International handbook of development economics

Ahlburg, Dennis: Leeds School of Business, University of Colorado,Boulder, Colorado, USA Alderman, Harold: World Bank, Washington, DC, USA Arestis, Philip: Department of Land Economy, Un

OF DEVELOPMENT ECONOMICS VOLUME ONE

International Handbook

of Development Economics

Volume One

Edited by

Amitava Krishna Dutt

University of Notre Dame, USA

All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechani- cal or photocopying, recording, or otherwise without the prior permission of the publisher.

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is available from the British Library

Library of Congress Control Number: 2008927966

ISBN 978 1 84542 327 8 (2 volume set)

Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

List of contributors viii

PART I INTRODUCTION

1 The meaning and measurement of development 3

Paul Streeten

Amiya Kumar Bagchi

Steven N Durlauf, Andros Kourtellos and Chih Ming Tan

José Gabriel Palma

Bob Sutcli ffe

Kenneth P Jameson

Salim Rashid

v

PART III MACROECONOMICS OF GROWTH

AND DEVELOPMENT

14 General long-run approaches to growth and development 189

Amitava Krishna Dutt

15 New growth theory and development economics 207

Heinz D Kurz and Neri Salvadori

16 Short-run macroeconomic issues in development 223

Peter J Montiel

Jørn Rattsø

José Antonio Ocampo

PART IV FACTORS IN DEVELOPMENT

19 Savings, investment and capital accumulation 269

Andrés Solimano and Mario Gutierrez

20 Role offinance and credit in economic development 290

Philip Arestis and Santonu Basu

Gregory K Ingram and Marianne Fay

Dennis Ahlburg and Robert Cassen

Albert Berry

George Psacharopoulos and Harry Anthony Patrinos

25 Health and nutrition and economic development 356

Harold Alderman, Jere R Behrman and John Hoddinott

PART V SECTORS IN DEVELOPMENT

30 Factor market imperfections in poor agrarian economies 435

Parikshit Ghosh and Ashok Kotwal

Ahlburg, Dennis: Leeds School of Business, University of Colorado,

Boulder, Colorado, USA

Alderman, Harold: World Bank, Washington, DC, USA

Arestis, Philip: Department of Land Economy, University of Cambridge,

Development (CRED), University of Namur, Namur, Belgium

Balasubramanyam, V.N.: Department of Economics, Lancaster University,

Lancaster, UK

Bardhan, Pranab: Department of Economics, University of California,

Berkeley, California, USA

Basu, Santonu: Queen Mary, University of London, London, UK

Becker, Charles M.: Department of Economics, Duke University, Durham,

North Carolina, USA

Behrman, Jere R.: Department of Economics, University of Pennsylvania,

Philadelphia, Pennsylvania, USA

Berry, Albert: Department of Economics, University of Toronto, Toronto,

Canada

Birdsall, Nancy: Center for Global Development, Washington, DC, USA Brown, Graham: Department of International Development, University of

Oxford, Oxford, UK

Williamstown, Massachusetts, USA

Cassen, Robert: London School of Economics, London, UK

Dahi, Omar S.: School of Social Science, Hampshire College, Amherst,

Massachusetts, USA

viii

Damon, Amy: University of Minnesota, Minneapolis-St Paul, Minnesota,

USA

Darity, William A., Jr: Duke University, Durham, North Carolina, USA Demir, Firat: Department of Economics, University of Oklahoma,

Norman, Oklahoma, USA

Durlauf, Steven N.: Department of Economics, University of

Wisconsin-Madison, Wisconsin-Madison, Wisconsin, USA

Dutt, Amitava Krishna: Department of Economics and Policy Studies,

University of Notre Dame, Notre Dame, Indiana, USA

Dutta, Dilip: Faculty of Economics and Business, University of Sydney,

Sydney, Australia

Elson, Diane: Levy Economics Institute of Bard College, and Department

of Sociology, University of Essex, Colchester UK

Evans, Peter: Department of Political Science, University of California,

Berkeley, California, USA

Evenson, Robert E.: Department of Economics, Yale University, New

Haven, Connecticut, USA

Fay, Marianne: World Bank, Washington, DC, USA

University, New York, USA

FitzGerald, Valpy: University of Oxford, Oxford, UK

Ghosh, Jayati: Centre for Economic Studies and Planning, School of Social

Sciences, Jawaharlal Nehru University, New Delhi, India

Ghosh, Parikshit: Indian Statistical Institute, Delhi, India

Gibson, Bill: Department of Economics, University of Vermont,

Burlington, Vermont, USA

Glass, Amy Jocelyn: Department of Economics, Texas A&M University,

College Station, Texas, USA

Glewwe, Paul: Department of Applied Economics, University of

Minnesota, St Paul, Minnesota, USA

Gray, Cheryl W.: World Bank, Washington, DC, USA

Sussex, Brighton, UK

Gutierrez, Mario: International consultant, Paris, France

Washington, DC, USA

Hoksbergen, Roland: Department of Economics, Calvin College, Grand

Rapids, Michigan, USA

Huang, Yasheng: Sloan School of Management, Massachusetts Institute of

Technology, Cambridge, Massachusetts, USA

Ingram, Gregory K.: Lincoln Institute of Land Policy, Cambridge,

Massachusetts, USA

Jager, Henk: Amsterdam School of Economics, University of Amsterdam,

Amsterdam, The Netherlands

Jameson, Kenneth P: Department of Economics, University of Utah, Salt

Lake City, Utah, USA

Jha, Raghbendra: Division of Economics, Australian National University,

Canberra, Australia

New York, USA

Kaminsky, Graciela L.: George Washington University and NBER,

Washington, DC, USA

Amsterdam, Amsterdam, The Netherlands

Kotwal, Ashok: Department of Economics, University of British

Columbia, Vancouver, Canada

Kourtellos, Andros: Department of Economics, University of Cyprus,

Nicosia, Cyprus

United Nations, New York, USA

Kurz, Heinz D.: Department of Economics, University of Graz, Graz,

Austria

Masson, Paul R.: Rotman School of Management, University of Toronto,

Toronto, Canada

McPeak, John: Department of Public Administration, Maxwell School,

Syracuse University, New York, USA

Montiel, Peter J.: Williams College, Williamstown, Massachusetts, USA

Morley, Samuel A.: International Food Policy Research Institute,

Washington, DC, USA

Nafziger, E Wayne: Department of Economics, Kansas State University,

Manhattan, Kansas, USA

Ndulu, Benno J.: Governor, Bank of Tanzania, Dar-es-Salaam, Tanzania.

Columbia University, New York, USA

O’Connell, Stephen A.: Department of Economics, Swarthmore College,

Swarthmore, Pennsylvania, USA

Pack, Howard: Department of Business and Public Policy, Wharton

School, University of Pennsylvania, USA

Palma, José Gabriel: University of Cambridge, Cambridge, UK

Patnaik, Prabhat: Centre for Economic Studies and Planning, School of

Social Sciences, Jawaharlal Nehru University, New Delhi, India

Patrinos, Harry Anthony: World Bank, Washington, DC, USA

Platteau, Jean-Philippe: Centre for Research in the Economics of

Development (CRED), University of Namur, Namur, Belgium

Psacharopoulos, George: University of Illinois, Champaign, Illinois, USA

Providence, Rhode Island, USA

Radelet, Steven: Center for Global Development, Washington, DC, USA

Austria

Rashid, Salim: Department of Economics, University of Illinois,

Urbana-Champaign, Illinois, USA

Rattsø, Jørn: Department of Economics, Norwegian University of Science

and Technology (NTNU), Trondheim, Norway

Rayment, Paul: formerly, Economic Commission for Europe, United

Nations, Geneva, Switzerland

Rivera-Batiz, Francisco L.: Columbia University, New York, USA

Rodríguez, Francisco: Department of Economics, Weslyan University,

Middletown, Connecticut, USA

Ros, Jaime: Department of Economics and Policy Studies and Kellogg

Institute of International Studies, University of Notre Dame, Notre Dame,Indiana, USA

