on Windows the World Economy: An Introduction to International Economics Revised: 14 February 2011
Kenneth A. Reinert Cambridge University Press 2012
CHAPTER 20 Development Concepts
I once spoke with a Ghanaian student who had just taken his first course in international economics. He held a well-known book on globalization in his hand (I wont say which one) and was waving it at me. Professor, he asked with some agitation, what do es all this really mean for my country? We are going nowhere! His question was a profound one, and it is shared by many, many individuals who have similar feelings about their countries relationships to the world economy. It is a question that we will begin to answer in this part of the book on the fourth window on the world economy, international development. Stated another way, the question is: What can globalization, be it via international trade, international production or international finance, do for the wellbeing of individuals around the world, particularly in those places where measures of standards of living are low, where a significant number of people are deprived in some significant respects? We will address this question in the five chapters making up this part of the book, beginning in this chapter on development concepts. It may seem funny that we are dedicating an entire chapter to concepts. We did not have a chapter on trade concepts! But it is appropriate because the notion of development is close to our notion of what is good and desirable for people, and it therefore takes some preliminary sorting out. 1 So we will begin by considering what we mean by development, taking up development as growth, development as human development, and development as structural change. Appendices to this chapter take up the relationship of gross domestic product and gross national income, as well as the Lorenz curve and Gini coefficient ratio, two measures of the degree of income inequality in an economy.
1
This is why there is an emerging field of development ethics, described, for example, in Crocker (2008).
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Analytical elements for this chapter: Countries, sectors, factors.
What Is Development?
Conceptions of development can differ dramatically among citizens as well as among development researchers and practitioners. From an economic standpoint, the primary goal of international economic development is the improvement of human well-being. The dilemma we face, however, is that it is difficult to isolate a universal conception of human well being, and without such a universal conception, there can be no single concept and measure of international development.2 Conceptions of development can also change over time. Indeed, there is a tendency to fall into what Santioso (2006) called the endless waltz of paradigms.3 For these reason, conceptions of development tend to become multitudinous as was noted by Arndt (1987) in a parody: Higher living standards. A rising per capital income. Increase in productive capacity. Mastery over nature. Freedom through control of mans environment. Economic growth. But not mere growth, growth with equity. Elimination of poverty. Basic needs satisfaction. Catching up with developed countries in technology, wealth, power, status. Economic independence, self-reliance. Scope for self-fulfillment for all. Liberation, the means to human ascent. Development, in the vast literature on the subject appears to have come to encompass almost all facets of the good society, everymans road to utopia (p. 1). We are going to try to give some more structure to the development concept than is contained in this quotation. To do so, we are going to consider three broad views of development, namely, development as growth, development as human development, and development as structural change. Development as growth views development as the sustained increase in either output per capita or income per capita. It is related to the conception of poverty as a deprivation of income. Development as human development views development as an increase in what individuals can achieve in the broadest sense of that word. It is related to another conception of poverty as deprivations of achievements of various kinds, namely education and health. Finally, development as
As Szirmai (2005) emphasized, development is unavoidably a normative concept involving very basic choices and values (p. 9). 3 As noted by Szirmai (2005), there is a time element inherent in this process: A common characteristic of recipes for development is their short-term perspective. Time and again, proposals have been put forward in order to achieve certain goals. In the meantime, developments that take place irrespective of the fashion of the day are ignored or disregarded. But when the immediate results are slow in materializing, disenchantment set in. The issue disappears from the public eye, and new and more appealing solutions and catch-phrases emerge (pp. 2-3). See also Adelman (2001).
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structural change views development as involving significant alterations in patterns of production, consumption and even social relations. Development as growth is the most common view of development, but development as human development and structural change have important roles to play as well. We begin with development as growth.
