The Process of Economic Development

Theory, Institutions, Applications and Evidence

James M. Cypher, James L. Dietz, James M Cypher, James L Dietz

• Publisher: Routledge
• Year: 2004
• eBook ISBN: 9781134524198
• Edition: 2
• Topic: Business
• Subtopic: Business General
• Index: Business

Drawing together recent changes in the debates with the history of the subject, The Process of Economic Development is a textbook with a story to tell. A discussion of recent events is integral to the book, with discussions ranging from
* the environment
* the debt crisis
* export led industrialization
* import substitution industrialization
* growth theory and technological capability
The book has an accessible style and format. Plentiful diagrams, boxed summaries, and end of chapter questions help the reader to grasp many-faceted topics.
Coverage includes Latin America, Africa and Asia giving students a uniquely balanced world picture.

Part 1
An overview of economic development

1
The development imperative

No society can surely be flourishing and happy, of which
the far greater part of the members are poor and miserable.

Adam Smith, The Wealth of Nations

Our Dream is a World Free of Poverty
Aphorism heading the World Bank’s Mission Statement

After studying this chapter, you should understand:

• the relative magnitude of poverty in the less-developed nations and some of its human and social costs;
• differences in relative incomes and development levels between regions of the less-developed world and compared to more-developed regions;
• trends in economic growth in different regions of the world;
• the extent of inequality in the distribution of income, in wealth and in participation in economic and social life of the world’s poor in different regions of the world;
• the range of barriers to development, both internal and external, that tend to thwart economic, social, and human development;
• the importance of structural change, of technology and of institutional innovation to more rapid progress in the future in the less-developed world.

Why study economic development?

Throughout the 1990s, some eleven million children under the age of five were dying every year in the less-developed nations from preventable illnesses (UNDP 2001:9; WHO 1994; World Bank 1993a:1). These are sobering numbers and are difficult to grasp as aggregate abstractions. They translate to more than 35,000 deaths daily, more than 1,400 children dying every hour of every day of every week and of every month of the year, children whose lives ended before they really had an opportunity to begin. More than half of these deaths were due to respiratory illnesses and to diarrhoea and the severe dehydration that can ensue, exacerbated by malnutrition in a vicious circle of hunger and disease (see Focus 1.1 Saving Lives: ORT).¹ Roughly, in the ten seconds it has taken you to read this paragraph, five more children in the less-developed world will have perished, and they too will have perished unnecessarily.²

FOCUS 1.1 SAVING LIVES: ORT

Imagine yourself for a moment as a poor rural villager in a less-developed nation with a young child in your care who develops diarrhoea. What would you do to prevent the illness from becoming life threatening?

Diarrhoea causes the body to throw off more water than can be reabsorbed. Death can result if more than 15 percent of the body’s fluid is lost. What does this child need? What can you do to prevent dehydration and death? Clinics, phone calls, medicine, and a visit to a pharmacy are not options! You must come up with a home remedy. And fast! Think carefully about what you would do before reading on.

Along with the loss of water, sodium (salt) is also lost with diarrhoea. There is a fairly precise concentration of sodium in the human blood supply required for the body to function properly. With diarrhoea, this balance is upset as the kidneys, which normally regulate the salt level in the blood supply, are unable to maintain the proper balance. What the sick body needs is both sodium and more liquid, but the illness disturbs this delicate equilibrium and threatens survival.

The remedy is “oral rehydration therapy” or ORT. Simply providing the sick child with water to drink—which may have been the immediate cause of the diarrhoea in the first instance—is not enough. Nor, interestingly, is water mixed with salt. Because of the diarrhoea, the body cannot absorb the salt properly with the result that excess salt gets stored in the intestinal track and causes more water to pass into the intestine, actually worsening the diarrhoea. However, a mixture of water, salt, and sugar (glucose) will work, allowing the salt to be properly processed by the body and for water retention to be increased and the dehydration process halted.