Saggi, Kamal: Department of Economics, Southern Methodist University,

Dallas, Texas, USA

Salvadori, Neri: Department of Economic Science, University of Pisa, Pisa,

Italy

Sapsford, David: Department of Applied Economics, University of

Liverpool, Liverpool, UK

Sen, Anindya: Indian Institute of Management, Kolkata, India

Shapiro, Helen: Department of Sociology, University of California, Santa

Cruz, CA, USA

Solimano, Andrés: UN-Economic Commission for Latin America and the

Caribbean

Squire, Lyn: Global Development Network, New Delhi, India

Stewart, Frances: Department of International Development, University

of Oxford, Oxford, UK

Streeten, Paul: Emeritus Professor, Department of Economics, Boston

University, Boston, Massachusetts, USA

Syrquin, Moshe: School of International Studies, University of Miami,

Coral Gables, Florida, USA

Medford/Somerville, Massachusetts, USA

Tokman, Victor E.: Economic Advisor to the President of Chile, Santiago,

Chile, formerly at the International Labour Organization, Geneva,Switzerland

Triplett, Russell E.: University of North Carolina at Chapel Hill, North

Development economics is a very large and growing subdiscipline or field ofeconomics Since it is concerned with the economic problems of economieswhich have been variously defined as underdeveloped, less-developed ordeveloping, and where most of the poor and the underprivileged people ofthe world live, it is also arguably one of the most important – if not the mostimportant – field of economics It is also a complex field which has beenapproached by scholars using different approaches, involving different

definitions of development, different methods of analysis, different views ofhow economies function, and different recipes of what should be done tobring about development In the course of the evolution of the field, even ifone focuses only on its evolution since the end of World War II, someapproaches have enjoyed greater popularity at certain times, when othershave lost ground, with role reversals later on

The field’s size, complexity and transformations make it a difficult ness to represent it with a handbook, especially when some excellent onesalready exist But these same features of the field provided us with somereasons to take on the task It has been some years since some of the earlierhandbooks were published To the extent that handbooks survey recent lit-eratures, they become outdated Moreover, it can be argued that some ofthe earlier efforts did not sufficiently take into account the great diversity

busi-of approaches in the field and arguably stressed some approaches morepopular at the time

In line with our goals, we approached scholars who were experts in theirarea to participate in this project We asked them to discuss what theybelieved to be some of the key issues concerning their topic, and of themajor contributions to it, rather than writing exhaustive surveys.Moreover, we asked the contributors to examine analytical contributions,

as well as the relation between these contributions and real-world andpolicy issues, although inviting them to choose the precise balance betweenthese We also asked contributors to attempt to cover contributions fromalternative theoretical perspectives To further have different views repre-sented, especially views under-represented in mainstream development eco-nomics, we approached scholars using a variety of different approaches and

devoted an entire section of the Handbook (Part II) to the discussion of

alternative approaches

The Handbook is divided into nine parts Part I, which is introductory,

dis-cusses the meaning and measurement of economic development, historical

xiii

and interdisciplinary perspectives on development, empirical regularities indevelopment, and data problems and empirical modeling in developingeconomies.

Part II, as mentioned earlier, deals with alternative approaches It startswith earlier contributions to development economics, then discusses classi-cal development theory of the early days after World War II, and then turns

to different approaches to development economics, that is, the dependencyand structuralist approaches, the Marxist approach, the institutionalistapproach and the neoclassical approach The different approaches can becharacterized in different ways, and our contributors have chosen their owncharacterizations

Part III examines the macroeconomics of growth and development Itstarts with a discussion of general long-run approaches to growth from atheoretical perspective, and then discusses new growth theory in moredetail Then it turns to short-run macroeconomic issues Next it turns tosectoral interactions, focusing on the interaction between agriculture andindustry, and to general open economic issues in development

Part IV discusses factors in development, not only in the narrow sense ofinputs such as capital, labor and natural resources, but also in the broadersense which includes entrepreneurship, the environment and technologicalchange On capital, one entry examines savings, investment and capitalaccumulation in general, another entry focuses on finance and credit, andyet another discusses physical infrastructure On labor, there are entries onpopulation, labor markets, education and human capital formation, andhealth and nutrition Next it turns to the role of entrepreneurship, andnatural resources are then discussed The environment is addressed next,not just as a factor of production, but also in terms of its sustainability Afinal entry addresses technological issues, focusing on technical choice andtechnological change

Part V examines specific sectors in development On agriculture, thereare entries on agricultural factor markets and institutions and on the so-called Green Revolution, which addresses the issue of technological change

in the sector Next, the discussion turns to the industrial sector, the mal sector, and services Finally, there is an entry on urbanization and inter-sectoral migration

infor-Part VI turns to international issues On international trade, it starts with

a discussion of how free trade affects developing countries, then examinesthe role of the terms of trade, which has received much attention in the devel-opment literature, and then turns to trade policy, especially to the debatebetween import-substitution and export-promotion policies On interna-tional capital flows, it examines direct foreign investment, debt and portfolioflows and addresses the issue of the volatility of capital flows, and then turns

to foreign aid Next, international migration and the brain drain are ined International technology transfers are addressed by focusing on one ofthe major modes of such transfers, foreign direct investment The role played

exam-by international institutions in development is addressed exam-by examining theBretton Woods institutions and the World Trade Organization This partends with an examination of the relation between rich and poor countries,

or what is usually referred to as North–South issues

Part VII examines distributional issues It first discusses the ment and determination of income inequality, addressing how develop-ment affects inequality It then turns to how income distribution affectsgrowth and development The measurement and determinants of povertyare addressed in the next entry, examining poverty in a narrow way as well

measure-as a broader, multidimensional way Issues concerning gender are examined

in the next entry which considers how the fruits of development are sharedbetween the sexes and whether improving gender distribution and devel-opment are positively related The economic conditions of children and theimpact of growth of children’s welfare are examined next Finally, this partexamines the measurement and conceptual issues relating to ethnicinequality, and discusses the relation between ethnic inequality and eco-nomic growth

Part VIII examines the role of the state and other institutions in opment It commences with a general discussion of the two main institu-tions emphasized in economics, the state and the market It next examines

devel-different aspects of government policy, that is, monetary policy, fiscalpolicy, stabilization policy and structural adjustment, planning and projectappraisal, and state-owned enterprises and privatization This is followed

by a discussion of corruption The role of law and legal institutions isexamined next, followed by a discussion of the institution of propertyrights Broader issues regarding culture and development are considerednext The part concludes with a discussion of the causes and consequences

of wars, especially civil wars, in less-developed countries

Finally, Part IX provides a review of the main issues concerning recentactual development experience It opens with an overall discussion ofdevelopment in less-developed regions from an international perspective Itthen examines in turn Latin America and the Caribbean, sub-SaharanAfrica, North Africa and the Middle East, China, South Asia, the EastAsian newly industrialized countries, and the post-socialist transitionaleconomies The inclusion of the final region is explained both because theseare often considered to be less-developed countries, and because their expe-rience has important lessons for development

The chapters just described, numbering 71, have been written by 90 tributors, who live in (or are from) all five continents This – in addition to

con-the fact that it covers development issues relating to, and con-the experience of,

countries all around the less-developed world – makes the Handbook truly

international in scope

A work such as this could not have been completed without the hardwork of a large number of people As editors, we would like to thank all thecontributors, who have graciously devoted time and contributed theirexpertise to this project We would also like thank some other individualsfor their comments and/or suggestions, including Chris Barrett, KaushikBasu, Jagdish Bhagwati and Michael Ellerman A few people whose workwas to be included here – Sanjaya Lall, David Pierce and Richard Sabot –have passed away We are grateful for their willingness to contribute anddeeply saddened by their deaths

The Editors

PART I

INTRODUCTION

Paul Streeten

What do people want?