Growth
An early and persistent conception of international development is in terms of the sustained increase in either per capita production or per capita income, or in other words growth. This concept begins with the circular flow diagram of Chapter 13 (Figure 13.2). In this diagram, gross domestic product or GDP is the same as gross national income or GNI. In most countries, there is a difference between GDP and GNI described in an appendix to this chapter. For the most part, we ignore this difference and work with GDP as our crucial variable. In the circular flow diagram, GDP or Y is divided by the total population to calculate GDP per capita or y . GDP per capita is an important measure of the level of economic development, and the growth rate of GDP per capita is an important measure of the pace of economic development over time. Why is growth considered to be such a central indicator of development? Rodrik (2007) echoed much of the field when he stated that Economic growth is the most powerful instrument for reducing poverty. (N)othing has worked better than economic growth in enabling societies to improve the life chances of their members, i ncluding those at the very bottom (p. 2). However, as Easterly (2001) commented, We experts dont care about rising gross domestic product for its own sake. We care because it betters the lot of the poor and reduces the proportion of people who are poor. We care because richer people can eat more and buy more medicines for their babies (p. 3). So it is not increases in GDP per capita per se that matter for development, but what can be done with it. This is an important point that we will return to when w e discuss human development. Table 20.1 gives information on GDP per capita for twelve countries of the world for the year 2008. As we can see in Table 20.1, the range of GDP per capita among countries is significant. The average per capita income in Japan and the United States is approximately 150 times that in Ethiopia. From the perspective of development as the level of per capita GDP, we therefore would conclude that Japan and the United States are over 150 times more developed than Ethiopia. The growth perspective, based as it is on GDP per capita, has a few limitations that are important to recognize. These include: 1. Per capita GDP does not account for factor income flows among the countries of the world. This is the distinction between GDP and GNI that we take up in an appendix to this chapter. 2. Per capita GDP only includes market activities, and many activities in developing countries take place outside the market. For example, GNP does not include
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farmers production of agricultural products for consumption within his or her family, but only the amount sold on the market.4
Table 20.1 Development Indicators for Selected Countries (2008 except where indicated)
Country GDP Per Capita (US dollars) PPP GDP Per Capita (US dollars) Growth Rate of GDP Per Capita (percent) Gini Coefficient Index (various years) Life Expectancy Adult Literacy Human Development Index (0 to 1, 2007 throughout) 0.414 0.532 0.612 0.734
(years)
(%)
Ethiopia Haiti India Indonesia
321 649 1,065 2,246
869 1,119 3,032 4,001
7.9 -0.8 3.7 4.8
30 (2005) 60 (2001) 37 (2005) 39 (2005)
55 61 64 71
36 (2004) 63 (2006) 92 (2006) 91 (2000) 95 (2000) 90 (2007) 89 (2007) .. 98 (2007) .. ..
China Costa Rica Brazil Turkey
3,422 6,565 8,536 9,881
6,195 11,250 10,367 14,068
9.0 1.2 4.1 -0.6
42 (2005) 49 (2007) 55 (2007) 41 (2006)
73 79 72 72
0.772 0.854 0.813 0.806
South Korea Spain Japan United States
19,162 35,000 38,268 47,210
26,875 32,995 33,799 47,210
2.0 -0.6 -1.1 -0.5
.. 35 (2000) .. 41 (2000)
80 81 83 78
0.937 0.955 0.960 0.956
Source: World Bank and United Nations Development Program Note: The Gini coefficient ranges from 0 to 1. The Gini coefficient index ranges from 0 to 100.
4
Some development economists would point out that this exclusion is most relevant to the economic activities of women who tend to work more intensively in the home than do men. This is one aspect of what is knows as gender and development. 4
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3. Per capita GDP does not account for certain costs associated with development such as the use of nonrenewable resources, the loss of biodiversity, and pollution. Scholars and practitioners working in the field of sustainable development address this limitation.5 4. Per capita GDP is an average measure that hides the distribution of income among the households of a country. If income distribution becomes more unequal as per capita GDP increases, the level of well-being of the poorest groups in the country could fall. We discuss this issue below. 5. Per capita GDP is not always an accurate predictor of human development. It is not always well correlated with indicators of human development such as levels of education and health. As emphasized by Sen (1989) many years ago, countries with high GDP per capita can nevertheless have astonishing low achievements in the quality of live (p. 42). We discuss this issue below. 6. The nominal or currency exchange rates used to convert GDP into US dollars for comparison among countries are misleading. A large part of economies consist of non-traded goods. Furthermore, a large part of non-traded goods consist of services. Services tend to be less expensive in developing countries, so a US dollar buys more in developing countries than in developed countries.6 The solution to the last of the above problems lies in what is now called the purchasing power parity (PPP) methodology. This methodology is closely related to the purchasing power parity model of exchange rates that we developed in Chapter 14. The PPP methodology uses US dollar prices to value all goods in all countries. This has the effect of increasing the GDP of developing countries. Table 20.1 presents PPP GDP per capita for the twelve countries we are using as examples. Note the following in this table. First, the PPP measures are larger than the standard measures for the first 9 countries presented in the table. This reflects the cheaper nature of services and other non-traded goods in these countries relative to the United States. This helps us to understand how it is possible for individuals to survive in these countries with such low levels of GDP per capita. Some of these survival challenges are presented in the accompanying box. Second, the PPP GDP per capita for the United States is identical to its GDP per capita since the same prices are used in both calculations. Third, the PPP GDP per capita is lower for Spain and Japan than its GDP per capita. This reflects the fact that its services and other non-traded goods are more expensive than in the United States. Incomes do not go as far in Spain and Japan as in the other countries of the table.
See, for example, Hopwood, Mellor and OBrien (2005) and Pearce, Barbier and Markandya (2000). 6 We mentioned non-trade goods in Chapter 14 in our assessment of the purchasing power parity model of exchange rate determination. We will encounter this concept again in Chapter 24 on structural change and adjustment. One of the original attempts to examine the less expensive nature of services in developing economies was Bhagwati (1984).
