Economic Development
FOURTH EDITION

cambridge university press
The Edinburgh Building, Cambridge cb2 2ru, UK
First published in print format
isbn-13 978-0-521-82966-3
isbn-13 978-0-511-14048-8
© E. Wayne Nafziger 2006
2005

Contents

PART I. PRINCIPLES AND CONCEPTS OF DEVELOPMENT
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Nature and Scope of the Text, 1 / Organization of the Text, 3 / How the
Other Two-Thirds Live, 3 / Globalization, Outsourcing, and Information
Technology, 6 / India’s and Asia’s Golden Age of Development, 8 / Critical
Questions in Development Economics, 10 / Limitations of Standard
Economic Approaches, 11 / Guide to Readings, 12
2 The Meaning and Measurement of Economic Development . . . . . . . . . . . 15
Scope of the Chapter, 15 / Growth and Development, 15 / Classification of
Countries, 20 / Problems with Using GNP to Make Comparisons over Time,
25 / Problems in Comparing Developed and Developing Countries’ GNP,
27 / Comparison-Resistant Services, 30 / Purchasing-Power Parity (PPP), 30 /
Measurement Errors for GNP or GDP Adjusted for Purchasing Power, 33 /
A Better Measure of Economic Development?, 34 / Weighted Indices for
GNP Growth, 39 / “Basic-Needs” Attainment, 42 / Development as
Freedom and Liberation, 44 / Small Is Beautiful, 46 / Are Economic Growth
and Development Worthwhile?, 46 / Conclusion, 48 / Guide to Readings, 51
3 Economic Development in Historical Perspective . . . . . . . . . . . . . . . . . . . 53
Scope of the Chapter, 53 / An Evolutionary Biological Approach to
Development, 53 / Ancient and Medieval Economic Growth, 54 / World
Leaders in GDP per Capita, 1500 to the Present, 55 / Beginnings of
Sustained Economic Growth, 56 / The West and Afro-Asia: The 19th
Century and Today, 57 / Capitalism and Modern Western Economic
Development, 57 / Economic Modernization in the Non-Western World,
61 / Growth in the Last 100 to 150 Years, 74 / The Power of Exponential
Growth – The United States and Canada: The Late 19th and 20th Centuries,
77 / Economic Growth in Europe and Japan after World War II, 81 /
Recent Economic Growth in Developing Countries, 81 / The Convergence
Controversy, 88 / Conclusion, 91 / Guide to Readings, 93
4 Characteristics and Institutions of Developing Countries . . . . . . . . . . . . . 95
Scope of the Chapter, 95 / Varying Income Inequality, 95 / Political
Framework, 95 / An Extended Family, 97 / Peasant Agricultural Societies,
97 / A High Proportion of the Labor Force in Agriculture, 97 / A High
Proportion of Output in Agriculture, 97 / Inadequate Technology and
Capital, 102 / Low Saving Rates, 102 / A Dual Economy, 103 / Varying
Dependence on International Trade, 104 / Rapid Population Growth, 105 /
Low Literacy and School Enrollment Rates, 106 / An Unskilled Labor
Force, 107 / Poorly Developed Economic and Political Institutions, 107 /
Conclusion, 119 / Guide to Readings, 120
5 Theories of Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Scope of the Chapter, 123 / The Classical Theory of Economic Stagnation,
124 / Marx’s Historical Materialism, 126 / Rostow’s Stages of Economic
Growth, 128 / Vicious Circle Theory, 131 / Balanced Versus Unbalanced
Growth, 132 / Coordination Failure: The O-Ring Theory of Economic
Development, 137 / The Lewis–Fei–Ranis Model, 138 / Baran’s Neo-
Marxist Thesis, 142 / Dependency Theory, 144 / The Neoclassical
Counterrevolution, 149 / The Neoclassical Growth Theory, 153 / The New
(Endogenous) Growth Theory, 155 / Conclusion, 157 / Guide to Readings,
161 / Appendix to Chapter 5: The Harrod–Domar Model,
162
PART II. POVERTY ALLEVIATION AND INCOME DISTRIBUTION
6 Poverty, Malnutrition, and Income Inequality . . . . . . . . . . . . . . . . . . . . 165