The great West Indian economist and Nobel Prize winner Arthur Lewis

defined development as the enlargement of the range of people’s choices

Following him the United Nations Development Programme’s Human

Development Reports chose the same definition Some earlier definitionshave run in terms of commodity bundles or specific needs satisfactions In

the book First Things First (Streeten et al., 1981) my co-authors and I say:

First, and most important, the basic needs concept is a reminder that the

opportu-nity for a full life In the past two decades, those concerned with development have sometimes got lost in the intricacies of means and lost sight of the end They came near to being guilty, to borrow a term from Marx, of ‘commodity fetishism’.

‘Opportunity’ is near in meaning to Amartya Sen’s ‘functioning’ and ability’ In our basic needs work we tried hard to get away from the

‘cap-definition of development in terms of an aggregate of goods and servicesproduced and consumed and its growth, of the detached objects peoplehappen to possess, and to emphasize the end: people’s full lives.1

Amartya Sen’s analysis has been in term of ‘capabilities’ and ings’, and not satisfactions, or happiness, or commodities.2 Sen goesbeyond the analysis of the commodities in terms of their characteris-tics (a shirt serves warmth and decoration, and if drip-dry saves ironing)which consumers value, and analyses the characteristics of the consumers;whether they have the capability to make use of the commodities The sameamount of food has a different significance: according to whether the con-sumer is healthy or has parasites in their stomach, in which case the basicneeds of the worms rather than of the consumer are met; according to therate of metabolism, the age, sex, size and work load of the consumer;according to the climate, according to whether she is pregnant or lactating;according to whether the consumer has acquired through education theknowledge of how to prepare the food; and according to whether they needthe food for other uses than their own consumption, such as entertainment

‘function-or ceremonies

3

Sen also argues that human development cannot be judged only by states, and that the freedom to choose between different options is animportant component of well-being A given commodity bundle has a

end-different significance to the consumer according to whether he or she hasother options, though he or she does not exercise them, or whether thatsame bundle is the only one available There is a difference between a starv-ing pauper, a fasting monk and Gandhi on hunger strike, which is not

reflected in the low calorie intake of all three Only the starving pauperlacks capability But Sen’s capabilities cannot be observed, while achieve-ments can If failure of achievement is voluntary, it is acceptable But someauthors (like Frances Stewart)3 have argued that it is better to separatefreedom of choice and look at poverty in terms of observable achievements

In this sense, all three are deprived Sen lumps together achievement andfreedom of choice in happiness ‘capability’

Happiness, as experienced by the individual, is not what human opment can aim at or is mainly about Not only can the government notdeliver happiness;4people may be miserably poor and yet be contented.Anita Brookner in one of her novels tells of a woman who was so modestthat she did not even presume to be unhappy.5And Susan Minot (1992) in

devel-her novel Folly writes: ‘not only did she not think of making certain choices

herself, she was completely unaware of having the desire to do so’ Indianwomen report being ill much less frequently than Indian men.6

The use of Sen’s capabilities can be frustrated if the opportunities fortheir exercise do not exist or if individuals are deprived of these opportu-nities as a result of discrimination, obstacles or inhibitions: if there is nodemand for their productive contributions so that people are unemployed,

or if there are legal or social or conventional restrictions on their ment, or if they do not have enough leisure, or if political oppression ordeprivation of human rights prevents them from full participation in thelife of their communities There can be ‘jobless’ growth, there can be ‘voice-less’ growth, there can be ‘rootless’ growth, and there can be jobless, voice-less and rootless non-growth Different countries illustrate each of thesecases

employ-Getting income is one of the options people would like to exercise It is

an important, but not an all-important option Human developmentincludes the expansion of income and wealth, but it includes many othervalued and valuable things as well

For example, in investigating the priorities of poor people, one discoversthat what matters most to them often differs from what outsiders assume.More income is only one of the things desired by poor people Adequatenutrition, safe water at hand, better medical services, more and betterschooling for their children, cheap transport, adequate shelter, continuing

employment and secure livelihoods, and productive, remunerative, ing jobs do not show up in higher income per head, at least not for sometime.

satisfy-There are other non-material benefits that are often more highly valued

by poor people than material improvements Some of these partake in thecharacteristics of rights, both positive and negative; others in those ofstates of mind Among these are good and safe working conditions,freedom to choose jobs and livelihoods, freedom of movement and speech,self-determination and self-respect, independence, mobility, liberationfrom oppression, violence and exploitation, less dependence on patrons,security from persecution and arbitrary arrest, not having to move in search

of work, a satisfying family life, the assertion of cultural and religiousvalues, a sense of identity, access to power or direct empowerment, recog-nition, status, adequate leisure time and satisfying forms of its use, a sense

of purpose in life and work, the opportunity to join and participate actively

in the activities of civil society, and a sense of belonging to a community.These are often more highly valued than income, both in their own rightand as means to satisfying and productive work They do not show up inhigher income figures No policy-maker can guarantee the achievement ofall, or even the majority, of these aspirations, but policies can create theopportunities for their fulfillment

Economic growth can be quite rapid without an improvement in thequality of life of the majority of the people, and many countries haveachieved a high quality of life with only moderate growth rates of income

It has been observed that there is a positive correlation between income perhead and the indicators of human development Some have drawn the erro-neous conclusion that it is only income that matters But, first, this rela-tionship is far from perfect, and the interesting questions are raised by theoutliers and particularly by countries that have achieved high human devel-opment at low levels of income Second, this relation depends entirely onthe extra income that arises from growth being used for public educationand health and for specific attacks on poverty If these two conditions areabsent, the correlation disappears.7Much also depends on the initial dis-tribution of assets If land ownership is fairly equally distributed and masseducation is widespread, the benefits of economic growth will be reflected

in good human development

Economic growth is often considered to be an essential component ofhuman development But growth (in the narrow sense of a continuingincrease of the quantity of goods and services produced and consumedover time) is simply the inter-temporal dimension of any policy objective,although it has been wrongly monopolized by production and consump-tion: it should apply to poverty reduction, employment, investment, a

more equitable income distribution, environmental protection, leisureand, of course, also to income But once you specify for income, con-sumption and production, the ‘What?’ ‘To whom?’ ‘By whom?’ ‘For what?’and ‘When?’ growth becomes the incidental result, not the objective, of asensible economic policy Growth is too unspecified, abstract, aggregateand unbounded to be a sensible objective of policy It also implies an

infinite horizon, without limits to increases in income What matters is thecomposition of the national income, to what uses it is put, its distributionamong beneficiaries, now and for future generations; and with how much

effort and in what conditions it is produced If and only if the extraresources resulting from growth go largely to the poor, and if they arespent on public health and education, will a contribution to human devel-opment result

The national income is a quite inadequate measure of human ment for several reasons It counts only goods and services that areexchanged for money, leaving out of account the large amount of workdone inside the family, mainly by women, and work done voluntarily forchildren or older people or in communities Public services are counted attheir cost, so that doubling the wages of all public servants appears todouble their contribution to welfare or development National incomeaccounting does not distinguish between goods and regrettable necessities,like military or anti-crime expenditure, products needed to combat ‘bads’.Addictive eating and drinking is counted twice: when the food and thealcohol are consumed, and when large sums are spent on the diet industryand on cures for alcoholism Much of what is now counted as economicgrowth is really either combating evils, and fixing blunders and social decayfrom the past, or borrowing resources from the future, or shifting functionsfrom the community and household to the market.8

develop-National income accounting does not add leisure gained by fewerworking hours or an earlier retirement age, and does not subtract from theextra income-generated leisure lost if women are forced (or desire) to take

on jobs outside the family, or men to take on a second job Environmentaldegradation, pollution and resource depletion are not deducted, so that theearth is treated, it has been said, like a business in liquidation Freedom,human rights and participation are ignored Most important, the conven-tional measure does not allow for the distribution of the income, countingall goods and services at their market prices Increasing the production ofwhiskey, bought by rich men, counts for much more than increasing theproduction of milk that would have gone to a starving child Attempts havebeen made here and there to correct for these faults and omissions, butnational income remains a quite inadequate measure of economic welfare

or of development

Some of these shortcomings can be removed by adjustments in theaccounting methods These concern those components of well-being thatcan be, in principle, brought into relation with the measuring rod of money.