A mixture of glucose (20 grams), sodium chloride (salt, 3.5 grams), sodium citrate (2.5 grams), and potassium chloride (1.5 grams) in one litre of clean water provides the ideal mixture for ORT. ORT must be initiated quickly before the dehydration becomes too severe. If it is not, intravenous rehydration may be the only alternative.
Source: Foster 1992:197–198

Adults also die in pointless numbers in the less-developed world: more than seven million each year from illnesses such as tuberculosis and other contagious diseases that could be prevented or cured at a relatively small cost to society. Most of these deaths are rooted in extreme poverty and deprivation, including famine and sometimes civil war. They are human losses that, in our modern and affluent times, are not the result of any lack of human knowledge about how to prevent them.³ The means to prevent this waste of human life is at hand; what is lacking seems to be the will.

If all this were not bad enough, since the 1980s an HIV/AIDS epidemic in many African countries has decimated what limited progress there had been on the health and poverty fronts with some countries, such as Botswana and Zimbabwe, especially hard hit. In confronting these and other problems, many of the barriers to progress in the less-developed countries seem to continue to be found in obstinate economic, political and social structures that remain resistant to the changes that could make extreme poverty and privation—and millions of deaths from poverty-related illnesses each year—the relics of history they deserve to be (World Bank 1993a:116; 2000:4–5).

Poverty in the less-developed world

Table 1.1 provides an overview of the extent of poverty facing the less-developed nations. In 1985, one out of every three persons, some 1,116 million men, women, and children, were “poor” by the World Bank’s classification of having less than the equivalent of $370 per year available to meet their needs. By 1993, this number had risen to more than 1,300 million persons in poverty, and by 1998, preliminary statistics by the World Bank using the same roughly $1/day standard, found 1,198.9 million living in poverty, more than had been so living in 1985. If the cut-off line for poverty is extended to $2 a day, some 2.8 billion individuals fell below that standard in 1998, nearly half the world’s 6 billion population (World Bank 2000:3, 13).

Part I of Table 1.1 provides even more detail. Among those counted as poor in 1985, nearly one in five (633 million) were classified as “extremely poor” with an annual average per person income of less than $275. Former World Bank President, Robert McNamara, called these people the “absolute poor,” human beings who suffer “a condition of life so degraded by disease, illiteracy, malnutrition, and squalor as to deny its victims basic human necessities.” … (It) “is life at the very margin of physical existence.”

Table 1.1 Extent of world poverty and the poverty gap

As McNamara suggested, the wretched condition of life of the absolute poor is almost beyond the power of understanding of those who live in developed countries (McNamara 1976:5).

Almost one-half of the less-developed world’s poor lived in southern Asia in 1985, with the greatest number in India. Part II of Table 1.1 shows that southern Asia’s share of the less-developed world’s total number of poor had not fallen in the 1990s (522 million out of a total 1,198.9 million poor). Sub-Saharan Africa, on the other hand, accounted for almost one-fourth of all the poor in the less-developed world by 1998, compared to 16 percent in 1985, as the incidence of poverty there worsened compared to trends in the rest of the world.

What is disheartening is the relatively small decrease in poverty in most of the regions shown in Part II of Table 1.1, not to mention the rise in poverty in Africa in the early 1990s. The decline in the incidence of poverty in East Asia from 20 percent of the region’s population in 1985 (Part I of Table 1.1) to 15.3 percent in 1998 (and even lower when China is excluded; Part II) is one of the success stories of the past two decades, one that will be highlighted throughout this text. Still, poverty levels remain agonizingly high, reducing opportunities for the poor and their children over the future in a vicious circle. Quoting the World Bank from more than a decade past: “more than 1 billion people, one-fifth of the world’s population, live on less than one dollar a day—a standard that Western Europe and the United States attained two hundred years ago” (World Bank 1991:1). This is still true today. It is also important to recognize that the incidence of poverty is not gender-neutral, something the aggregate figures in the table obscure. “Poverty has a woman’s face—of 1.3 billion people in poverty 70% are women [female]” (UNDP 1995:4).

