per year 85 live in countries in which total per capita income in 2005 was or less . Adjusting for purchasing power , the per capita income levels would be and , respectively . The latter numbers compare to per capita income in income countries of over . Babies born in poor countries are 16 times more likely to die in their first five years than are babies born in rich countries . About a quarter of the populations of countries is undernourished . About 40 ( over 50 for women ) of the people 15 years old and older in countries are illiterate . Roughly of the people in countries do not have access to safe drinking water . Clearly , the high standards of living enjoyed by people in the world developed economies are the global exception , not the rule . This chapter looks at the problem of improving the standard of living in poor countries . Rich and Poor Nations The World Bank , an international organization designed to support economic development by providing financial assistance , advice , and other resources to poor countries , classifies over 200 countries 659

Principles of 660 according to their levels of per capita gross national income . The categories in its 2008 report , as shown in Table World Incomes , Selected Countries , were as follows countries These countries had per capita incomes of 935 or less in 2007 . There were 49 countries in this category . About 20 of the world total population of about billion people lived in countries in 2007 . countries There were 95 countries with per capita incomes of more than 936 but less than . countries are further subdivided into lower and upper countries . Roughly of the world population lived in countries in 2007 . We should note that the percentage of the world population living in countries increased dramatically ( and the percentage living in countries decreased dramatically ) when China and India moved from being to countries . countries There were 65 nations with per capita incomes of or more . Just 16 of the world total population lived in countries in 2007 . Countries in the and categories are often called developing countries . A developing country is thus a country that is not among the nations of the world ( The World Development Report , 2006 ) Developing countries are sometimes referred to as countries . How does the World Bank compare incomes across countries ?

The World Bank converts gross national income ( figures to dollars in two ways . One is to take in a local currency and convert using the exchange rate , averaged over a period in order to smooth out the effects of currency fluctuations . This type of comparison can , however , be misleading . A country could have a relatively high standard of living but , for a variety of reasons , a low exchange rate . The per capita figure would be quite low the country would appear to be poorer than it is . A better approach to comparing incomes converts currencies to dollars on the basis of purchasing power . This measure is reported in what are called international dollars . An international dollar has the same purchasing power as does a dollar in the United States . This is reported in the column labeled 2007 International in Table World Incomes , Selected Countries . Table World Incomes , Selected Countries

661 Author removed at request of original publisher Gross National Income per Capital , 2007 countries countries countries Country 2007 2007 Int . Country 2007 2007 Int . Country 2007 2007 Int . 110 330 India 950 Czech . Saudi Sierra Leone 260 660 China . Arabia Mozambique 320 690 Thailand Israel 470 Iran Greece Haiti 560 Jamaica 10 Japan 730 Costa France Vietnam 790 Brazil Canada . United 800 Argentina States Pakistan 870 Russian Fed . Ireland 930 Turkey Norway Average 578 Average Average , lower middle , upper middle Source World Development Indicators database , World Bank , revised October 17 , 2008 . The international dollar estimates typically show higher incomes than estimates based on an exchange rate conversion . For example , in 2007 Mozambique per capita , based on exchange rates , was 320 . Its per capita based the international dollars was 690 . Ranking of countries , both rich and poor , by per capita differs depending on the measure used . According to the per capita figures in Table World Incomes , Selected Countries , which convert data in domestic currencies to dollars using exchange rates , the United States ranked fifteenth of all countries in 2007 . Using the international dollars method , its rank is tenth . China is ranked at 132 when per capita is based on the exchange rate conversion method but rises to 122 based on the international dollar method .

Principles of 662 Characteristics of Countries Low incomes are often associated with other characteristics severe inequality , poor health care and education , high unemployment , heavy reliance on agriculture , and rapid population growth . We will examine most of these problems in this section . Population growth in nations is examined later in the chapter . Inequality Not only are incomes in countries quite low income distribution is often highly unequal . Poverty is far more prevalent than per capita numbers suggest , as illustrated by curves , introduced in the chapter on inequality , that show the cumulative shares of income received by individuals or groups . Consider Costa and Panama , two Latin American countries with roughly equivalent levels of per capita ( Costa was and Panama in 2007 ) Panama income distribution is comparatively less equal , while Costa is far more equal . Figure Poverty and the Distribution of Income Costa versus Panama compares the 2003 curves for Costa and Panama , the most recent year for which the information was available . The 20 of the households with the lowest incomes in Costa had twice as large a share of their country total income as did the bottom 20 of households in Panama . That means Costa poor were about twice as well off , in material terms , as Panama poor . Figure and the of income Costa Panama 00 90 80 70 60 50 40 Percentage of income 30 20 10 10 20 30 40 60 70 80 90 100 Percentage of population