Information Sparsity, 165 / Scope of the Chapter, 167 / Poverty as
Multidimensional, 167 / $1/day and $2/day Poverty, 171 / Global and
Regional Poverty, 173 / Concepts and Measures of Poverty: Amartya Sen’s
Approach, 176 / The Lorenz Curve and Gini Index (G): Measures of the
Distribution of Income, 179 / The World Bank, Institute for International
Economics, and Sala-i-Martin: Three Views of Poverty and Inequality, 181 /
Early and Late Stages of Development, 186 / Low-, Middle-, and
High-Income Countries, 188 / Slow and Fast Growers, 191 / Women,
Poverty, Inequality, and Male Dominance, 191 / Accompaniments of
Absolute Poverty, 194 / Identifying Poverty Groups, 195 / Case Studies of
Countries, 196 / Policies to Reduce Poverty and Income Inequality, 202 /
Income Equality Versus Growth, 210 / Poverty, Inequality, and War, 212 /
Conclusion, 214 / Guide to Readings, 217
7 Rural Poverty and Agricultural Transformation . . . . . . . . . . . . . . . . . . . 220
Scope of the Chapter, 221 / Agriculture’s Role in Transforming the
Economy, 221 / Major Rural Groups in Poverty, 222 / Rural Poverty by
World Region, 223 / Rural and Agricultural Development, 223 /
Rural–Urban Differentials in 19th-Century Europe and Present-Day LDCs,
224 / Agricultural Productivity in DCs and LDCs, 224 / The Evolution of
LDC Agriculture, 226 / Multinational Corporations and Contract Farming,
228 / Growth of Average Food Production in Sub-Saharan Africa, Other
LDCs, and DCs, 229 / Food in India and China, 232 / LDC Food Deficits,
235 / Food Output and Demand Growth, 237 / Fish, Meat, and Grains,
238 / Factors Contributing to Low Income and Poverty in Rural Areas,
239 / Policies to Increase Rural Income and Reduce Poverty, 245 /
Agricultural Biotechnology, 264 / Conclusion, 266 / Guide to Readings, 268
PART III. FACTORS OF GROWTH
8 Population and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Scope of the Chapter, 271 / World Population Throughout History,
271 / Population Growth in Developed and Developing Countries, 272 /
World Population: Rapid but Decelerating Growth, 273 / The Demographic
Transition, 277 / Is Population Growth an Obstacle to Economic
Development?, 284 / Strategies for Reducing Fertility, 297 / Conclusion,
304 / Guide to Readings, 306
9 Employment, Migration, and Urbanization . . . . . . . . . . . . . . . . . . . . . . 308
The Production Function, 308 / Employment Problems in LDCs, 309 / Scope
of the Chapter, 310 / Dimensions of Unemployment and Underemployment,
310 / Underutilized Labor, 311 / Labor Force Growth, Urbanization, and
Industrial Expansion, 311 / Disguised Unemployment, 314 / Rural–Urban
Migration, 316 / Western Approaches to Unemployment, 319 / Causes of
Unemployment in Developing Countries, 321 / Policies for Reducing
Unemployment, 325 / Conclusion, 330 / Guide to Readings, 332
10 Education, Health, and Human Capital . . . . . . . . . . . . . . . . . . . . . . . . . 334
Scope of the Chapter, 334 / Investment in Human Capital, 335 / Economic
Returns to Education, 335 / Noneconomic Benefits of Education, 337 /
Education as Screening, 338 / Education and Equality, 339 / Education and
Political Discontent, 342 / Secondary and Higher Education, 342 /
Education via Electronic Media, 344 / Planning for Specialized Education
and Training, 345 / Achieving Consistency in Planning Educated People,
346 / Vocational and Technical Skills, 347 / Reducing the Brain Drain, 348 /
Socialization and Motivation, 350 / Health and Physical Condition, 352 /
Mortality and Disability, 354 / AIDS, 355 / Conclusion, 357 / Guide to
Readings, 359
11 Capital Formation, Investment Choice, Information Technology,
and Technical Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361