With the exception of the last column of Part I, the numbers in Table 1.1 provide what is called a “headcount” of the numbers of poor falling below the poverty line. Such a measure does not distinguish between those persons whose incomes are far below the poverty line and who hence need more assistance to reach the poverty threshold from those whose incomes already have brought them closer to the income level needed to escape official poverty. The headcount measure of poverty simply counts all persons below some income level as poor. The headcount measure is thus not at all sensitive to the severity of the poverty situation of those counted as poor; it treats all poor as if they were somehow the same.

The condition of being poor, however, is not similar for all those who are so classified. Imagine, for example, one country with half its population below the poverty line, but each is only $5 per year away from the poverty level of income. That is poverty of quite a different magnitude than another country which also has half its population below the poverty line, but each is $100 per year away from escaping poverty. The headcount measure of poverty, by simply adding up how many people fall below the poverty line, fails to capture this distinction and both countries will be counted as having 50 percent of their citizens in poverty by the headcount measure. Obviously, however, the severity of poverty in the first country is substantially less than in the second. There is another way to measure poverty that considers this issue.

The last column of Table 1.1 Part II, provides this alternative perspective on measuring poverty. The concept of the “poverty gap” captures the severity of the poor’s plight. It is the additional amount of consumption (or income) that must be generated by a country to bring all the poor above the poverty line. The poverty gap is measured as a percent of a region’s (or a country’s) total current consumption (or it could be measured as a percent of income) that must be created and received by the poor in the right amounts to bring each family’s income above the poverty line. For some regions of the world and for some countries the poverty gap was as low as 1–2 percent of current consumption; in other regions, the poverty gap was as high as 10–12 percent of total consumption. Data that is more recent is available on the poverty gap for individual economies, as the note to this paragraph notes, but it is not uniform by years and thus is not so easily displayed for comparison.⁴

For all the less-developed nations, an increase in income equivalent to about 3–4 percent of current consumption received in the right amounts by each family or individual in poverty would have been sufficient to shift all the poor above the World Bank’s $2 per day poverty line in 1985. It is not unreasonable to assume that this amount is not substantially different now. Obviously, to accomplish the long-term goal of a world without poverty, a simple transfer of income from better-off citizens to the poor is not the ultimate means or goal. Reducing poverty is not about transfers of income, except in the short-run to alleviate the worst kinds of suffering. Rather, a permanent reduction in poverty requires a sufficient increase in production, jobs and incomes for the now poor such that they are no longer povertystricken and remain non-poor through their own efforts, not handouts.

This objective of a permanent increase in income and output that reaches the poor in the magnitudes shown in the table would not seem to be an overwhelmingly large technical barrier. For example, India could resolve to generate sufficient extra income and output in the economy over a generation to contribute to an increase in the income of the poor in the amount equal to 12 percent of total consumption. Over 25 years, this does not seem to be a technically unattainable goal, amounting to an increase in total consumption on the order of well less than 1 percent per year.

The possibility of fully eradicating poverty would seem to be within reach. It is not an impossible aspiration requiring super-human efforts beyond current resource capabilities. Greater productivity of labor and a better distribution of the world’s productive resources, both human and physical, are what are needed to effect a long-term decrease in the poverty profile. It is a reasonable and humane objective for all the less-developed nations to target the elimination of absolute poverty from within their borders. It is a goal that the World Bank has embraced, with the target of cutting poverty in half by 2015 (World Bank 2001:5–6; also see UNDP 2001:22–25). Even for the poorest nations, the magnitude of the increase in output and income required to reduce poverty is within their grasp over a medium-range per...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Boxes
• Focuses
• Preface to the Second Edition
• Preface to the First Edition
• Acknowledgments
• Part 1: An Overview of Economic Development
• Part 2: Theories of Development and Underdevelopment
• Part 3: The Structural Transformation
• Part 4: Problems and Issues