663 Author removed at request of original publisher Costa had about he same per capua as Panama . bul Panama income distribution was far more unequal . Panama poor had much lower living standards than Costa poor , as suggested by me curves for the two . Source . World Development Indicators ( revised October 17 . 2003 ) In general , the greater the degree of inequality , the more desperate is the condition of people at the bottom of an income distribution . Given the high degree of inequality in many countries , it is very important to look at income when we compare living standards in different countries . Health and Education Poor nations are typically characterized by low levels of human capital . Where facilities are inadequate , that human capital can be reduced further by disease . Where educational resources are poor , there will be little progress in improving human capital . One indicator of poor health care appears on the supply side . countries have fewer doctors , relative to their populations , than countries . For example , the UN estimates that in 2006 about 60 of mothers giving birth in developing countries had access to a skilled provider ( doctor , nurse , or midwife ) While that is up from 47 in 1990 , the lack of access to a provider may explain much of the difference in maternal death rates between developed and developing countries about nine maternal deaths per live births in developed countries compared to about 450 per in developing countries ( United Nations , 2008 ) We can also see the results of poor health care in statistics on health . Among the world developing countries , the infant mortality rate , which reports deaths in the first year of life , was 57 per live births in 2005 . There were six infant deaths per live births among the countries that year ( United Nations Development Program , 2007 ) Another health issue facing the world countries is malnutrition . Malnutrition rates in all developing countries in the 2002 to 2004 period averaged 17 , 35 in the least developed countries . Still another issue is the spread of . Here there is some progress . The number of people newly infected declined from million in 2001 to million in 2005 . treatments are also leading to a reduction in deaths from million in 2005 to million in 2007 . Longer survival means that the number of people living with HIV ( from just under 30 million in 2001 to about 33 million in 2007 ) is rising and most of the people living with HIV are in Africa ( United Nations , 2008 ) Education in poor and nations is improving . In 1991 , about 80 of children in developing countries were enrolled in primary schools . In 2005 , about 85 were . The comparable numbers in developed countries are about 95 . Enrollment rates taper off for high school ( about 53 in 2005 in developing countries compared to 91 in developed countries ) United Nations Development Program , 2007 )

Principles of 664 Unemployment Unemployment is pervasive in nations . These nations , already faced with low levels of potential output , are producing well below their potential . Unemployment rates in countries vary widely , reaching as high as 15 or more in some countries . If we count discouraged workers , people who have given up looking for work but who would take it if it were available , and people who work less than full time , not by choice but because more work is unavailable , then unemployment in countries to more than 30 . Migration within countries often contributes to unemployment in urban areas . Factors such as ethnic violence , poverty , and drought often force people to move from rural areas to cities , where unemployment rates are already high . Reliance on Agriculture One of the dominant characteristics of poor nations is the concentration of employment in agriculture . Another is the very low productivity of that employment . Agriculture in countries often employs a majority of the population but produces less than of . One of the primary forces behind income growth in wealthy countries has been the shift of labor out of agriculture and into more productive sectors such as manufacturing . This shift is also occurring in income nations but has lagged far behind . The solution to these problems lies in economic development , to which we turn next . Economic Development A If the problems of nations are pervasive , the development that helps to solve those problems must transform the very nature of their societies . The late Austrian economist Joseph described economic development as a revolutionary process . Whereas economic growth implies quantitative change in production processes that are already familiar to the society , economic development requires qualitative change in virtually every aspect of life . Robert , an economist at the New School for Social Research in New York , has argued , Economic development is political and social change on a wrenching and tearing scale . It is a process of institutional birth and institutional death . It is a time when power shifts , often violently and abruptly , a time when old regimes go under and new ones rise in their places . And these are not just the unpleasant side effects of development . They are part and parcel of the process , the Very driving force of change itself ( 1970 ) Economic development transforms a nation at its core . But what , precisely , is development ?

Many 665 Author removed at request of original publisher definitions follow in noting the massive institutional and cultural changes economic development involves . But whatever the requirements of development , its primary characteristics are rising incomes and improving standards of living . That means output must it must increase relative to population growth . And because inequality is so serious a problem in nations , development must deliver widespread improvement in living conditions . It therefore seems useful to define economic development as a process that produces sustained and widely shared gains in per capita real . In recent years , the United Nations has constructed measures incorporating dimensions of economic development that go beyond the level of per capita . The Human Development Index ( includes three expectancy , educational attainment ( adult literacy and combined primary , secondary , and enrollment ) as well as per capita real . The Gender Development Index ( uses the same variables as the but adjusts them downward to take into account the extent of gender inequality . A third index , the Human Poverty Index ( measures human deprivation and includes such indicators as the percentage of people expected to die before age 40 , the percentage of underweight children under age , the percentage of adults who are illiterate , and the percentage of people who live in poverty . The number reported for the shows the percentage of people in the country who suffer these . Table Human Development Index , Gender Development Index , and Human Poverty Index shows the , the rank , and the for selected countries , by rank . The is constructed to have an upper limit of . Canada is the United States is . As the table shows , the for developing countries range from in Argentina to in Sierra Leone . The greater the difference between the and the of a country , the greater the disparity in achievement between males and females in the country . Countries can have similar but different or . By looking at a variety of measures , we come closer to examining the extent to which the gains in income growth have been shared or not . Table Human Development Index , Gender Development Index , and Human Poverty Index

Principles of 666 Country Human Development Development Human ) Index rank Index ( 2005 Index ( 2005 , Rank ( A . 2005 Iceland NA Norway Canada 10 France 12 16 States 24 Greece 24 NA 32 gig 29 NA 38 Argentina 36 48 Costa 47 61 70 NA 67 Russia 59 NA Fed . 70 Brazil 60 78 Thailand 71 81 China 73 84 Turkey 79 90 Philippines 77 94 Iran 84 01 Jamaica 90 05 Viet Nam 91 14 100 NA 17 Bolivia 103 26 Morocco 112 28 India 113 35 117 36 Pakistan 125 48 Kenya 127

667 Author removed at request of original publisher Human Development Development Human Poverty Index rank Index ( 2005 Index ( 2005 , Rank ( 2005 154 132 156 135 173 Mali 151 177 Sierra 157 Leone Source United Nations Development Program , Human Development Report ( New York Macmillan , 2007 ) Key Ta The World Bank classifies countries as being , or . More than 80 of the world people live in and countries . Among the problems facing nations are low living standards , inequality , inadequate health care and education , high unemployment , and the concentration of the labor force in productivity agricultural work . Economic development is a process that generates sustained and widely shared gains in per capita real . Try It ! Provided below is information about two developing countries in Western Africa , and Guinea . Use the information to plot their curves for consumption , which are similar to curves for income distribution , discussed in the chapter on inequality , poverty , and discrimination . Then , based on the material in this section , contrast the concept of economic growth , as discussed in the chapter on that topic , with the concept of economic development , the subject of this chapter . Which of the two countries do you believe fits better the definition of development ?