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Surviving in Mexico City
Patrick Oster, a journalist residing in Mexico City, hired a woman by the name of Adelaida Bollo Andrade as a maid. He documented the qualities of her life in his book The Mexicans. While working for the Oster family, Adelaida woke each morning at 5:00 AM. This would allow her to catch the 6:00 AM bus to start her three-hour commute to work. Typically, the total daily commute of six hours would cost Adelaida one half of her daily wage. Her workday of eight hours was followed by her return commute. Since she and her family could not afford even a small refrigerator, there was an addition one hour commute each day to the market. Adelaida was left with 9 hours for cooking, cleaning, taking care of her family, and sleep. Adelaidas family lived in cinder block home of dimensions 15 by 24 feet with a corrugated metal roof and one window. There was one bed for the four children, which left the concrete floor for Adelaida and her husband to sleep on. Light came from a single, bare bulb hanging from the ceiling. Cooking was done on a three-burner gas stove. Aside from an old kitchen table, the only other family possession was an old, black-and-white television donated to the family by their doctor. The family latrine consisted of a hole in the back yard. The familys water supply was contaminated, and their food consisted of tortillas, beans, and coffee. These conditions contributed to frequent illnesses among Adelaidas children, including diarrhea, vomiting, and fevers. These illnesses would require Adelaida to go into debt to pay for doctor services. Adelaidas difficult life is not in any way unusual for the residents of many large cities in developing countries. Lack of education, poor health, and difficult working conditions are the norm for the urban poor. The important challenge for governments, development organizations, and the private sector is to strategically improve these human lives in a broad-based way. It has proved, in many instances, to be a difficult challenge. Source: Oster (1989)
Related to, but not always emphasized in, the per capita income measure is the question of the distribution of total income among the households of the economy. This is typically measured using the Lorenz curve and the Gini coefficient. Calculation of these measures is discussed in an appendix to this chapter. The Gini coefficient ranges from the extreme of zero (perfect equality) to unity (perfect inequality). In practice, the coefficient ranges from approximately 0.25 (relatively low inequality) to 0.60 (relatively high inequality). The Gini coefficient index multiplies the Gini coefficient by 100 and therefore ranges from 0 to 100. Gini coefficient indices the countries in our sample are presented in Table 20.1. The important point evident here is that income distribution is, to some extent, independent of the level of per capita income. A middle-income country such as Brazil can have a worse income distribution than a low-income country such as India. There is some
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evidence that equality of income can lead to a higher growth rate of total output. We will return to this possibility in Chapter 21. Deprivations in per capita GDP (and therefore of per capita GNI) is a central measure of poverty, namely poverty as income deprivation. The World Bank keeps estimates of both the poor and the extremely poor. The former is defined as those living below a US$2.00 per day poverty line (measured using PPP methods). The latter is defined as those living below a US$1.25 per day poverty line (again measured using PPP methods). The data that are available in this series appear in 3 year increments and are presented in Figure 20.1.7 We can see here that there is both good and bad news. The good news is that the number of extremely poor individuals is declining over time to a level below 1.5 billion. There is broad agreement in the field that most of this decline has been due to development processes in China. The bad news is that the number of poor is more or less constant and at a current value of 2.5 billion. The poverty challenge i s therefore immense.
Figure 20.1 Recent Evolution of World Poverty (millions of persons)
3000
2500
2000
millions of persons
1500
1000
500
0 1981 1984 1987 1990 1993 Extremely Poor 1996 Poor 1999 2002 2005
Source: World Bank, World Development Indicators Online
7
The longest tracking of world poverty is provided by Bourguinon and Morrison (2002). These estimates cover the 1820 to 1992 period. 7
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It is becoming clear that the relationship between distribution and poverty is more important then ever. With the movement of some large countries from low income to middle income status (India and Indonesia, for instance), the majority of the worlds extremely poor reside in middle rather than low income countries. 8 Therefore, along with growth, it is often the distribution of income within middle income countries that is important for alleviating poverty. Analyzing the relationship between growth and poverty takes note of the fact that poverty reduction depends on initial inequality levels and changes in inequality as well as growth itself. It also gives rise to what has come to be known as pro-poor growth.9 This line of thinking considers what is known as the growth elasticity of poverty, namely the ratio of the percentage change in a poverty rate to the percentage change in a growth measure such as GDP per capita. This elasticity can vary by country, time period and region within a country and be influenced by a multitude of factors. But it is a first step in recognizing that the link between growth and poverty alleviation is not uniformly onefor-one, and it opens up a discussion on how to best increase the growth elasticity of poverty.
Human Development
We noted above that income per capita is not always valued for its own sake but for what it can achieve. This distinction between means (income) and ends (achievements) is one made most strongly in a conception of international development in terms of human development. One major source of the human development perspective was in the work of Nobel Laureate Amartya Sen who once stated that To broaden the limited lives into which the majority of human beings are willy-nilly imprisoned by force of circumstances is the major challenge of human development in the contemporary world (1989, p. 55).10 Sens work inspired the United Nations Development Program (UNDP) to take up the human development perspective in the form of an annual Human Development Report (HDR) that has been published since 1990. The first such report began with the following statement: People are the real wealth of a nation. The basic objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives (p. 9). The human development perspective sees the growth of GDP or GNI per capita as an important but limited measure of the rate of economic development. For example, the 1995 HDR stated the following:
See Sumner (2010) who places the figure at three fourth of the worlds extremely poor living in middle income countries. 9 See, for example, Cord (2007) and Kakwani and Pernia (2000). 10 More formally, the human development perspective grew out of Sens (1989) concepts of capabilities and their role in international development. Another major contributor to the capabilities concept was Nussbaum (2000). See also Alkire (2002). The term usually u sed in the human development perspective is capabilities, but we use the term achievements here.
