Introduction to Development Economics Fourth edition Subrata Ghatak O Routledge g ^ ^ Taylor &. Francis Group LONDON AND NEW YORK
Contents Preface to the fourth edition Preface to the third edition Preface to the second edition Preface to the first edition Acknowledgements xi xii xiii xiv xvi 1 INTRODUCTION 1 1.1 Introduction 1 1.2 Characteristics of the less developed countries 1 1.3 Types of markets in less developed countries 20 1.4 Production conditions in less developed countries 20 1.5 Growth and development 23 1.6 Human development index 26 Appendix 1.1 Measurement of income inequality 28 Appendix 1.2 A note on production functions 30 PARTI The economic theory of growth and development 35 2 GROWTH THEORIES AND THEIR RELEVANCE TO LESS DEVELOPED COUNTRIES 37 2.1 Introduction 37 2.2 Classical scenario 37 2.3 The Keynesian theory and less developed countries 39 2.4 The Harrod-Domar model and its applications 42 2.5 The neoclassical theory and less developed countries 43 2.6 Marx's theory and less developed countries 47 2.7 The Kaldor-Mirrlees model 52 2.8 The neoclassical growth accounting formula and the new endogenous growth theory 55 2.9 Differences in economic growth 60
vi Contents Appendix 2.1 The basic equations of the neoclassical economic growth model 71 Appendix 2.2 Endogenous growth models 73 3 DUAL ECONOMY MODELS 79 3.1 Introduction 79 3.2 : The 'surplus' labour and its contribution to development 79 3.3 The Fei-Ranis model 83 3.4 The Jorgenson model 87 3.5 Some extensions of the dual economy models: the Dixit-Marglin model 90 3.6 The Kelly et al. model 91 3.7 Dual economy models: a critique 91 Appendix 3.1 Employment and growth 94 Part II Investment, saving, foreign resources and industrialization in less developed countries 97 4 ALLOCATION OF RESOURCES: INVESTMENT CRITERIA 99 4.1 The need for investment criteria in less developed countries 99 4.2 The capital turnover criterion 100 4.3 The social marginal productivity criterion 101 4.4 The maximization of the rate of creation of investible surplus principle 101 4.5 The reinvestible surplus criterion 103 4.6 Balanced and unbalanced growth 109 Appendix 4.1 The dichotomy between savings and output maximization and its solution 112 5 DOMESTIC RESOURCES FOR DEVELOPMENT 115 5.7 Introduction 115 5.2 The nature of money markets in less developed countries 115 5.3 Money and economic growth 116 5.4 Inflation and economic growth 117 5.5 Financial liberalization in LDCs: causes and consequences 124 5.6 Objectives of fiscal policy in less developed countries 126 5.7 Fiscal policy and growth 127 5.8 Deficit financing and less developed countries 131 5.9 The tax structure in less developed countries 132 5.70 Taxation and domestic resource mobilization in less developed countries: the evidence 138
Contents vii 5.77 Tax reforms in less developed countries in the 1980s 140 5.72 Budgetary deficits and Ricardian equivalence: the case of India 141 6 FOREIGN RESOURCES AND ECONOMIC DEVELOPMENT 146 6.1 Introduction 146 6.2 The concept of foreign resources 146 6.3 Criteria for distribution of foreign resources 147 6.4 Different types of foreign resource 150 6.5 Dual-gap analysis and its evaluation 154 6.6 Gains and losses of investment by multinational corporations in less developed countries: some theoretical issues 157 6.7 Private foreign investment and the transfer of technology to less developed countries 162 6.8 Special drawing rights and the 'link' 170 6.9 Foreign aid and economic growth 176 Appendix 6.1 Less developed countries and world trade 180 7 INDUSTRIALIZATION, PROTECTION AND TRADE POLICIES 190 7.1 Major reasons jor industrialization in less developed countries 190 7.2 The role of tariff's in economic development 290 7.3 The optimum tariff argument 191 7.4 The infant industry argument 193 7.5 Distortions in the factor markets 196 7.6 The balance of payments argument 197 7.7 The employment argument 197 7.8 'Nominal' and 'effective' rates of protection 198 7.9 The 'cost'of protection 203 7.70 Economic growth and trade 205 7.11 Terms of trade between developed countries and less developed countries 206 7.72 Export instability and economic growth in less developed countries 208 7.73 The role of the United Nations Conference on Trade and Development and some trade policies to help less developed countries 210 7.74 Non-tariff barriers and the generalized system of preferences 212 7.75 Regional co-operation among less developed countries 213 7.16 Trade liberalization and industrialization 214 7.77 The North-South models and intra-industry trade 219 7.18 Conclusion 220 Appendix 7.1 Indices of instability of exports 223