Explain . Percentage Share of Consumption Average annual growth Average annual growth rate rate of ( of per capita Lowest Second Third Fourth Highest 20 20 20 20 20 . Guinea . The definition of deprivation for developed countries applies a higher standard than it does for developing countries .

Principles of 668 Case in Point ( Growth and Development ) or ( Growth or Development ) The 1971 Nobel laureate in economics , Simon , hypothesized that , at low levels of per capita income , increases in income would lead to increases in income inequality . The hypothesis was later extended to include concern that early growth might not be associated with improvements in other aspects of development , such as those measured by the or . The rationale for growth pessimism was that the structural changes that often accompany early as migration , occupational changes , and environmental hurt poorer people . The passage of time and the availability of more information on developing countries experiences allow us to test whether such pessimism is warranted . The results of a recent study of 95 episodes of economic growth and decline around the world show that the distribution of income can go either way . Clearly , as the table below shows , with the direction of change in the distribution of income split almost during periods of growth , there is no longer any reason to think that growth necessarily increases income inequality . As the table also shows , by a ratio of to , the income of the poor usually improves during periods of growth . This means that even when inequality increases , the poor usually gain in absolute terms as income grows . There were only seven periods of income decline included in the study , but , in general , during those periods the distribution of income grew more unequal and the incomes of the poor fell . measures of development , such as the and the , have not been calculated for a long enough period to allow us to see the trend in these social indicators of development , but we can look at various aspects of human development and poverty over time . As shown in the graphs accompanying this case , there have generally been improvements in the percentage of people with access to safe water , in the adult literacy rate , and in the percentage of underweight children under age . On this last indicator , the improvement in Africa is very small , but keep in mind that the rate of growth of real per capita in this region has been just over per year . There is no guarantee that economic growth will improve the plight of the world is indeed wide variation in individual countries experiences . In general , though , economic growth makes most people , including most poor people , better off . As former World Bank Senior Vice President and Chief Economist Joseph put it , Aggregate economic growth benefits most of the people most of the time and it is usually associated with progress in other , social dimensions of Periods of growth ( 88 ) Periods of decline ( Indicator Improved Worsened Improved Inequality 45 43 Income of the poor 77 11

669 Author removed at request of original publisher ma loo 90 so so To to 60 . um lira a sa sa , a , mo , I Me inn he Sour ?

Source World Development Indicators database , World Bank , revised October 17 , 2006 . Sources United Nations , Human Development Report , 1997 ( New York Oxford University Press , 1997 ) 72 , 224 Human Development Report , 1998 ( New York Oxford University Press , 1998 ) 206 Joseph , International Development Is It Possible ?

Foreign Policy 110 ( Spring 1998 ) Answer to Try It ! Problem Economic growth refers to the process of increasing a country potential output . Graphically , this can be represented by rightward shifts in the aggregate supply curve or by the shifting outward of the production possibilities curve . The challenge of economic development , however , is for countries to move toward their level of potential output and to achieve widely shared gains in per capita . This process usually involves widespread structural changes in the way people standards of living , the kinds of jobs they have , their health , and so forth . When comparing Cote and Guinea , for example , it is clear that the distribution of consumption is much more equal in the former . This implies that Cote is coming closer to generating widely shared gains in per capita real .

Principles of 670 100 80 ) 60 ( 40 Cote 20 20 40 60 80 100 Percentage of population References , Between Capitalism and Socialism ( New York Vintage Books , 1970 ) United Nations , The Millennium Development Goals Report 2008 , 27 . United Nations Development Program , Human Development Report ( New York Macmillan , 2007 ) The World Development Report 2006 ( New York Oxford University Press , 2006 ) xiv , comments on this usage The term developing countries includes and economies and thus may include economies in transition from central planning , as a matter of convenience . The term advanced countries may be used as a matter of convenience to denote economics .

Population Growth and Economic Development Learning Objectives . Explain the relationship between population growth and the rate of increase in per capita income . Summarize Thomas reasoning that led to the concept of a trap , and explain why his dire predictions have not occurred in many countries in modern times . Explain what is meant by a demographic transition , and describe how it has proceeded in very different ways in developed Versus developing countries . It is easy to see why some people have become when it comes to population growth rates in developing nations . Looking at the world countries , they see a population of more than billion growing at a rate that suggests a doubling every 31 years . How will we cope with so many more people ?

The following statement captures the essence of widely expressed concerns At the end of each day , the world now has over two hundred thousand more mouths to feed than it had the day before at the end of each week , one and million more at the close of each year , an additional eighty million . Humankind , now doubling its numbers every years , has fallen into an ambush of its own making economists call it the trap , after the man who most forcefully stated our biological predicament population growth tends to outstrip the supply of food ( 1976 ) But what are we to make of such a statement ?