A monetary value can be attached to leisure time Income distribution can

be allowed for by attaching greater weights to the incomes and their growth

of the bottom 20 percent, 30 percent or 40 percent of the population.Depletion of non-renewable raw materials can be evaluated and a measurefor sustainable income can be designed

For other components of choice and welfare, monetary measurement ismuch more difficult or may be impossible The enjoyment we derive from

an unspoiled wilderness, the satisfaction from work, political engagementthat results from participation, the sense of community, brotherhood andsisterhood that grows out of social activities, the freedom, peace and sense

of security that are common in a well-run society, these cannot easily bereduced to dollars and cents Yet they form the essence of human develop-ment

Human development: the latest stage

The contributing tributaries to human development can be grouped underfive headings: (1) economic growth; (2) human resource development;(3) human rights and participation; (4) peace and security; and (5) sustain-ability The role of culture falls under the heading of human rights and par-ticipation Issues of equity, and in particular of gender equity, run throughall five tributaries

We now live in a ‘risk society’ People are bombarded with assessments

of the risks of decisions (from what they eat to whether they should buildnuclear power stations) They have lost the old certainties about how theirlives will turn out: no more jobs, or marriages, for life

Human development is the end, the tributaries are the means; but they canalso acquire end characteristics themselves Environmental sustainability,peace, participation, human resources and, by some, even economic growthare valued in their own right To the extent that they are ends, they all have

to be included in human development The five tributaries can augment eachother, for example when human resources contribute to higher growth, orwhen respect for human rights advances peace There are also feedbacksfrom achievements in human development to further improvements inhuman development These may be indirect by improving the five compo-nents (economic growth, human resource development, human rights andparticipation, peace and security, and sustainability), or they may be direct.The latter occur within and between families when knowledge is passed onand when better education of mothers has an impact on their children.Several studies have shown that women’s education, control over cash

income and access to power, in addition to being desirable in themselves,improve the health, nutrition and education of children, reduce fertility,reduce infant mortality, reduce health hazards of adults arising from lowbirth weight, raise productivity, reduce inequality, are beneficial for the envi-ronment, and increase the range and effectiveness of public debates.Gender issues are particularly important for reproductive freedom – forpeople, especially women, to be able to choose the size of their families.There is now a wealth of evidence to show that given the opportunity tochoose smaller families without adverse economic and social consequences,smaller families are indeed chosen With human development – that is withthe expansion of education, especially of girls and women, the reduction ofinfant mortality rates, and medical facilities (including the opportunity ofbirth control) – fertility rates have come down sharply It may seem para-doxical that reduced infant mortality rates, more children surviving, shouldcontribute to reduced population growth But there is overwhelming evi-dence that parents try to overinsure themselves against the deaths of theirchildren (particularly sons) and that more surviving children reduce thedesired family size Human development is the best way to reducing popu-lation growth, and reduced population growth advances human develop-ment Human development, in addition to longer life expectancy, bettereducation and securer lives, makes it possible for people to opt for smallerfamilies.

It is thought that some of these links lend themselves more easily to surement than others The human resources of education can be capturedunder literacy rates and school enrolment rates, and the human resources

mea-of health under life expectancy and infant mortality It is for this reasonthat more attention has been paid to these links than to others, such as thatbetween participation and human development, not so readily broughtinto relation with a measuring rod Some may have become victims of thefallacy that what cannot be counted does not count or even exist But it may

be questioned whether the quality of education or the attitudes that a goodeducation instills, such as punctuality, discipline, teamwork, and so on, arecaught under the conventional statistical social indicators The same goesfor health measures Economic growth, based on increases in gross nationalproduct (GNP), has of course been the archetypal case of counting and hasattracted the limelight of attention

Human development goes beyond basic needs in that it is concerned withall human beings, not only the poor, not only poor countries, not only basicneeds Human development applies to the advanced, industrial countries,

as much as to middle-income and low-income countries The indicators are

of course different though, alas, to John Kenneth Galbraith’s complaintabout private affluence amid public squalor has been added in many

advanced countries that of private affluence amid private squalor A walkthrough the streets of New York or London provides plenty of evidence.But once nearly 100 percent literacy and average life expectancy of 78 yearsare reached, there is not much to distinguish one industrial country fromanother Years of schooling have been included in the indicator for educa-tion as a differentiating characteristic between, say, Britain and the USA.Sudhir Anand and Amartya Sen have suggested the division of all coun-tries into three groups: low, medium and high levels of human development(see Anand and Sen, 1993, and ‘Technical Notes 2 Human developmentindex: a survey of recent reviews’ in UNDP, 1993, pp 104–14) For countrieswith a low value of human development the basic Human DevelopmentIndex can be used to rank their performance For countries with a mediumvalue of human development Anand and Sen add one supplementary indi-cator to each of the three basic variables, life expectancy, literacy and log ofgross domestic product (GDP) per head In the longevity category they addinfant and child mortality (under age five); in the education category theyadd secondary school enrollment; and in the income category they add theincidence of income poverty in the country.

For countries with a high level of human development they add a furthersupplementary indicator to the two already existing in each category in themedium group To the survival (longevity) category they add the maternalmortality rate; to the education category they add tertiary enrollment; and

to the income category they add Gini coefficient-corrected mean nationalincome (that is, gross domestic product per head multiplied by (1-G) TheTable 1.1 illustrates the new additions

Additional indicators of shortfalls from human development should belooked for elsewhere in the high human development countries: in home-lessness, drug addiction and crime rates Divorce rates and suicide rates aremore controversial They can be regarded as indicating more options andtherefore positive achievements, particularly suicides of terminally illelderly patients On the other hand, they may be regarded as signs of thebreakdown of the social fabric of a society, a failure of upholding whatsome regard as the moral values of the family or the sanctity of life

A shorthand way of describing development is a variation of AbrahamLincoln’s definition of government It is development of the people, forthe people, by the people ‘Of the people’ implies adequate income generationthrough jobs, ‘for the people’ implies social services for those who need help,and ‘by the people’ means participation and democracy It could also be inter-preted as the economic, social and political dimensions of development.The intellectual move from income to welfare or utility, to chosenbundles of goods and services, to characteristics of these goods and ser-vices, to needs that they meet, and finally to the enlargement of choices, has

enriched our understanding The enlargement of choices of one sectionshould not be at the expense of the legitimate choices of another This hastwo important implications: (1) in equity, so that one person’s enlargementdoes not encroach on that of others; and (2) over time, so that our presentchoices do not encroach on the choices of future generations, or what hascome to be known as ‘sustainability’ This concern for the future shouldcover not only the physical environment – raw material exhaustion withouttechnical substitution and pollution – but also resilience to outside shocks,debt and political sustainability.

Both equity and sustainability raise complex and difficult questions, notdiscussed here ‘To each according to his or her .’ Filling in the dots ishighly controversial Sustainability must refer to the constituents, not to thedeterminants of well-being But maintaining the constituents of the well-being of future generations depends on population growth, and on changes

in technology and in preferences, all uncertain

Table 1.1 Indicators of human development

Human

development

corrected mean National Income

A human development strategy stresses the importance of institutionsfor improving the human condition Among these are not only the state,both as an agent to make markets work efficiently and to step in where theyfail, and the market, but also the civil society: democratic politicalprocesses, the news media, non-governmental organizations, grassrootsorganizations, action groups and the public at large It is in their interactionthat the conditions for the good life should be found.