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The human development concept consistently asserts that growth is not the end of development but the absence of growth often is. Economic growth is essential for human development. But to fully exploit the opportunities for improved well being that growth offers, it must be properly managed, for there is no automatic link between economic growth and human progress (pp. 122-123). The most fundamental contribution of the HDR was the introduction of the human development index (HDI). A brief description of its originator, Pakistani economist Mahbub ul Haq, is presented in the accompanying box. The HDI measures development as reflecting three important components: per capita income, health, and education. The construction of the HDI can be represented as in Figure 20.2. The HDI consists of equal, one-third components of per capita income, life expectancy, and education. The per capita income component is calculated in such as way that higher levels receive declining weights. Therefore, increases in per capita incomes are more important from low levels than from high levels.11 Life expectancy is taken as an overall measure of health. Education is measured with one-third weight being given to primary, secondary, and tertiary enrollment and two-thirds weight being given to adult literacy. Thus, there is more of an emphasis placed on educational outcomes than enrollment. HDI measures for our sample of countries, along with information on life expectancy and adult literacy, are presented in Table 20.1 above.
Mahbub ul Haq and the HDI
The Human Development Report and its HDI were originally developed by the Pakistani development economist Mahbub ul Haq. ul Haq was educated at Cambridge, Yale, and Harvard Universities and worked at the World Bank. From 1982 to 1988, he was finance minister of Pakistan. He then moved to the United Nations Development Program and began to work on the human development paradigm. At his invitation, this work was done in collaboration with the Indian development economist Amartya Sen. Sen recalled that I did not, I must admit, initially see much merit in the HDI itself, which, as it happens, I was privileged to help him devise. I had expressed to Mahbub considerable skepticism about trying to focus on a crude index of this kind, attempting to catch in one simple number a complex reality about human development and deprivation. In fact, the crudeness had not escaped Mahbub at all. He did not resist the argument that the HDI could not but be a very limited indicator of development. But after some initial hesitation, Mahbub persuaded himself that the dominance of GNP could not be broken by any set of tables. We need a measure, Mahbub explained to me, of the same level of vulgarity as the GNP just one number but a measure that is not as blind to social aspects of human lives as the GNP is. Mahbub
11
The way in which PPP per-capita incomes were discounted at higher levels in the Human Development Reports changed in 1999, so that higher income levels were not discounted as severely as before. See UNDP (1999), Technical Note, pp. 159-163. 9
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hoped that not only would the HDI be something of an improvement on, or at least a helpful supplement to, the GNP, but also that it would serve to broaden public interest in the other variables that are plentifully analyzed in the Human Development Reports. Mahbub got this exactly right, I have to admit, and I am very glad that we did not manage to deflect him from seeking a crude measure. By skilful use of the attracting power of the HDI, Mahbub got readers to take an involved interest in the large class of systematic tables and detailed critical analyses presented in the Human Development Reports. ul Haq was a long-time opponent of military spending in South Asia, seeing it as being at odds with human development in the region. However, when he died in 1998, he had just witnessed the revival of nuclear testing in India and Pakistan. And he missed the awarding of the Nobel Prize in Economics to his old friend, Amartya Sen, later that year. Sources: The Economist (1998) and Sen (1999a)
Figure 20.2 The Human Development Index
HDI
1/3
1/3
1/3
PPP per capita income with declining weight for higher incomes
life expectancy
education
1/3
2/3
primary, secondary, and tertiary enrollment
adult literacy
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There are a two major points concerning human development to note in Table 20.1. First, achievements in health (life expectancy) and education (literacy) vary substantially. Just within this sample of countries, life expectancy varies by a range of nearly 30 years!12 Similarly, literacy rates vary between approximately 35 percent and nearly universal (just under 100 percent). These dramatic different levels of human development result in a wide range of HDIs reported in the last column of Table 20.1. Second, although there is a positive correlation between GDP per capita and both life expectancy and adult literacy (and therefore the HDI), some important variation from the norm is possible. For example, Rica Costa has an average life expectancy and an adult literacy rate equivalent to that of the United States despite its GDP per capita being only approximately 15 percent of the US value (approximately 25 percent in PPP terms). Consequently, Costa Ricas HDI is above that of many other countries in its income group. These sorts of variations are better captured by the human development concept than the growth concept and point to the important role of health and educational policy in human development outcomes. If there is a single-most important indicator of human development, it is perhaps life expectancy. Table 20.1 above reports life expectancy for a single year, but it is instructive to consider how life expectancy has changed in recent decades. This is presented in Figure 20.3 for 1970 to 2008. The data are reported for low, middle and high income countries. We can see that the increases in life expectancy for these three groups of countries have been 12 years for low and middle income countries and 9 years for high-income countries. So, despite the disparities of Table 20.1, there is a general improvement of life expectancy over time in most instances. That is welcome news. The HDI has been criticized in many instances for at least three reasons. 13 Some observers claim that its weighting scheme among per capita income, health, and education is arbitrary. This is certainly the case, but to be fair, the same could be said of the growth perspective, which assigns a weight of unity to per capita income alone. The HDI has also been criticized for being too political in its assigning declining weights to higher per capita incomes. Finally, the HDI has been criticized for relying on measures for which data are unreliable.