Certainly , if the world population continues to increase at the rate that it grew in the past 50 years , economic growth is less likely to be translated into an improvement in the average standard of living . But the rate of population growth is not a constant it is affected by other economic forces . This section begins with a discussion of the relationship between population growth and income growth , then turns to an explanation of the sources of population growth in countries , and closes with a discussion of the warning suggested in the quote above . Population Growth and Income Growth On a simplistic level , the relationship between growth in population and growth in per capita income is clear . After all , per capita income equals total income divided by population . The growth rate of per capita income roughly equals the difference between the growth rate of income and the growth rate of population . Kenya annual growth rate in real from 1975 to 2005 , for example , was . Its population growth rate during that period was , leaving it a growth rate of per capita of just . A slower rate of population growth , together with the same rate of increase , would have 671

Principles of 672 left Kenya with more impressive gains in per capita income . The implication is that if the developing countries want to increase their rate of growth of per capita relative to the developed nations , they must limit their population growth . Figure Population and Income Growth , plots growth rates in population versus growth rates in per capita from 1975 to 2005 for more than 100 developing countries . We do not see a simple relationship . Many countries experienced both rapid population growth and negative changes in real per capita . But still others had relatively rapid population growth , yet they had a rapid increase in per capita . Clearly , there is more to achieving gains in per capita income than a simple slowing in population growth . But the challenge raised at the beginning of this section remains Can the world continue to feed a population that is growing is , doubling over fixed intervals ?

and income . 19754005 ' 00 . 09 . I I I ' A ' Annual rate of population growth ( A El than of population rates versus per ( or various developing ( or the period ) suggests no Systematic relationship between the tales of population and or income growth . Source . United Nations Development , Human Development Report ( New York . Macmillan . 20117 ) The Trap and the Demographic Transition In 1798 , Thomas Robert published his Essay on the Principle of Population . It proved to be one of the most enduring works of the time . fundamental argument was that population growth will inevitably collide with diminishing returns . Diminishing returns imply that adding more labor to a fixed quantity of land increases output , but by ever smaller amounts . Eventually , concluded , increases in food production would be too small to sustain the increased number of human beings who consume that output . As the population continued

673 Author removed at request of original publisher to grow unchecked , the number of people would eventually outstrip the ability of the land to generate enough food . There would be an inevitable trap , a point at which the world is no longer able to meet the food requirements of the population , and starvation becomes the primary check to population growth . A trap is illustrated in Figure The Trap . We can determine the total amount of food needed by multiplying the population in any period by the amount of food required to keep one person alive . Because population grows exponentially , food requirements rise at an increasing rate , as shown by the curve labeled Food Food produced , according to , rises by a constant amount each period its increase is shown by an straight line labeled Food Food required eventually exceeds food produced , and the trap is reached at time . The faster the rate of population growth , the sooner is reached . Figure The Trap Food required Food produced trap Time If al a fixed rate . me amount of food increase exponentially . But held that he output of food could increase only by a constant amount each period . Given these two different growth . food would eventually up food . The the subsistence level of food at me . shown here El point What happens at the trap ?

Clearly , there is not enough food to support the population growth implied by the Food required curve . Instead , people starve , and population begins rising arithmetically , held in check by the Food produced curve . Starvation becomes the limiting force for population the

Principles of 674 population lives at the margin of subsistence . For , the fate of human beings was a standard of living barely sufficient to keep them alive . As he put it , the view has a melancholy Happily , predictions do not match the experience of Western societies in the and centuries . One weakness of his argument is that he failed to take into account the gains in output that could be achieved through increased use of physical capital and new technologies in agriculture . Increases in the amount of capital per worker in the form of machines , improved seed , irrigation , and fertilization have made possible huge increases in agricultural output at the same time as the supply of labor was rising . Agricultural productivity rose rapidly in the United States over the last two centuries , just the opposite of the fall in productivity expected by . Productivity has continued to expand . was wrong as well about the relationship between population growth and income . He believed that any increase in income would boost population growth . But the law of demand tells us that the opposite may be true higher incomes tend to reduce population growth . The primary cost of having children is the opportunity cost of the parents time in raising incomes increase this opportunity cost . Higher incomes increase the cost of having children and tend to reduce the number of children people want and thus to slow population growth . Panel ( a ) of Figure Income Levels and Population Growth shows the birth rates of , and countries for the period . We see that the higher the income level , the lower the birth rate . Fewer births translate into slower population growth . In Panel ( we see that nations had much slower rates of population growth than did and nations over the last 30 years . ome Levels and Population

675 Author removed at request of original publisher Panel ( a ) countries countries countries Total fertility rate ( births per woman ) Panel ( countries countries countries Average annual population growl rate ( We ) Panel ( shows that had much higher total fertility rates ( births per woman ) during he period than did nations . In Panel ( we see that nations had . much higher rate uf during the period . Source World Development database . World Bank , revised October 17 , 2005 . An increase in a nation income can be expected to slow its rate of population growth . Hong Kong , for example , has enjoyed dramatic gains in income since . Its birth rate and rate of population growth have fallen by over half during that time . But if economic development can slow population growth , it can also increase it . One of the first gains a developing nation can achieve is improvements in such basics as the provision of clean drinking water , improved sanitation , and public health measures such as Vaccination against childhood diseases . Such gains can dramatically reduce disease and death rates . As desirable as such gains are , they also boost the

Principles of 676 rate of population growth . Nations are likely to enjoy sharp reductions in death rates before they achieve gains in per capita income . That can accelerate population growth early in the development process . Demographers have identified a process of demographic transition in which population growth rises with a fall in death rates and then falls with a reduction in birth rates . The process of demographic transition has unfolded in a strikingly different manner in developed versus less developed nations over the past two centuries . In 1800 , birth rates barely exceeded death rates in both developed and less developed countries . The result was a rate of population growth of only about per year worldwide . By 1900 , the death rate in developed nations had fallen by about 25 , with little change in the birth rate . Among developing nations , the birth rate was unchanged , while the death rate was down only slightly . The combined result was a modest increase in the rate of world population growth . Changes were much more rapid in the century . By 1965 , the death rate among developed nations had plunged to about of its 1800 level , while the birth rate had fallen by half . In developing nations , death rates took a similarly dramatic drop , while birth rates showed little change . The result was dramatic world population growth . The world economies have completed the demographic transition . Less developed nations have begun to make progress , with birth rates falling by a slightly greater percentage than death rates . The results have been a sharp slowing in the rate of population growth among nations and a more modest slowing among nations . Continued slowing in population growth at all income levels is suggested in Figure The Demographic Transition at Work Actual and Projected Population Growth . Between 1965 and 1980 , the world population grew at an annual rate of , suggesting a doubling time of 36 years . For the world as a whole , it is predicted that population growth will slow to a rate during the period , a rate that would imply a doubling time of 65 years . Figure The at Work . Actual and Population Growth