The Human Development Index: a political rallying point

The item in the UNDP’s Human Development Reports (1990–2005) that has

caught the public’s eye and caused most controversy is perhaps analyticallythe weakest: it is the Human Development Index (more fully discussedbelow) It is clear that the concept of human development is much widerand richer than what can be caught in any index or set of indicators This

is true of other indicators, such as those of temperature But, it might beasked, why try to catch a vector in a single number?

Yet, such indexes are useful in focusing attention and simplifying theproblem They have considerable political appeal They have a strongerimpact on the mind, draw public attention more powerfully, than a long list

of many indicators, combined with a qualitative discussion They are catching The strongest intellectual argument in their favor is that theyshow up the inadequacies of other indexes, such as GNP, and thereby con-tribute to an intellectual muscle therapy that helps us to avoid analyticalcramps They can serve as mental finger exercises But it should be remem-bered that human development is a much richer concept than what can becaught in any index

eye-The Human Development Index comprises: (1) the logarithm of GDP perhead, calculated at the real purchasing power, not at exchange rates, up to the

international poverty line; (in subsequent Reports after that of 1990 this was

modified in various ways); (2) literacy rates (and, since the 1991 Report, mean

years of schooling); and (3) life expectancy at birth These disparate itemsare brought to a common denominator by counting the distance between thebest and worst performers and thereby achieving a ranking of countries.Critics have said that not only are the weights of the three components arbi-trary, but also what is excluded, and what is included Partha Dasgupta(2001) has pointed out that the index misrepresents concerns about thefuture, since it does not deduct capital depreciation; that it reflects onlycurrent well-being, and that it is an index only of human capital, leaving outnatural capital If these omissions are allowed for, what appears as a goodhuman development performance turns out to be much worse

As we have seen, one of the great drawbacks of average income per head

is that it is an average that can conceal great inequalities But, it may be

objected, the components of the Human Development Index (HDI),namely life expectancy and literacy, are also averages They can concealvast discrepancies between men and women, boys and girls, rich and poor,urban and rural residents, different ethnic or religious groups The HDIhas in fact been disaggregated by sex, region and ethnic groups for a fewcountries.

Another problem with the HDI is the implicit trade-off between lifeexpectancy and income For a country with an income per head less thanthe world average ($5711 per year at 1993 purchasing power parity, which

is about the income per head of Costa Rica) an increase of annual GDPper head of $99 will exactly compensate for one year less of life expectancy,

so as to keep the HDI constant.9If the people in one poor country have oneyear less of life expectancy but $100 higher GDP per head than in anothercountry, this country will have a higher HDI The value attached tolongevity rises sharply with income For a country with twice the averageincome (about the income per head of Malta), an extra year of life is valued

at $7482 in income per head At three times the average (about the income

in the United Kingdom) it is worth $31631, about twice the country’sincome per head At four times the average (about Switzerland’s income)its value reaches $65038, about three times actual income The implication

is that life is far less valuable in poor countries than in rich ones The valuejudgments underlying these trade-offs have rightly been rejected So

‘human development’ and the Human Development Index are not ultimateinsights and other ideas will take their place We are all free to guess whatthese will be

There are, however, several reasons why human indicators are less leading than income per head First, the distribution of literacy and lifeexpectancy is much less skewed than that of income There is a maximum

mis-of 100 percent literacy In spite mis-of all the achievements mis-of modern cine, the maximum lifespan has not been extended so far, although thereare some who predict that scientific progress will extend maximum lifeexpectancy Aubrey de Grey of the University of Cambridge predicts lifeexpectancy in 2100 will be 5000 years None of us will be around to checkwhether he is right (Nicholas D Kristof, 2003) For income, on the otherhand, the sky is the limit A very few very high-income earners can raise theaverage (The median or the mode would eliminate some of the distortions.)Second, therefore, the average of the human indicators tells us somethingabout the distribution There cannot be high averages with too many peoplenot participating Since the non-poor have access to public services beforethe poor, reductions in infant mortality, and so on are indications ofimprovements for the poor For life expectancy the average is actually betterthan a figure corrected for distribution between men and women This is so

medi-because the potential life expectancy of females is longer than that ofmales, if we start from the same life expectancy.10

Third, any upward move in a human indicator can be regarded as animprovement Some might object if only the literacy of boys or the lifeexpectancy of men is increased, but unless it can be shown that suchincreases worsen the fate of girls and women, by, for example, increasingthe ability and desire to oppress, to object would smack of envy and dog-in-the-manger attitudes

Fourth, whereas the high incomes of some can cause relative deprivation

in others, this is not true for human indicators If anything, the benefits inthe health and education of anybody benefits the whole community.Fifth, international income gaps, whether relative or absolute, mayinevitably be widening, but to aim at reducing international gaps in humanindicators is both sensible and feasible In fact, looking at development inhuman terms presents a more cheerful picture than looking in incometerms Since 1960 average life expectancy has increased by 16 years, adultliteracy by 40 percent, nutritional levels by over 40 percent, and child mor-tality rates have been halved The international gap has closed Whileaverage income per head in the South is 6 percent of that in the North, lifeexpectancy is 80 percent, literacy 66 percent and nutrition 85 percent.Sixth, human indicators show the troubles of overdevelopment or, better,mal-development, as well as of underdevelopment Diseases of affluencecan kill, just as the diseases of poverty can Income, on the other hand, doesnot show up the destructive aspects of wealth

Seventh, indicators that measure impact rather than inputs distinguishbetween goods and anti-bads (regrettable necessities) which bring us back

to zero: unnecessary food requirements arising from unwanted pregnanciesand feeding children that die; or from long walks to collect water and fuel;

or from excess work or from long walks between unconsolidated plots orlooking for work; for urban dwellers, high housing and transport costs.Eighth, there is considerable political appeal in a simple indicator thatidentifies important objectives and contrasts them with other indicators

A separate index covers aspects of human freedom and human rights,clearly an important aspect of human development Life expectancy andliteracy could be quite high in a well-managed prison China shows remark-able progress on human development, but without political freedom.Should the freedom index be integrated into the Human DevelopmentIndex? There are some arguments in favor, but the balance of arguments isprobably against First, it might be said that freedom is so important (and,opportunity costs apart, costless) that no trade-off should be possiblebetween its loss and gains in some of the other indicators.11Secondly, polit-ical conditions are much more volatile than changes in education and health

Once a mother knows the importance of education for her children, or ofhygienic behavior, this knowledge is not lost even when incomes drop Sohuman indicators tend to be fairly stable Political indicators, on the otherhand, can change overnight with a coup A third argument against aggregat-ing freedom with the positive aspects of human development is that grading

is more subjective and less reliable than measuring life expectancy or literacy.Finally, one of the most interesting questions is how freedom is related

to human development more narrowly interpreted, or how negative andpositive rights or freedom are associated This can be done only if they arerecorded by separate indexes, not components of the same.12Thus we mightformulate a hypothesis that freedom, though not a necessary condition ofhuman development, is entirely consistent with it even at quite low levels;and that human development, once it has reached a certain stage, leadsinevitably to the call for freedom by the people Here is a message of hope

6 In the film of Edith Wharton’s The Age of Innocence, Newland Archer, seeing the

futil-ity of creating a soul mate of his wife, says, ‘There’s no point in liberating some one who does not realize she is not free.’ Not everyone would agree Against people’s self- perception being above their real situation, Jodha (1988) found that people whose income had declined felt themselves better o ff by the criteria of independence (especially from patrons), mobility, security and self-respect.