viii Contents Part III Sectoral development and planning 227 8 SECTORAL ALLOCATION OF RESOURCES: AGRICULTURE 229 8.1 Introduction 229 8.2 : The role of agriculture in economic development 229 5.3 The concept of 'marketed surplus' 231 8.4 A model to mobilize agricultural surplus 235 5.5 Acreage response to prices 238 8.6 Marketed surplus, size-holdings and output 238 5.7 Limitations of price policy and some alternatives 244 5.5 Conclusion 245 9 GREEN REVOLUTION AND INCOME DISTRIBUTION 246 9.1 Introduction 246 9.2 The nature of the Green Revolution 246 9.3 Causes of the Green Revolution 251 9.4 Effects of the Green Revolution on income: a simple theory 255 9.5 Effects of the Green Revolution on relative factor shares 255 9.6 Problems and prospects of the Green Revolution 258 9.7 The basic needs approach 260 9.8 Growth theory and basic needs 262 9.9 A note on famines 265 10 POPULATION, POVERTY, INCOME DISTRIBUTION, EMPLOYMENT AND MIGRATION 271 70.7 Population and economic development 271 70.2 Population explosion in less developed countries and the theory of demographic transition 273 70.3 Low-level equilibrium trap 21A 10.4 Fertility and population growth in less developed countries 275 70.5 Poverty and income distribution 281 10.6 Income inequality 281 10.7 Absolute poverty 284 70.5 Redistribution with growth 287 70.9 The employment problem 289 70.70 The Todaro model 291 70.7/ Migration theory and evidence: an assessment. 296 70.72 Stork's model 298 70.73 Employment policy 299
Contents 10.14 Poverty, inequality and financial development 300 Appendix 10.1 The definition of a poverty line 304 Appendix 10.2 Migration 306 Appendix 10.3 Schultz's model of the household production approach to fertility 307 Appendix 10.4 Poverty and nutrition 310 11 DEVELOPMENT PLANNING 311 77.7 Concept of economic planning 311 77.2 Types of planning 311 77.3 Economic models and economic planning 312 11.4 The case for and against planning 313 77.5 Development planning models 314 11.6 Application of the Harrod-Domar model in development planning: India's first five year plan 316 77.7 A two-sector Harrod-Domar model for planning: the Kenyan case 317 77.5 Feldman-Mahalanobis sectoral planning and the Indian secondfi,ve year plan 318 77.9 Macroeconometric models in development planning 320 77.70 Input-output analysis in development planning 322 77.7/ Linear programming and development planning 326 11.12 Micro-planning: aims of cost-benefit analysis 331 77.73 The Little and Mirrlees method of project evaluation in less developed countries 335 11.14 The United Nations Industrial Development Organization (1972) guidelines 340 77.75 Social accounting and development planning by Barbara M. Roberts 343 Appendix 11.1 The Feldman Mahalanobis model 347 L2 STRUCTURAL ADJUSTMENT AND DEVELOPMENT 351 72.7 Structural adjustment and economic growth 351 72.2 The structural adjustment and stabilization policies of the IMF 351 72.3 Trade adjustment 353 12.4 Structural adjustment, stabilization and trade policies 354 72.5 Exchange rate and trade reforms 356 12.6 Structural adjustment programmes: the experience of sub-saharan African countries 359 72.7 Conclusion 361 ix
x Contents Part IV A new deal in commodity trade? 363 13 THE NEW INTERNATIONAL ECONOMIC ORDER 365 73.7 Introduction 365 73.2 The evolution of the new international economic order 366 73:3 The main objectives of a new international economic order 368 13.4 The theory of commodity price stabilization: demand/'supply shifts 369 73.5 Commodity price stabilization: gains and losses 371 13.6 Implications of international commodity agreements, buffer stocks and compensatory finances 373 73.7 Conclusion 375 14 THE INTERNATIONAL DEBT CRISIS with Nigel M. Healey 378 14.1 Introduction 378 14.2 The evolving debt position of the developing world 378 14.3 Why do developing countries become indebted? 381 14.4 Sources of external finance 382 14.5 Why do debt servicing problems arise? 383 14.6 The external dimensions of the 1982 crisis 384 14.7 Phase one: 'muddling through' the debt crisis, 1982-9 385 14.8 Phase two: debt forgiveness and the Brady Plan 391 15 ENVIRONMENT AND DEVELOPMENT 398 75.7 Introduction 398 75.2 Deforestation and macroeconomic environment 399 75.3 The 'tragedy of the commons' 401 15.4 Externalities, natural resource degradation and economic policies 402 75.5 A case study: the importance of fuelwood in household energy consumption 406 75.(5 An alternative jarming system: alley cropping in humid West African agriculture 412 75.7 Conclusion 413 Bibliography 416 Index 452