677 Author removed at request of original publisher Average annual rate of population growth ( 19604968 I countries I countries countries Population growth has slowed considerably in the past several decades . Source united Program . Human Development Report ( New York Macmillan , 2007 ) for periods and , united Nations Development Program , Human Development Report 1990 ( New york , Oxford Oxford University Press , 1990 ) for the period . in which categories to low . middle . and human development rankings . Key Ta The rate of increase in per capita income roughly equals the rate of increase in income minus the rate of increase in population . High rates of population growth do not necessarily imply low rates of growth in per capita income . prediction of a world in which production would be barely sufficient to keep people alive has proven incorrect because of gains generated by increased physical and human capital , advances in technology , and the tendency of higher incomes to slow population growth . A demographic transition is achieved when rising incomes begin to reduce birth rates and bring population growth in check . The text gives two main reasons why the trap did not occur ( increased use of physical capital and human capital and technological improvements in agriculture and ( higher income leading to fewer children . How do these two reasons alter Figure The Trap ?

Principles of 678 Case in Point China Population Growth Thomas , Fujian China BY . China is an example of a country that has achieved a very low rate of population growth and a very high rate of growth in per capita . China low rate of population growth represents a dramatic shift . As recently as the early , China had a relatively high rate of population growth its population expanded at an annual rate of from 1965 to 1973 . By the 19805 , that rate had plunged to . The World Bank reports a growth rate in China population of about in the early part of the century . This dramatic drop in the population growth rate was brought about by a strict government policy by which couples are allowed to have only one child . have been known to include fines , loss of employment , confiscation of property , demolition of homes , forced abortions , and sterilization . While the Chinese government has denied that forced abortions and are part of its strategy , policies are administered locally , and all of the above means of coercion seem to have been employed at one time or another . If a woman who already has one child becomes pregnant , she will most likely be forced to have an abortion . Although the policy has achieved its desired population has had some horrible side effects . Given a strong cultural tradition favoring having a son , some couples resort to infanticide as a means of eliminating newborn daughters . When the sex of an unborn baby is determined to be female , abortion is common . The coercive aspects of China policies and their undesirable side effects have been condemned by many governments around the world , as well as by nongovernmental organizations . Declarations from United Nations UN Conference on Population in Cairo in 1994 and the UN Conference on Women in Beijing in emphasized that birth rates are linked to the economic conditions of women and that improving health , education , and employment opportunities for women constitutes a better and more humane way of reducing birth rates . Fearful that and human rights activists from other

679 Author removed at request of original publisher countries might stir up those movements locally , the Chinese government actually designed the 1995 Beijing Conference so as to minimize contact between Chinese and foreigners . There are signs , though , that Chinese officials may have heard the message . In a number of counties in China , experimental programs with slogans such as Carry out Contraception and Family Planning Measures Voluntarily are underway . The new approach to family planning emphasizes health care , education , and reduction in poverty to encourage women to have fewer children . International pressures may only be part of the reason for the emerging Chinese change of heart . In the late , Chinese officials discovered that the number of births in China was being by about 30 . The aggressive policies may not have been as successful as they were cracked up to be . Answer to Try It ! Problem The first reason raises the curve labeled Food produced and suggests that it is exponential rather than linear . The second reason lowers the curve labeled Food The result is that the time , when the amount of food required exceeds the amount produced , is pushed further into the future , perhaps indefinitely if the Food produced stays above the Food required curve . The latter seems to have been the experience of today rich countries . References , Thomas Robert An Essay on the Principle of , Sources and Background , Criticism ( New York Norton , 1976 ) xi .

Keys to Economic Development Learning Objectives . List and discuss domestic policies that contribute to economic growth . State the dependency theory view of trade and developing nations , relate this theory to the strategy of import substitution , and evaluate that strategy . Outline some of the factors underlying the successes of newly industrialized countries . What are the keys to economic development ?

Clearly , each nation experience is unique we can not isolate the sources of development success in the laboratory . We can , however , identify some factors that appear to have played an important role in successful economic development . We will look separately at policies that relate to the domestic economy and at policies in international trade . Domestic Policy and Economic Development What domestic policies contribute to development ?

Looking at successful economies , those that have achieved high and sustained increases in per capita output , we can see some clear tendencies . They include a market economy , a high saving rate , and investment in infrastructure and in human capital . Market Economies and Development There can be no clearer lesson than that a economy is a necessary condition for economic development . We saw in the chapter that introduced the production possibilities model that economic systems can be categorized as market capitalist , command socialist , or as mixed economic systems . There are no examples of development success among command socialist systems , although some people still believe that the former Soviet Union experienced some development advances in its early years . One of the most dramatic examples is provided by China . Its shift in the late to a more based economy has ushered in a period of phenomenal growth . China , which has shifted from a command socialist to what could most nearly be categorized as a mixed economy , has been among the economies in the world for the past 20 years . Its growth has catapulted China from being one of the world poorest countries a few decades ago to being a country today . 680