7 Anand and Ravallion (1993).

8 Cobb et al (1995).

9 Ravallion (1997).

10 See Anand and Sen (1993).

11 This objection could be mitigated by using a geometrical rather than an arithmetic average With a zero weight for freedom, the total index becomes zero, however high the other components.

12 It could be said that the same argument applies to the relation between, for example, eracy and life expectancy, and that they should therefore not be lumped together in a single HDI.

lit-References

Anand, Sudhir and Martin Ravallion (1993), ‘Human Development in Poor Countries: On

the Role of Private Incomes and Public Services’, Journal of Economic Perspectives, 7 (1),

pp 133–50.

Anand, Sudhir and Amartya Sen (1993), ‘Human Development Index: Methodology and Measurement’, UNDP Occasional Papers No 8.

Brookner, Anita (1989), Latecomers, New York: Pantheon Books.

Cobb, Clifford, Ted Halstead and Jonathan Rowe (1995), The Genuine Progress Indicator, San

Francisco, CA: Rede fining progress.

Dasgupta, Partha (2001), Human Well-being and the Natural Environment, New York and

Oxford: Oxford University Press.

Jodha, N.S (1988), ‘The poverty debate in India: A minority view’, Economic and Political Weekly, Special Number, 23 November, pp 2421–8.

Keynes, John Maynard (1931), Essays in Persuasion, London: Macmillan, p 176.

Kristof, Nicholas D (2003), ‘Where is thy sting?’, New York Times, 12 August.

Minot, Susan (1992), Folly, New York: Washington Square Press.

Ravallion, Martin (1997), ‘Good and bad growth: The Human Development Reports’, World Development, 25 (5), pp 631–8.

Sen, Amartya (1984), Resources, Values and Development, Oxford: Basil Blackwell, and

Cambridge, MA: Harvard University Press.

Sen, Amartya (1985), Commodities and Capabilities, Amsterdam: North-Holland.

Sen, Amartya (1987), The Standard of Living, edited by G Hawthorn, Cambridge: Cambridge

University Press.

Stewart, Frances (1993), ‘Strategies to Fight Poverty’, mimeo, revised draft, Oxford Streeten, Paul with Javed Shahid Burki, Mahbub ul Haq, Norman Hicks and Frances Stewart

(1981), First Things First: Meeting Basic Human Needs in Developing Countries, New York

and Oxford: Oxford University Press.

UNDP (1990–2005), Human Development Reports, New York and Oxford: Oxford University

Press.

UNDP (1993), Human Development Report, Oxford and New York: Oxford University Press.

Amiya Kumar Bagchi1

Straightening the historical record

When and where did acceleration in rates of economic growth and humansurvival occur during the last 500 years? It was a maintained hypothesis ofmost mainstream economists (see, for example, Kuznets, 1960 [1965]) thatthe people of today’s developing countries were already poorer than theEuropeans when the Industrial Revolution began to transform the Englisheconomy As a result of the work of Bairoch (1982) and eminent students ofthe economic history of China and India, such as Habib (1982),Raychaudhuri and Habib (1982), Li (1986, 1998), Frank (1998), Moosvi(2000), Pomeranz (2000) and Guha (2001), it is now clear that both Chinaand India did better than the core countries of Western Europe in terms ofhuman survival and growth of per capita incomes down to the mid-eighteenth century in the case of India, and down to the eve of the firstOpium War, that is, 1840 or so in the case of China (Bagchi, 2004, 2005a).Population growth rates in India and China were higher than in the corecountries of continental Western Europe (namely, England, France,Germany, Holland, Italy and Spain) between 1600 and 1750–1800 (Bagchi,2005a, Chapter 5) We do not have reliable data on longevity for countriesother than England and China before the nineteenth century The availabledata on those two countries, with very unequal population numbers, indicatethat before the middle of the eighteenth century the average Chinese citizenlived as long as his or her English counterpart (Bagchi, 2005a, Chapter 9).Apart from the evidence on human survival, historians have also come

to question the idea that the standard of living of ordinary people washigher in Europe than in India or China before the nineteenth century(Parthasarathi, 1998; Allen, 2004)

The evidence relating to economic growth and human developmentduring the past 500 years throws up two axial ages, that is, two ages in whichthe countries were clearly separated into two groups by turning on an axis.The first was the period when the Industrial Revolution, originating inEngland, spread to continental Western Europe and the North Atlanticseaboard (and Australia and New Zealand), and thereby raised the rates ofeconomic growth and changed the structure of national incomes and occu-pations in those lands from dominance by the primary to that by the sec-ondary sector This axial age started around 1760

16

The second axial age can be dated from roughly the 1870s, when infantmortality rates began declining on a sustained basis in the industrializingcountries and longevity went up beyond earlier historical records to 60years and above, while the other countries continued to have high mortal-ity rates and short lives.

The roots of the first axial age and, in particular, the origins of the trial revolution in England and its diffusion in the nineteenth century tocontinental Western Europe and the USA (followed by Canada, Australiaand Japan) have caused and continue to elicit scholarly controversy Theold imperialist idea, revived by North and Thomas (1973), Jones (1981[1987]) and Landes (1998) that Europeans were always (or at least goingback to, say, 1000 CE) different from and better off than Asians (who con-stituted the majority of the global population), has not stood up to seriousscrutiny The related idea that it was the protection of private propertyrights and freedom of trade and exchange that made Europe distinctive hasalso failed to meet the test of evidence China and India had been bothengaged in intensive intra-regional and intercontinental trade for centurieswhen, in 1498, Vasco da Gama navigated the route round the southernCape of Africa to India Moreover, property rights were as protected inChina and India as in most of Europe down to the time of the establish-ment of European hegemony over these two most populous countries ofthe world (Bagchi, 2005a)

indus-What then led to the ‘great divergence’ (Pomeranz, 2000) between thefortunes of today’s developed countries and the rest of the world?Undoubtedly, the Industrial Revolution – with its three major characteris-tics, namely, the exploitation of economies of scale, the introduction ofprogressively labour-saving production methods and the upsurge in the use

of non-renewable resources of materials and energy – was the decisiveprocess separating the rich and the poor nations of today Following Wong(1997), we can distinguish between ‘Smithian growth’ in a market economyand growth in a fully capitalist economy In the former, goods were pro-duced for the market, occupations were specialized with a considerabledegree of division of labour, there were dense networks of exchange sup-ported by flows of money and credit; but property rights were regulated bylaw, regulations and custom, so nobody could accumulate unlimitedamounts of capital or dispossess producers through the control of prop-erty The commercialized economies of Western Europe, the lands border-ing the Mediterranean, India, China, South-East Asia and Japan before theMeiji Restoration (in 1868) were all economies characterized by Smithiangrowth However, China and India, with their diversifying agriculture andspecializing manufactures in response to the growth of long-distance oftrade and inflows of precious metals from Japan and the Americas were the

foremost exemplars of Smithian growth The Indian system of ture for the market spreading out to the country has been likened to whatwas called ‘proto-industrialization’ in the context of Flanders, northernFrance, western Germany and England at around the same period(Mendels, 1972; Kriedte et al., 1981) In 1750, China produced 32.8 per centand India produced 24.5 per cent of the global manufacturing output; by

manufac-1913, as a result of the working of imperialism and the industrialization ofthe leading capitalist economies, those shares had gone down to 3.2 per cent

in the case of China and 1.4 per cent in the case of India (Bairoch, 1982;Simmons, 1985) Even with China being the fastest-growing economythrough the 1990s and beyond, the proportion of China’s manufacturingoutput to the world manufacturing output in 2003 was only 11.5 per centand that of the Indian subcontinent (consisting of Bangladesh, India andPakistan) was about 2.5 per cent (derived from World Bank, 2005) So thedivergence still persists