Scope of the Chapter, 362 / Capital Formation and Technical Progress as
Sources of Growth, 362 / Components of the Residual, 364 / Learning by
Doing, 366 / Growth as a Process of Increase in Inputs, 366 / The Cost of
Technical Knowledge, 367 / Research, Invention, Development, and
Innovation, 368 / Computers, Electronics, and Information Technology,
370 / Investment Criteria, 378 / Differences between Social and Private
Benefit–Cost Calculations, 383 / Shadow Prices, 387 / Conclusion, 388 /
Guide to Readings, 391
12 Entrepreneurship, Organization, and Innovation . . . . . . . . . . . . . . . . . . 392
Scope of the Chapter, 393 / Entrepreneur as Innovator, 393 / Entrepreneur
as Gap-Filler, 395 / Functions of the Entrepreneur, 396 / Family as
Entrepreneur, 398 / Multiple Entrepreneurial Function, 399 / Achievement
Motivation, Self-Assessment, and Entrepreneurship, 399 / Theory of
Technological Creativity, 400 / Occupational Background, 401 / Religious
and Ethnic Origin, 402 / Social Origins and Mobility, 404 / Education, 406 /
Gender, 407 / Technological Mobilization and Entrepreneurship in Socialist
and Transitional Economies, 407 / Long-Term Property Rights, 409 /
Conclusion, 409 / Guide to Readings, 411
13 Natural Resources and the Environment: Toward
Sustainable Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
Sustainable Development, 413 / Importance of Natural Resources, 413 /
Land, Natural Resources, and Environmental Resources, 414 / Petroleum,
414 / Dutch Disease, 418 / Resource Curse, 418 / Poverty and
Environmental Stress, 420 / Grassroots Environmental Action, 421 / Market
Imperfections and Policy Failures as Determinants of Environmental
Degradation, 422 / Pollution, 426 / Contingent Valuation, 431 / Arid and
Semiarid Lands, 432 / Tropical Climates, 433 / Global Public Goods:
Climate and Biodiversity, 434 / Limits to Growth, 448 / Natural Asset
Deterioration and the Measurement of National Income, 452 / Adjusting
Investment Criteria for Future Generations, 455 / Living on a Lifeboat,
458 / Conclusion, 459 / Guide to Readings, 462
PART IV. THE MACROECONOMICS AND INTERNATIONAL
ECONOMICS OF DEVELOPMENT
14 Monetary, Fiscal, and Incomes Policy and Inflation . . . . . . . . . . . . . . . . 465
Scope of the Chapter, 466 / Limitations of Monetary Policy, 466 / Tax
Ratios and GNP Per Capita, 467 / Goals of Tax Policy, 468 / Political
Constraints to Tax Policy, 476 / Expenditure Policy, 477 / Inflation, 478 /
Financial Repression and Liberalization, 489 / A Capital Market and
Financial System, 493 / Financial Instability, 494 / Islamic Banking, 495 /
Conclusion, 496 / Guide to Readings, 499
15 Balance of Payments, Aid, and Foreign Investment . . . . . . . . . . . . . . . . 501
Scope of the Chapter, 501 / Globalization and Its Contented and
Discontented, 501 / North–South Interdependence, 503 / Capital Inflows,
504 / Two Gaps, 507 / Stages in the Balance of Payments, 508 / Sources of
Financing the Deficit: Aid, Remittances, Foreign Investment, and Loans,
508 / Perverse Capital Flows: From LDCs to DCs, 545 / Massive Capital
Inflows to the United States, 546 / Conclusion, 547 / Guide to Readings, 549
16 The External Debt and Financial Crises . . . . . . . . . . . . . . . . . . . . . . . . . 551
Scope of the Chapter, 551 / Definitions of External Debt and Debt Service,
552 / Origins of Debt Crises, 552 / Capital Flight, 555 / The Crisis from the
U.S. Banking Perspective, 558 / Spreads and Risk Premiums, 559 / The
Crisis from the LDC Perspective, 560 / Debt Indicators, 563 / Net Transfers,
564 / Major LDC Debtors, 564 / Financial and Currency Crises, 566 /
World Bank and IMF Lending and Adjustment Programs, 568 /