681 Author removed at request of original publisher The experience of other economies reinforces the general observation that markets matter . South Korea , Hong Kong , Singapore , and have achieved gigantic gains with a approach to economic growth . We should not conclude , however , that growth has been independent of any public sector activity . China , for example , remains a nominally socialist state its government continues to play a major role . The governments of South Korea , and Singapore all targeted specific sectors for growth and provided government help to those sectors . Even Hong Kong , which became part of China in 1997 , has a high degree of government involvement in the provision of housing , health care , and education . A market economy is not a economy . But those countries that have left the task of resource allocation primarily to the market have achieved dramatic gains . Hong Kong and Singapore , in fact , are now included in the World Bank list of economies . The Rule of Law and Development If a market is to thrive , individuals must be secure in their property . If crime or government corruption makes it likely that individuals will regularly be subjected to a loss of property , then exchange will be difficult and little investment will occur . Also , the rule of law is necessary for contracts that is , the rule of law is necessary to provide an institutional framework within which an economy can operate . We will see in the chapter on socialist economies in transition , for example , that Russia effort to achieve economic development through the adoption of a market economy has been hampered by widespread lawlessness . An important difficulty of economies with extensive regulation is that the power they grant to government officials inevitably results in widespread corruption that saps entrepreneurial effort and economic growth . Investment and Saving Saving is a key to growth and the achievement of high incomes . All other things equal , higher saving allows more resources to be devoted to increases in physical and human capital and to technological improvement . In other words , saving , which is income not spent on consumption , promotes economic growth by making available resources that can be channeled into uses . High saving rates generally accompany high levels of investment . The productivity of this investment , however , can be quite variable . Government efforts to invest in human capital by promoting education , for example , may or may not be successful in actually achieving education . Development projects sponsored by international relief agencies may or may not foster development . However , investment in infrastructure , such as transportation and communication , clearly plays an important role in economic development . Investment in improved infrastructure facilitates the exchange of goods and services and thus fosters development .

Principles of 682 International Economic Issues in Development In 1974 , the poorest nations among the developing nations introduced into the United Nations a Declaration on the Establishment of a New International Economic Order . The program called upon the rich nations to help them reduce the growing gap in real per capita income levels between the developed and developing nations . The declaration has come to be known as the New International Economic Order or for short . called for different and special treatment of the developing nations in the international arena in areas such as trade policy and control over multinational corporations . reflected a widely held view of international relations known as dependency theory . Dependency Theory and Trade Policy Conventional economic theory concerning international trade is based on the idea of comparative advantage . As we have seen in other chapters , the principle of comparative advantage suggests that free trade between two countries will benefit both and , in general , the freer the trade the better . But some economists have proposed a doctrine that challenges this idea . Dependency theory concludes that poverty in developing nations is the result of their dependence on nations . Dependency theory holds that the industrialized nations control the destiny of the developing nations , particularly in terms of being the ultimate markets for their exports , serving as the source of capital required for development , and controlling the relative prices and exchange rates at which market transactions occur . In addition , export industries in a developing nation are assumed to have small multiplier effects throughout the rest of the economy , severely limiting any positive role than an expanded export sector might play . Specifically , limited transportation , a poorly developed financial sector , and an uneducated work force stand in the way of multiplying any positive effects of export expansion . A poor country thus may not experience the kind of development and growth enjoyed by the rich country pursuing free trade . Also , increased trade makes the poor country more dependent on the rich country and its export service firms . In short , the benefits of trade between a rich country and a poor country will go almost entirely to the rich country . The development strategy that this line of argument suggests is that developing countries would need to become independent of the already developed nations in order to achieve economic development . In relative terms , free trade would leave the poor country poorer and the rich country richer . Some dependency theorists even argued that trade is likely to make poor countries poorer in absolute terms . president , Julius , speaking before the United Nations in 1975 , put it bluntly , I am poor because you are rich .

683 Author removed at request of original publisher Import Substitution Strategies and Development If free trade widens the gap between rich and poor nations and makes poor nations poorer , it follows that a poor country should avoid free trade . Many developing countries , particularly in Latin America , attempted to overcome the implications of dependency theory by adopting a strategy of import substitution , a strategy of blocking most imports and substituting domestic production of those goods . The import substitution strategy calls for rapidly increasing industrialization by mimicking the already industrialized nations . The intent is to reduce the dependence of the developing country on imports of consumer and capital goods from the industrialized countries by manufacturing these goods at home . But in order to protect these relatively industries at home , the developing country must establish very high protective tariffs . Moreover , the types of industries that produce the previously imported consumer goods and capital goods are unlikely to increase the demand for unskilled labor . Yet unskilled labor is the most abundant resource in the poor countries . Adopting the import substitution strategy raises the demand for expensive capital , managerial talent , and skilled in short supply . High tariffs insulate domestic firms from competition , but that tends to increase their monopoly power . Recognizing that some imported goods , particularly spare parts for industrial equipment , will be needed , countries can establish complex permit systems through which firms can import vital parts and other equipment . But that leaves a company fortunes in the hands of the government bureaucrats issuing the permits . A highly corrupt system quickly evolves in which a few firms bribe their way to easy access to foreign markets , reducing competition still further . Instead of the jobs expected to result from import substitution , countries implementing the import substitution strategy get the high prices , reduced production , and poor quality that come from reduced competition . No country that has relied on a general strategy of import substitution has been successful in its development efforts . It is an idea whose time has not come . In contrast , more successful economies in Asia and elsewhere have kept their economies fairly open to both imports and exports . They have shown the greatest ability to move the development process along . Development and International Financial Markets Successful development in the developing nations requires more than just redirecting labor and capital resources into newly emerging sectors of the economy . That could be accomplished by both domestic firms and international firms located within the economy . But to complement the reorientation of traditional production processes , economic infrastructure such as roads , schools , communication facilities , ports , warehouses , and many other prerequisites to growth must be put into place . Paying for the projects requires a high level of saving . The sources of saving are private saving , government saving , and foreign saving . Grants in the form of foreign aid from the developed nations supplement these sources , but they form a relatively small part of the total . Private domestic saving is an important source of funds . But even high rates of private saving can not