12
Two further points can be made here. First, low life expectancies have traditionally been associated with high rates of infant and child mortality (currently just under 10 million children per year). The exception to this rule is the HIV/AIDS crisis. Second, the HIV/AIDS crisis in some countries has caused life expectancies to begin declining rather than increasing. 13 See, for example, Srinivasan (1994). A consideration and critique of both the growth and capabilities (achievements) perspectives can be found in Reinert (2011). 11
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Figure 20.3 Life Expectancy in Low, Middle and High Income Countries (years)
90
80 75 73 71 70 64 61 60 57 52 50 49 45
78
80
67
69
57 54
years
40 30 20 10 0 1970
1980 High income
1990 Middle income Low income
2000
2008
Source: World Bank, World Development Indicators Online
In defense of the HDI, Streeten (1995) pointed out the following: 1. When there is an upward movement in the HDI, it almost always reflects an improvement in human well-being, something that is not always true of per capita income measures. 2. Closing gaps in HDIs among the countries of the world is both more important and more feasible than reducing international income gaps (p. 24).
3. The HDI registers (negatively) the potential impact of over-development in
capturing the diseases of affluence such as circulatory disease and diabetes that reduce the HDI through its health component.
4. The HDI, according to Streeten, is appropriately political in that it focuses
attention on important social sectors, policies, and achievements, which are not caught by the income measure (p. 25). Whatever our interpretation of the disagreements surrounding the HDI, we can at least state the following. Having the last three columns of Table 20.1 in front of us provides us with a little more information than the per capita GDP or GNI measures
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alone do. Since these columns of information are readily available and impact peoples lives so directly, it is very useful to glance at them, along with the GDP measures, when assessing development levels among sets of countries. Additionally, as we will see in Chapter 21, there are important feedbacks among the three components of the HDI that can be crucial mechanisms in development successes and failures.
Table 20.2 Additional Human Development Indices and Their Components
Index HDI
Health
Education
GDI
HPI-1 (through 2009)
Life expectancy Adult literacy rate and enrollment ratio Female and Female and male life male adult expectancy literacy rate and female and male enrollment ratio Probability of Adult illiteracy not surviving to rate age 40
Standard of Social Living Exclusion PPP income per capita Female and male PPP income per capita
HPI-2 (through 2009)
Probability of not surviving to age 60
Adult functional illiteracy rate
MPI (beginning 2010)
Malnutrition and child mortality
Lack of years of schooling and enrollment
Deprivation as measured by lack of access to safe water, lack of access to health services, and underweight children Percentage of population below poverty line, defined as 50 percent of median income Deprivations in electricity, drinking water, sanitation, flooring, cooking fuel and assets.
Long-term unemployment rate
Source: United Nations Development Program and Alkire and Santos (2010)
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In more recent years, the UNDP has introduced additional indices to supplement the HDI. These are summarized in Table 20.2. In 1996, it introduced the gender-related development index (GDI) and the gender-empowerment measure (GEM). The GDI adjusts the HDI downward to account for levels of gender inequality. For some countries, this makes a significant difference. In 1997, the UNDP introduced the hum an poverty indices 1 and 2 (HPI-1 and HPI-2) focusing on poverty in developing and developed countries, respectively. The former is especially relevant in capturing basic deprivations in education and health. In 2010, the HPI was replaced with the multidimensional poverty index (MPI) that attempts to capture multiple deprivations across health, education and standards of living.14 The UNDP and its wide array of development measures are part of a set of Millennium Development Goals (MDGs) set by the United Nations in 2000. The deadline of the MDGs (2015) is rapidly approaching and, despite progress in a number of areas, it appears that most of the goals will not be met. The MDGs are discussed in the accompanying box.