Neither proto-industrialization nor Smithian growth as such producedthe Industrial Revolution and led to the great divergence between theearlier leaders of the world economy and the North Atlantic seaboardnations The bourgeoisie needed to capture political power before theycould dispossess the producers and freely use any natural resources theycould claim as their property These steps led to resource-intensive indus-trialization in which workers were subjected to the discipline of themachine The bourgeoisie came to control the levers of state power first inthe Netherlands and then in England Capitalist relations as such did notallow the eruption of the Industrial Revolution in the Netherlands: itbecame too specialized in entrepôt trade and could not nurture ‘infantindustries’, it became too greatly urbanized before the knowledge of pro-phylaxis and urban sanitation had spread Moreover, it suffered a demo-graphic crisis caused by an unsanitary urban environment, and losses ofmanpower in wars and voyages In any case, the domestic market was toosmall to support the kind of economies of scale that became associatedwith the Industrial Revolution (Van Zanden, 1993; De Vries and Van derWoude, 1997; Bagchi, 2005a, Chapter 6)

In England, the enclosure movement created a proletariat even if it didlittle to raise agricultural productivity (Allen, 1992, 1994), and property-holders were allowed to control natural resources such as water sources,coal and iron ore with few restrictions Moreover, infant industries such ascotton textiles were protected against foreign manufactures, for example,Indian calicos, even as old industries such as woollens and agriculture con-tinued to enjoy protection Meanwhile, the demand from the navy and thearmy created a market for more and more specialized and lethal guns andcannon, and set up a competition for machines that would work well with

only some training and would not be dependent on manual dexterity vated for generations As capital and knowledge accumulated, they pro-vided the base for further accumulation of capital, technology and skill, asTucker (1774) had emphasized even before Smith’s canonical treatise(Smith, 1776 [1976]) swept the field of political economy.

culti-The Industrial Revolution can be seen as a process of cumulative tion It is driven by static economies, learning by doing and learningthrough competitive emulation, capital accumulation, adaptation of com-plementary and competitive production and organizational structures, andinnovations to overcome imbalances created by new vintages of equipmentand organizational changes These factors can be reinforced by network

causa-effects The more a particular type of equipment or a particular way ofdoing business is adopted by a number of firms or users, the cheaper itbecomes for the producer of that kind of equipment or the practitioner ofthat style of business to produce that equipment or intensify that particu-lar style of doing business The combination of dynamic economies of scaleand network effects can then generate a path-dependence in productionstructures, consumption patterns and business organization and businessbehaviour (David, 1985; Arthur, 1989)

The Industrial Revolution had as its background a revolution in scienceand an atmosphere of readiness to apply useful knowledge for practicalapplications (Mokyr, 2005) But that revolution was no older than the sev-enteenth century, nor did it at once lead to the technological innovationsthat gave England and the follower countries of the North Atlanticseaboard a decisive advantage over India and China, the older manufac-turing centres of the world The predilection for measuring and quantify-ing has been seen as a peculiarly European virtue going back to thethirteenth century CE (Crosby, 1997) But again, even if it was, it did notconfer its benefits for another 500 years in pushing the Europeaneconomies to the frontier of technological advance Finally, FrancisBacon, writing before the 1620s, has been seen to stand at the fountain-head of the conception of science as knowledge that has to be testedagainst empirical evidence and its practical utility He also projected thatinnovations would radically change the way things worked and peoplelived (1986 [1627]) But again, it was another 100 years before innovations

in civilian technology began to affect major areas of production inEngland Bacon’s imagined innovations also included weapons of war.Technological and organizational innovations associated with armedcombat in Europe had a major role not only in showing the way towardssetting up large-scale factories but also in enabling the early capitalistnations to aggrandize themselves by grabbing the resources, includinglabour power, of other countries

In both the axial ages, the forging ahead of the Western European landswas facilitated by armed conquest and the establishment of Europeanimperial hegemony over the rest of the world, and in particular on the twomost populous countries, namely, China and India The adverse impact ofBritish rule on India was well known to many early political economistssuch as Lord Lauderdale, but it went into oblivion through the writings ofpropagandists such as James Mill (Bagchi, 1996) India and China hadbeen the two greatest manufacturing nations of the world down to 1750(Bairoch, 1982) India went into a phase of massive deindustrialization,when in some of the core regions producing manufactures with artisanalmethods and exporting them worldwide, the proportion of the workingforce engaged in secondary industry declined from somewhere around

20 per cent to less than 10 per cent (Dutt, 1904 [1963]; Bagchi, 1976; Tilly,1994; Clingingsmith and Williamson, 2004) Similar, though perhaps lesscatastrophic changes took place in most of the colonial economies and thenewly independent countries of Latin America in the nineteenth century(Bagchi, 1982, Chapters 3 and 4)

Several misconceptions still cloud the analysis of the impact of alism on the colonial or semi-colonial countries The first is to say that thedisrupting effect of the invasion of the domestic market by machine-mademanufactures was unstoppable In fact, all the countries of Europe and theoverseas settlements of the USA, Canada and Australia adopted measures

imperi-to protect the domestic market against foreign manufactures and age the growth of domestic machine-driven industries (Sabel and Zeitlin,1985) Moreover, contrary to conventional wisdom, industrial growth wasfaster in the industrializing countries in the age of protection than in earlierperiods (Bairoch, 1993; O’Rourke, 2000) The non-white dependencies ofEurope were prevented from adopting any similar measures The newly lib-erated countries of Latin America could have adopted such measures Butthe British support for their struggle against Spain and Portugal had beenexplicitly or implicitly conditional on their adopting a free trade policy – apolicy that Britain did not adopt until the 1840s, two decades after the lib-eration of Latin America Moreover, the liberation entrenched landlordsgenerally exploiting unfree labour and abundant land as the ruling class ofLatin America That class saw its future as collaborators of the industrial-izing countries which would buy the products of their latifundia, ratherthan in industrializing their own countries The depression of the 1930sforced these rulers to adopt the policy of import-substituting industrial-ization (Bagchi, 1982, Chapter 3), but the landlord-dominated social struc-ture hobbled that effort

encour-Deindustrialization in countries like India was not compensated by

vibrant agricultural growth either (pace Clingingsmith and Williamson,

2004) In fact, because of the disruption of earlier methods of irrigationand crop rotation, the extraction of a large surplus from India without anyreturn and the consequent depression of domestic demand and,finally, theentrenchment of a landlord class as intermediaries in the tribute-extractingenterprise of British rulers, there was little growth in colonial India’s agri-cultural productivity (Bagchi, 2005a, Chapter 10) There were devastatingfamines in China and India throughout the greater part of the nineteenthcentury In the half-century before independence, the per capita agricul-tural output in India declined (ibid.).