Principles of 684 guarantee sufficient funds in a poor economy , where the bulk of the population lives close to the subsistence level . Government saving in the form of tax revenues in excess of government expenditures is almost universally negative . If the required investments are to take place , the developing nations have to borrow the money from foreign savers . The problem for developing nations borrowing funds from foreigners is the same potential difficulty any borrower faces the debt can be difficult to repay . Unlike , say , the national debt of the United States government , whose obligations are in its own currency , developing nations typically commit to make loan payments in the currency of the lending institution . Money borrowed by Brazil from a bank , for example , must generally be paid back in dollars . Many developing nations borrowed heavily during the , only to find themselves in trouble in the 19805 . Countries such as Brazil suspended payments on their debt when required payments exceeded net exports . Much foreign debt was simply written off as bad debt by lending institutions . While foreign debts created a major crisis in the 19805 , subsequent growth appeared to make these payments more manageable . A somewhat different international financial crisis emerged in the late . It started in Thailand in the summer of 1997 . Thailand had experienced 20 years of impressive economic growth and rising living standards . One element of its development strategy was to maintain a fixed exchange rate between its currency , the baht , and the dollar . The slowing of Japanese growth , which reduced demand for Thai exports , and weaknesses in the Thai banking sector were putting downward pressure on the baht , which Thailand central bank initially tried to counteract . As discussed there , this effort was abandoned , and the value of the currency declined . The Thai government , in an effort to keep its exchange rate somewhat stable , appealed to the International Monetary Fund ( IMF ) for support . The IMF is an international agency that makes financial assistance available to member countries experiencing problems in their international balance of payments in order to support adjustment and reform in those countries . In an agreement between Thailand and the IMF , Thailand central bank tightened monetary policy , thereby raising interest rates there . The logic behind this move was that higher interest rates in Thailand would make the baht more attractive to both Thai and foreign financial investors , who could thus earn more on Thai bonds and on other Thai financial assets . This would increase the demand for baht and help to keep the currency from falling further . Thailand also agreed to tighten fiscal policy , the rationale for which was to prepare for the anticipated future costs of restructuring its banking system . As we have learned throughout , however , monetary and fiscal policies will reduce real in the short run . The hope was that growth would resume once the immediate currency crisis was over and plans had been put into place for correcting other imbalances in the Thai economy . Other countries , such as South Korea and Brazil , soon experienced similar currency disturbances and entered into similar IMF programs to put their domestic houses in order in exchange for financial assistance from the IMF . For some of the other countries that went through similar experiences , notably Indonesia and Malaysia , the situation in 1999 was very unstable . Malaysia decided to forgo IMF assistance and to impose massive currency controls . In Indonesia , the financial crisis and the ensuing economic crisis led to political unrest . It held its first free elections in June 1999 , but violence erupted in late 1999 , when the overwhelming majority of people in East Timor voted against an Indonesian

685 Author removed at request of original publisher proposal that the province have limited autonomy within Indonesia and voted for independence from Indonesia . Remarkably , in the early , the economies of most of these countries rebounded , though they are now caught up in the global economic downturn . Development Successes As we have seen throughout this chapter , the greatest success stories are found among the newly economies ( in East Asia . These economies , including Hong Kong , South Korea , Singapore , and , share two common traits . First , they have allowed their economies to develop through an emphasis on , market capitalist strategies . The IEs achieved higher per capita income and output by entering and competing in the global market for products such as computers , automobiles , plastics , chemicals , steel , shipbuilding , and sporting goods . These countries have succeeded largely by linking standardized production technologies with labor . Second , the role of government was relatively limited in the , which made less use of regulation and bureaucratic controls . Governments were clearly involved in some strategic industries , and , in the wake of recent financial crises , in some cases it appears that this involvement led to some decisions in those industries being made on political rather than on economic grounds . But the principal contribution of governments in the Far Eastern IEs has been to create a modern infrastructure ( especially communications facilities essential for the development of a strong financial sector ) to provide a stable incentive system ( including stable exchange rates ) and to ensure that government bureaucracy will help rather than hinder exports ( especially by not regulating export trade , labor markets , and capital markets ) 1988 ) Chile adopted sweeping market reforms in the late , creating the freest economy in Latin America . Chile growth has accelerated sharply , and the country has moved to the group of nations . Perhaps more dramatic , the dictator who instituted market reforms , General , agreed to democratic elections that removed him from power in 1989 . Chile now has a greatly increased degree of political as well as economic has emerged as the most prosperous country in Latin America . Over the last decade , Mexico also shifted from a strategy of import substitution and began to follow more policies . The North American Free Trade Agreement ( turned all of North America into a free trade zone . This could not have occurred had Mexico not undergone such a dramatic shift in its development strategy . Mexico commitment to the new strategy was tested in 1994 , when the country underwent a currency crisis , similar to that experienced in many Asian countries in 1997 and 1998 . At that time , Mexico , too , entered into an agreement with the IMF to address economic imbalances in return for financial assistance . The government also provided support to help Mexico at that time . By 1996 , the Mexican economy was growing again , and Mexican commitment to more open policies has endured . Only with the passage of time will we know for sure whether the changed strategy worked in Mexico as well , but the early signs are that it is working . Although the trend in developing countries toward market reforms has been less heralded than the

Principles of 686 collapse of communism , it is surely significant . Will market reforms translate into development success ?