Millennium Development Goals
In September 2000, members of the United Nations (UN) met in New York City for a Millennium Summit. At the Summit, the UN General Assembly adopted a resolution entitled the United Nations Millennium Declaration. The Declaration stated that: the central challenge we face today is to ensure that globalization becomes a positive force for all the worlds people. More specifically, UN members pledged to spare no effort to free our fellow men, women and children from the abject and dehumanizing conditions of extreme poverty, to which more than a billion of them are currently subjected. In addition to endorsing a number of fundamental values, UN members established a set of goals, which are now known as the Millennium Development Goals. The first millennium development goal is to eradicate extreme poverty and hunger. It has two targets: to halve by 2015 the proportion of people whose income is less than US $1.25 a day (in PPP values) and to halve by 2015 the proportion of people who suffer from hunger. There is a good possibility that the first of these targets will be met due primarily to positive development in China, but it is likely that the second target will be missed. The second millennium goal is to achieve universal primary education for boys and girls by 2015. It now appears that this goal will not be met. The third development goal, related to the second, is to promote gender equality and empower women. As measured by equity in education, this goal will probably not be reached. The fourth development goal is to reduce the under-five mortality rate with a target of two thirds by 2015. It now seems that, despite substantial progress, this critical target will not be met.
14
See Alkire and Santos (2010). 14
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The fifth development goal is to improve maternal health with a target of reducing the maternal mortality rate by three fourths by 2015. The sixth development goal is to combat HIV/AIDS, malaria, and tuberculosis, and the seventh development goal is to ensure environmental sustainability. The last goal is to development a global partnership for development, a subject taken up in earnest at the 2002 Summit on Sustainable Development in Johannesburg, South Africa. As of 2005, the United Nations own website on the Millennium Development Goals already acknowledged that progress towards the goals has been mixed. A summit on the MDGs was held in 2010, and the accompanying report drew attention to the impacts of the 2007 to 2009 crisis in curbing progress on a few key goals. This was the case, for example, for halving the proportion of people who suffer from malnutrition. This is one area where international finance and international development interact and points to the urgent need for crisis prevention, with a particular focus on systemic risk discussed in Chapter 18. Source: http://www.un.org/millenniumgoals
Structural Change
There is a third perspective on development that is an important complement to the growth and human development perspectives. This is development as structural change. This perspective was summarized by Davis (2009) who wrote that Economic development is generally facilitated by a number of structural changes, including urbanization, the rise in the size of firms, the relative decline of the agricultural sector in terms of employment and output with expansion of manufacturing and services, the geographic expansion of markets, and increases in the diversity of goods produced and traded (p. 277). This line of thinking has its origins in the work of Nobel Laureate Simon Kuznets (1966). The basic notion of the structural change perspective in its economic application is that, as development proceeds, productive factors move out of lower-productivity activities into higher-productivity activities. This idea is more or less unassailable but has often applied in a particular, limited way. For example, a standard claim has been that development is a process of resources moving out of agriculture and into manufacturing. That is, development is a process of industrialization and urbanization. This limited application of the structural change perspective has led to a neglect of agriculture and rural development because these sectors are sometimes viewed as inherently unproductive, something we now know not to be true.15 The limited application also ignored what happened to high income countries as they developed in that it left out the important role of the service sector.
See, for example, Martin and Mitra (2001). Szirmai (2005) noted that In the history of European industrialization, increases in agricultural productivity preceded industrialization (p. 270, emphais added).
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The truth is that, as development proceeds, the service sector expands. Eventually, even the manufacturing sector shrinks as this process unfolds. Szirmai (2005) captured this process well in the following statement:16 It is striking how important the services sector has become in developing countries. Even in the 1950s, services were the largest sectors in terms of value added. Developing countries have not followed the classical sequence of shifts from agriculture to industry, followed by later shifts from industry to services. Rather, the service sector developed parallel to the industrial sector, as the shares of agriculture declined (p. 110). Why might this be so? Part of the answer lies in the fact that an increasingly productive sub-component of the service sector is producer services that can supply both agricultural and manufacturing sectors with important inputs. This includes communications, transportation and logistics, and financial services at a general level, but many more specific producer services in practice. As was pointed out by Francois and Reinert (1996), producer services actually support productivity in manufacturing, including export manufacturing.17 While it is important to account for the role of structural change as economies grow and develop, we need to do so outside of the simplistic agriculture shrinks, manufacturing grows perspective. The empirical reality is more complicated than that, with increases in agricultural productivity and an important role for services being part of the picture. Further, structural change can occur outside of the economic sphere, with particular social and political changes taking place. While beyond the scope of this book and chapter, these potential socio-political changes are very important.18
Conclusion
From an economic standpoint, the primary goal of international economic development, as well as the trading of goods and services and the movement of capital in the world economy, is the improvement of human well-being. That is, at some level, the international development window explored here is more important than the international trade, production and finance windows. However, it is hard to isolate a universally accepted conception of human well-being. Keeping in mind this limitation, this chapter investigates three complementary concepts of economic development, namely growth, human development and structural change. The HDI indicator of human development represents a more comprehensive view of development than growth, but is not as universally acknowledged as a key indicator. Its advantage is that is expands the dimensionality of our thinking about development into the realms of health and education.
16 17
See also Francois and Hoekman (2010). See also Francois and Woerz (2008). 18 See Chapters 11 and 12 of Szirmai (2005) for an effective review of these issues. 16
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Whatever our measure of development, as we stressed in Chapter 1, levels of development differ in profound ways among the countries of the world. Our hope is that increased integration of countries via trade, production, and financial linkages would promote some convergence in levels of development, but this is not always the case. 19 We will spend the remainder of this book assessing these divergent outcomes. In doing so, you will perhaps develop you own partial answers to the question posed to me by the Ghanaian student mentioned at the beginning of this chapter.