Most of the economies of ex-colonial countries in Asia, Africa and LatinAmerica began to grow again at a positive rate from the 1950s after theirliberation from colonial rule or imperial domination But their growth ratesbegan to falter from the late 1970s largely under the onslaught of structuraladjustment policies and financial liberalization forced on them by theInternational Monetary Fund, the World Bank and the rich capitalistcountries led by the USA, often acting in collusion with rulers of the coun-tries that had become indebted to the transnational banks through the cor-ruption and profligacy of the same rulers

Contrary to the impression conveyed by mainstream economists, theperformance of the so-called developing countries was better in the period1950–80 when these countries practised a state-promoted path of develop-ment than when they were forced to adopt a policy of freeing capital fromall restraint, while depriving workers of the few social security benefits theyhad enjoyed earlier (Weisbrot et al., 2001; Bagchi, 2005a, Chapters 23–24).The countries or city-states of East Asia, such as Taiwan, South Korea,Singapore, Hong Kong and the People’s Republic of China, bucked thistrend: they were free of landlordism, their governments tried to universal-ize education, starting with elementary education and moving up towardshigher levels, they practiced extensive state patronage and accessed foreignmarkets as a means of enabling their own firms to reap the benefits of spe-cialization, acquiring new technologies and utilizing the economies of scaleand scope China, building on its socialist foundations but progressivelyincreasing incentives for the producers and promoting competition amongdomestic enterprises by pushing them to adopt innovations on a country-wide scale and using her massive investments and continually improvingindustrial technologies, has become the fastest-growing economy of theworld

Economic development has any meaning only if it also leads to the opment of human capabilities As we have noted above, the surge ineconomic growth and the sustained development of longevity in industri-alizing Europe were separated by a century In terms of political freedomalso, outside the core countries of Britain and Scandinavia, most other

devel-European members of the Organisation for Economic Co-operation andDevelopment had to wait until the end of World War II before establishingformal democracy The benefits of modern medicine began to diffuse to thedeveloping countries after their independence But from 1980 there hasbeen a slowdown, if not a reversal in the decline in infant and adult mor-tality rates in some of the poorest countries of the world (Weisbrot et al.,2001; Bagchi, 2004; 2005a, Chapters 23–24; Deaton, 2005).

The world population of roughly 6.32 billion is now polarized between

a small minority of high-income countries (with 948.3 plus million people),

a group of middle-income countries with a population of 2748.6 millionand a group of low-income countries with a population of 2614.5 million.2However, many of the middle-income countries depended on the export ofoil for their income and saw their incomes falling over 1990–2003, as didmany of the ex-Soviet countries of Eastern Europe and Central Asia(UNDP, 2005, ‘Human Development Indicators’, Table 14) Moreover,levels of mortality and longevity moved in an adverse direction in many ex-Soviet and sub-Saharan countries (UNDP, 2005, Chapter 1)

On the other hand, the experience of China and the industrializedregions of East Asia indicates that with appropriate changes in social struc-ture, it is possible to close the gap rapidly with the more affluent countries

in respect of most indicators of human development, and to use that higherlevel of development to try and narrow the gap in levels of income

Thinking about economic development

In Europe, since the sixteenth century, publicists, merchants and advisors

to governments had been putting forward their views about how to increasethe wealth of the princes and countries they were concerned with But the

locus classicus of thinking about economic development was Adam Smith’s Wealth of Nations (Smith, 1776 [1976]) In this book, Smith put forward his

view that economic development is driven by the division of labour andexpanding markets in an economy which is free of unnecessary restraints

on trade, and the freedom of economic agents to choose their professionsand the fields in which to invest their capital Smith’s analysis was histori-cally grounded and he stressed institutional changes as much as marketforces as the factors driving economic growth Smith’s view that economicdevelopment is driven by capitalist accumulation was sharpened further byDavid Ricardo (1817 [1951]) He located profit as the basic income shareout of which accumulation would be financed In his scheme, there is a clearconflict between the interests of landowners and capitalists because,through the operation of diminishing returns, accumulation drives up theprice of food grains, raises rents and lowers the profit share Ricardo’stheory of comparative cost driving international trade and his theory of

profit-driven accumulation provided the arguments for abolishing the tection of British agriculture, since that would cheapen corn and increasethe incentive and wherewithal for further accumulation His free tradearguments also supplied the rationale for England’s export-led growth ofmanufactures and capitalist development But Ricardo is also the origina-tor of economic analysis that is detached from particular historical con-texts, and can therefore be regarded as the pioneer of ahistorical modes ofanalysis of economic growth.

pro-Karl Marx (1867 [1886]) further developed the theory of capitalist mulation by demonstrating that the conflict between an increasing wageshare and capitalist accumulation would lead to class struggles overemployment and wages, periodic cycles, and a long-term tendency of cap-italists searching for and introducing labour-saving innovations Marx’sanalysis was firmly grounded in the experience of the British IndustrialRevolution and he saw capitalism as being driven by a continual need forexpansion Lenin (1899 [1964]) took up the theme of the continually expan-sive tendency of development under capitalism and introduced the idea ofuneven development that has been used strategically by later analysts toexplore the unevenness of development between nations, between regions,and between lagging and leading sectors of an economy

accu-The problem of economic development almost vanished from mists’ discourse after the so-called marginalist revolution of the 1870s.Prodded by worries about what could be done in a war-devastated Easternand South-Eastern Europe, and the soon-to-be-independent colonies ofEuropean powers, economic development entered into official and acade-mic discourse again only from the 1940s Rosenstein-Rodan (1943 [1958])was a trailblazer in this direction, to be followed by a number of otherwriters trying to combine the lessons of Soviet industrialization withnational income accounting that came into wide use after the Keynesianrevolution (see, for example, Datta, 1952) Most of them agreed that theimperially imposed division of labour under which the underdevelopedcountries were to specialize in agricultural commodities with low incomeelasticities of demand had to be overturned and a vigorous programme ofindustrialization had to be taken in hand if the poverty of these newlyindependent nations was to be seriously dented The Prebisch–Singer

econo-thesis that the terms of trade of primary producers vis-à-vis the

industri-alized nations had been on a downward trend for most of the twentiethcentury added vigour to the industrializers’ argument (Prebisch, 1950;Singer, 1950)

In mainstream economics, the analysis of economic development sincethe 1950s followed two parallel and mainly non-intersecting paths The so-called neoclassical theories of growth associated with the names of Robert

Solow and Trevor Swan ended up with huge residuals that had to beexplained away in an ad hoc fashion (for a summary, see Romer, 2006,Chapters 1–2) Moreover, they flew in the face of the Keynes–Kaleckitheorem that in a market economy it is investment that drives growth, andsaving is equated to investment through the working of the multiplier andchanges in the relative shares of wages and profit They also had nothing

to say about the problem of underdevelopment of the economies that vided livelihoods to the majority of the global population The new orendogenous growth theory in the neoclassical tradition makes a mystifieduse of the notion of human capital and totally fails to take account of con-tradictions in the growth process such as demand failures and unequaldevelopment between different countries and regions (for a summary of thetheory, see Romer, 2006, Chapter 3; for a critique, see Bhaduri, 2006)

pro-An alternative modelling trajectory was pursued by analysts who tookthe drives and institutions of capitalism seriously This was to follow thepath blazed by Kalecki in integrating the behaviour of a monopolisticallycompetitive capitalist class with that of a working class struggling to main-tain their real wages The bargaining power of the working class waxed andwaned as the labour market became tighter or slacker Kalecki envisagedthe possibility that business cycles might be caused by the ruling class in acapitalist economy in order to beat down the workers (Kalecki, 1971).Using a slightly different modelling strategy, Goodwin (1967 [1982]) treatedthe capitalist–worker relationship as a predator–prey interaction that gen-erated a growth cycle

Kaldor (1957) departed drastically from neoclassical models by treatingaccumulation of capital and the rate of technical progress as being organ-ically linked Here he was building on the work of Adam Smith, AllynYoung, Gunnar Myrdal and Josiah Tucker, who recognized the role of bothstatic and dynamic economies of scale in raising productivity throughincreased division of labour and economies of agglomeration (Bagchi,1998)

Following a Marx–Kalecki tradition and incorporating the Prebisch–Singer hypothesis that there is a basic asymmetry between the demandpattern of an agrarian and an industrialized economy – namely, the incomeelasticity of demand for primary products is generally less than onewhereas the corresponding value is larger than one, especially for newindustrial products – other economists have built up models of growth thatgenerate systematic differentials between the industrialized North and theagrarian South (for a full-length treatment, see Dutt, 1990) The work ofSteindl (1952) and Schumpeter, 1911/1934, 1942) has been used to illumi-nate processes of intra-capitalist competition and innovations arising out

of, and in turn driving that competition (Bloch, 2000) Bhaduri (2006) has