Fundamentalists versus the Columbia School (Stiglitz–Sachs), 569 /
Changing the IMF and the International Financial Architecture, 571 / IMF
Failed Proposals to Reduce Financial Crises, 573 / Debt Cancellation, 573 /
Concerted Action, 575 / The IMF’s Sovereign Debt Restructuring
Mechanism, 576 / Resolving the Debt Crises, 577 / The Policy Cartel, 586 /
Conclusion, 587 / Guide to Readings, 589
17 International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591
Scope of the Chapter, 591 / Does Trade Cause Growth?, 591 / Arguments
for Free Trade: Comparative Advantage, 592 / Arguments for Tariffs, 596 /
Path Dependence and Comparative Advantage, 603 / The Application of
Arguments For and Against Free Trade to Developed Countries, 603 / Shifts
in the Terms of Trade, 608 / Import Substitution and Export Expansion in
Industry, 612 / Global Production Sharing and Borderless Economies, 615 /
DC Import Policies, 622 / Expanding Primary Export Earnings, 626 /
Agricultural Protection, 628 / Trade in Services, 630 / The Mankiw Debate,
632 / Intellectual Property Rights, 632 / Foreign Exchange Rates, 633 /
Domestic Currency Overvaluation, 634 / Avoiding Bias against Exports,
635 / Domestic Currency Devaluation, 635 / The Real Exchange Rate
(RER), 636 / Dual Exchange Rates, 637 / Exchange-Rate Adjustment and
Other Prices, 638 / The Impossible Trinity: Exchange-Rate Stability, Free
Capital Movement, and Monetary Autonomy, 638 / Currency Crises, 639 /
Managed Floating Plus, 641 / Regional Integration, 642 / The Euro and U.S.
Dollar as LDC Reserve Currencies, 645 / Promotion and Protection of
Infant Entrepreneurship, 647 / Black Markets and Illegal Transactions, 648 /
Conclusion, 649 / Guide to Readings, 652
PART V. DEVELOPMENT STRATEGIES
18 Development Planning and Policy Making: The State
and the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655
State Planning as Ideology for New States, 656 / Afro–Asian Socialism, 657 /
Dirigiste Debate, 657 / Scope of the Chapter, 658 / Soviet Planning, 658 /
Indian Planning, 659 / The Market versus Detailed Centralized Planning,
661 / Indicative Plans, 665 / Planning Goals and Instruments, 665 / The
Duration of Plans, 666 / Planning Models and Their Limitations, 667 /
Input–Output Tables and Other Economic Data, 668 / Public Policies
Toward the Private Sector, 673 / Public Expenditures, 673 / Conclusion,
674 / Guide to Readings, 676
19 Stabilization, Adjustment, Reform, and Privatization . . . . . . . . . . . . . . .677
The World Bank, 677 / International Monetary Fund, 678 / Internal and
External Balance, 679 / Critique of the World Bank and IMF Adjustment
Programs, 681 / A Political Economy of Stabilization and Adjustment, 683 /
Empirical Evidence, 685 / The Sequence of Trade, Exchange Rate, and
Capital Market Reform, 689 / Public Enterprises and the Role of Public
Goods, 690 / Arguments for Public Enterprises, 691 / Definition of
State-Owned Enterprises, 691 / Importance of the State-Owned Sector, 691 /
Performance of Private and Public Enterprises, 692 / Determinants of Public
Enterprise Performance, 695 / Privatization, 697 / Some Pitfalls of
Privatization, 698 / Public Enterprises and Multinational Corporations,
699 / Adjustment and Liberalization in Eastern Europe, the Former Soviet
Union, and China, 700 / The Collapse of State Socialism and Problems with
Subsequent Economic Reform in Russia, 704 / The Transition from
Socialism to the Market in Poland, 718 / The Transition to a Market
Economy in China, 719 / Lessons for LDCs from the Russian, Polish, and
Chinese Transitions to the Market, 732 / Guide to Readings, 735
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 737
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827