Review Exercises
1. In your opinion, is the GDP per capita or growth perspective a sufficient measure of economic development? Why or why not? 2. How can the PPP adjustment to income per capita change the ranking of countries levels of economic development? Is this an important adjustment to make? 3. A controversial aspect to the human development index is its use of declining weights for per capita income. Do you agree with this adjustment? Why or why not? 4. The human development index takes into account health and education as well as per capita income. Why might health and education be important considerations in the process of economic development? 5. Take some time to explore the UNDPs website at www.undp.org. Try to locate the human development indicators that are a part of the most recent Human Development Report (www.hdr.undp.org). Look up the indicators for a country in which you have an interest.
Further Reading and Web Resources
A concise source on the material of this chapter is Lewis (2009). Comprehensive texts in economic development include Cypher and Dietz (2004) and Szirmai (2005). Goldin and Reinert (2007) examine the relationship of a number of aspects of globalization to development and poverty alleviation. A popular but solid book on the poorest of the world is Collier (2007). Readers with an interest in the human development concept would benefit from a close reading of Sen (1987, 1989 and 1999b). Those readers with an interested in the HDI itself should turn to the United Nations Development Programs annual Human Development Report, particularly UNDP (2010), the 20th anniversary report. A more traditional annual review is the World Banks World Development Report. Both of these reports are essential sources of data on developing countries. The UNDPs web site can be found at http://www.undp.org. Its Human Development Report series can be found at http://www.hdr.undp.org. The World Banks World Development Report series can be found at http://www.worldbank.org/wdr.
19
On this point, see Goldin and Reinert (2007). 17
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References
Adelman, I. (2001) Fallacies in Development Theory and Their Implications for Policy, in G.M Meier and J.E. Stiglitz (eds.), Frontiers of Development Economics: The Future in Perspective, Oxford University Press, 103-134. Alkire, S. (2002) Dimensions of Human Development, World Development, 30:2, 181205. Alkire, S. and M.E. Santos (2010) Acute Multidimensional Poverty: A New Index for Developing Countries, Human Development Research Paper 2010/11, United Nations Development Program. Arndt, H.W. (1987) Economic Development: The History of an Idea, University of Chicago Press. Bhagwati, J. (1984) Why Are Services Cheaper in the Poor Countries? Economic Journal, 94:374, 279-286. Bourguignon, F. and C. Morrisson (2002) Inequality Among World Citizens: 18201992, American Economic Review, 92:4, 727-744. Collier, P. (2007) The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It, Oxford University Press. Cord, L.J. (2007) Overview, in T. Besley and L.J. Cord (eds.) Delivering on the Promise of Pro-Poor Growth: Insights and Lessons from Country Experiences, World Bank, 1-27. Crocker, D.A. (2008) Ethics of Global Development: Agency, Capability and Deliberative Democracy, Cambridge University Press. Cypher, J.M. and J.L. Dietz (2004) The Process of Economic Development, Routledge. Davis, L. (2009) Development, in K.A. Reinert, R.S. Rajan, A.J. Glass and L.S. Davis (eds.), The Princeton Encyclopedia of the World Economy, Princeton University Press, 277-280. Easterly, W. (2001) The Elusive Quest for Growth, MIT Press. The Economist (1998) Obituary: Mahbub ul Haq, July 25. Francois, J.F. and B. Hoekman (2010) Services Trade and Policy, Journal of Economic Literature, 48:3, 642-692.
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Francois, J.F. and K.A. Reinert (1996) The Role of Services in the Structure of Production and Trade: Stylized Facts from a Cross-Country Analysis, Asia-Pacific Economic Review, 2:1, 35-43. Francois, J.F. and J. Woerz (2008) Producer Services, Manufacturing Linkages, and Trade, Journal of Industry, Competition and Trade, 8:3-4, 199-229. Goldin, I. and K.A. Reinert (2007) Globalization for Development: Trade, Finance, Aid, Migration and Policy, World Bank. Hopwood, B., M. Mellor and G. OBrien (2005) Sustainable Development: Mapping Different Approaches, Sustainable Development, 13:1, 38-52. Kakwani, N. and E. Pernia (2000) What is Pro-Poor Growth? Asian Development Review, 18:1, 1-16. Kuznets, S. (1966) Modern Economic Growth: Rate, Structure, and Spread, Yale University Press. Martin, W. and D. Mitra (2001) Productivity Growth and Convergence in Agriculture versus Manufacturing, Economic Development and Cultural Change, 49:2, 403-422. Nussbaum, M.C. (2000) Women and Development: A Capabilities Approach, Cambridge University Press. Oster, P. (1989) The Mexicans: A Personal Portrait of a People, Harper and Row. Pearce, D., E. Barbier and A. Markandya (2000) Sustainable Development: Economics and Environment in the Third World, Earthscan. Reinert, K.A. (2011) No Small Hope: The Basic Goods Imperative, Review of Social Economy, 69:1, 55-76. Rodrik, D. (2007) One Economics, Many Recipes: Globalization, Institutions and Economic Growth, Princeton University Press. Santiso, J. (2006) Latin Americas Political Economy of the Possible, MIT Press. Sen, A. (1987) The Standard of Living, Cambridge University Press. Sen, A. (1989) Development as Capability Expansion, Journal of Development Planning, 19, 41-58. Sen, A. (1999a) Mahbub ul Haq: The Courage and Creativity of His Ideas, Journal of Asian Economics, 10:1, 1-6.