The jury is still out . Market reform requires that many be swept aside . Whether that can be achieved , and whether poor people who lack human capital can be included in the development effort , remain open questions . But some dramatic success stories have shown that economic development can be achieved . The fate of billions of desperately poor people rests in the ability of their countries to match that success . Key Ta A market economy , perhaps with a substantial role for government , appears to be one key to economic growth . A system in which laws and property rights are well established and enforced also promotes growth . High rates of saving and investment can boost economic growth . Dependency theory suggests that poor countries should seek to insulate themselves from international trade . The import substitution strategies suggested by dependency theory have not been successful in generating economic growth , and a number of countries have moved away from this strategy . Case in Point Democracy and Economic Development India . Democracy as an economic institution has typically received mixed notices from economists . While virtually

687 Author removed at request of original publisher all the world rich nations have democratic systems of government , it isn clear that democracy is necessary for development . India long provided the strongest to the idea that democracy promotes development . It has long been a democracy , yet its per capita income has kept it among the world poor countries . India government has traditionally opted for extensive regulation that has curtailed development . Countries such as China , with no democracy and a repressive government , have managed to generate very high rates of economic growth . China per capita income now exceeds that of India by about 50 . Lee Kuan Yew , Singapore former prime minister , put it this way I believe what a country needs to develop is discipline more than democracy . The exuberance of democracy leads to indiscipline and disorderly conduct which are inimical to Many economists have reached the conclusion that countries are likely to become democratic once they achieve a high degree of economic development . Political freedom , they argue , is a normal good . The demand for freedom thus increases as incomes rise , making the creation of democratic institutions a product of economic growth , not a cause of it . Two recent by economists John and and the other by economists Michael Nelson and Ram the conventional view , arguing instead that democracy and economic growth are compatible . Using statistical models that control for a variety of factors that affect economic growth , such as investment and population growth , both studies concluded that there is a positive relationship between political freedom and economic growth . In the latter study , the authors separately tested the direction of causality does growth cause democracy or does democracy cause growth ?

They conclude that the direction of causality goes from democracy to economic growth . They also controlled for the level of economic freedom ( an index of price stability , government size , discriminatory taxation , and trade restrictions ) which many studies have concluded is critical for development . As argued in this chapter , more economic freedom does lead to higher economic growth , but so does more political freedom . Just as pessimism that economic growth has a negative impact on the poor is dissipating , likewise the notion that developing countries must wait until they are developed in order for their citizens to experience political freedom is also falling by the wayside . Sources Jagdish , Democracy and Development , American Enterprise , no . 1995 ) 69 John and , of Growth Further Evidence on the Role of Political Freedom , Journal of Economic Development 22 , no . December 1997 ) Michael Nelson and Ram Singh , Democracy , Economic Freedom , Fiscal Policy , and Growth in A Fresh Look , Economic Development and Cultural Change 64 , no . July 1998 ) References , The Lessons of East Asian Development , Economic Development and Cultural Change 36 , no . April 1988 )

Review and Practice Summary Developing nations face a host of problems low incomes unequal of income inadequate health care and education high unemployment and a concentration of workers in agriculture , where productivity is low . Economic development , the process that generates widely shared gains in income , can alleviate these problems . The sources of economic growth in developing countries are not substantially different from those that apply to the developed countries . Market economies with legal systems that provide for the reliable protection of property rights and enforcement of contracts tend to promote economic growth . Saving and investment , particularly investment in appropriate technologies and human capital , appear to be critical . So , too , does the ability of developing nations to match their population growth rate with the ability of the economy to increase real output . Dependency theory , the notion that developing countries are in the grip of the industrialized countries , led to import substitution schemes that proved detrimental to the growth prospects of developing nations . The movement of Latin American countries such as Mexico and Chile to market systems is a rejection of dependency theory . There is a general movement toward strategies to support economic development in the future . But even strategies will work only if efforts are made to ensure an adequate infrastructure , including the development of financial institutions capable of providing the required signals to guide individual decision making . Concept Problems . What is the difference between economic development and economic growth ?

Look at the Case in Point on the relationship between growth and development . Why do you think that the distribution of income is more likely to become more unequal during economic ?

What are the implications for the development of a society that is unable to reduce its population growth rate below , say , per year ?

Explain how technological progress the trap . China reduced its rate of population growth by force ( see the Case in Point ) Given the likely effects of population growth on living standards , do you think such a policy is reasonable ?

Are there other ways a government might seek to limit population growth ?

On what basis might a poor country argue that its poverty is a result of high incomes in another country ?

Do you think Mexico poverty contributed to wealth ?

Given the arguments presented in the text , what do you think the United States should do to assist 688 689 Author removed at request of original publisher Mexico in its development efforts ?

Numerical Problems . Consider two economies , one with an initial per capita income of ( about the income of Israel ) growing at a rate of per year , the other with an initial per capita income of 600 ( about the income of Guinea ) growing twice as fast ( that is , at a rate of per year ) Using the rule of 72 from the chapter on economic growth , calculate how long it will take for the income country to achieve the per capita income enjoyed by the richer one . How long will it take to literally catch up to the richer nation , assuming that the growth rates continue unchanged in the future ?

Use the most recent copy of the World Development Report available in your library ( or at ) to determine the five poorest countries in the world . Look up data on the distribution of income , education , health and nutrition , and demography for each country ( information on some of these variables will not be available for every country ) Do you think that low incomes cause the observations you have made , or do you think that low levels of education , health , and nutrition and high rates of population growth tend to cause poverty ?

A country rate of growth is per year . Its population is growing per year . At what rate is its per capita changing ?