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Sen, A. (1999b) Development As Freedom, Knopf. Srinivasan, T.N. (1994) Human Development: A New Paradigm or Reinvention of the Wheel? American Economic Review, 84:2, 238-243. Streeten, P.P. (1995) Thinking About Development, Cambridge University Press. Sumner, A. (2010) Global poverty and the new bottom billion: Three-quarters of the Worlds poor live in middle-income countries, Institute of Development Studies. Szirmai, A. (2005) The Dynamics of Socio-Economic Development, Cambridge University Press. United Nations Development Program (1990) Human Development Report 1990. United Nations Development Program (1995) Human Development Report 1995. United Nations Development Program (1999) Human Development Report 1999. United Nations Development Program (2010) Human Development Report 2010.
Appendix: Gross Domestic Product and Gross National Income
There is an important distinction between gross domestic product (GDP) and gross national income (GNI).20 GDP is defined as the value of goods and services produced H within a countrys borders. We will call this country Home and call its GDP YGDP . The distinction between GDP and GNI begins with the Home countrys factor payments. This is the income from property in Home owned by foreign citizens and wages paid to foreign laborers working in Home. We will call the Home countrys factor payments H YHF . But the opposite flow is given by factor income. This is income from property in foreign countries owned by Home citizens and wages from Home workers in foreign H countries. We will call the Home countrys factor income YFH . The difference between factor income and factor payments gives net factor income as follows:
H H Home countrys net factor income YFH YHF
(20.1)
We can then state the relationship between the Home countrys GDP and GNI as follows:
H H H H Home countrys gross national income YGNI YGDP YFH YHF
(20.2)
20
The term for gross national income used to be gross national product or GNP. The World Bank changed this terminology, however, and we follow that convention here. 20
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In developing countries hosting multinational enterprises (see Chapter 22) that are H H H repatriating a lot of profits, YHF is large and consequently YGDP YGNI . But in developing
H countries with a large number of citizens working abroad (see Chapter 12), YFH is large H H and consequently YGNI YGDP . The bottom line of these distinctions, however, is that GNI is a better measure of the income and purchasing power of the citizens of a country than GDP.21 That said, researchers often rely on GDP because it fits neatly into growth models such as those we will discuss in the next chapter.
If we define LH to be the population of the Home country, per capita GDP and GNI in year i are:
Y H Per capita GDP in year i GDP LH
H YGNI Per capita GNI in year i LH
i
(20.3)
i
(20.4)
To simplify a bit, lets drop the H superscripts and turn the growth rates. The growth rate of per capita GDP between time periods 0 and 1 is given by:
g GDP
YGDP YGDP L 1 L 0 100 YGDP L 0
(20.5)
Finally, the growth rate of per capita GNI between time periods 0 and 1 is given by:
YGNI YGNI L 1 L 0 100 YGNI L 0
g GNI
(20.6)
From the growth perspective on development described in this chapter, the measurement an analysis of Equations 20.5 and 20.6 are the central problems to be confronted.
21
A further adjustment for transfers (e.g., aid and remittances) converts GNI into gross national disposable income (GNDI). 21
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Appendix: The Lorenz Curve and Gini Coefficient
The standard means of measuring income inequality based on the personal or household distribution of income is using the Lorenz curve and the associated Gini coefficient. The Lorenz curve is depicted in Figure 20.4. It relates cumulative percentage of income received (measured on the vertical axis) to the cumulative percentage of population (measured on the horizontal axis). The diagonal line in the figure is therefore the line of perfect equality, where each person receives the same income. Actual Lorenz curves, however, lie below the diagonal line, and the farther they are to the southeast corner of the box, the greater the level of inequality. The Gini Coefficient is measured using the area between the diagonal and the actual Lorenz curve, area A, and the area under the diagonal, area A+B. It is measured as:
Gini Coefficient A A B
(20.7)
The greater is the area of A, the higher the value of Gini coefficint, and the greater the degree of inequality. In theory, Gini coefficients range from the extremes of zero (perfect equality) to unity (perfect inequality). In practice, the coefficient ranges from approximately 0.25 (relatively low inequality) to 0.60 (relatively high inequality). The Gini coefficient index (Gini coefficient multiplied by 100) is what is reported in Table 20.1.
22
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Figure 20.4 The Lorenz Curve
100
cumulative percentage of income
A B
0
cumulative percentage of population
100
23