Economic Development: A Regional, Institutional, and Historical Approach

A Regional, Institutional and Historical Approach

Richard Grabowski, Sharmistha Self, William Shields

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317472575
• Edition: 2
• Topic: Business
• Subtopic: Business General
• Index: Business

The second edition of this innovative and affordable book integrates environmental and financial sustainability into its distinctive regional approach. By focusing on political economy in its cultural, religious and historical roots, as well as leadership decisions, it spurs critical thinking. Working through the unique development paths of individual countries, the authors foster integrative thinking and a strong sense of realism about both the prospects and challenges of economic development in the rapidly evolving global economy. The book is exceptional in both its theoretical nuance and accessible writing. An Instructors Manual with discussion questions, a test bank, and PowerPoint slides is available online to professors who adopt the text.

1

Introduction to Economic Development

One can rationally assume that all countries want to achieve a decent standard of living for their people through improved material well-being. However, nearly seventy years after the conclusion of World War II, when the plight of the poor was brought to the forefront, and economists, policy makers, and rich countries leaped forward with solutions, many countries still have high rates of poverty. The gap between rich and poor has widened in many countries. Growth remedies—scores of them—have failed. Even as recently as 1999, nearly two-thirds of the world’s population lived in countries where the average income was about one-tenth of the level in the United States. William Easterly (2002) referred to economists’ endeavors to solve the poverty puzzle as an “elusive quest.” According to him, this quest has remained elusive because of the failure to apply economic principles to practical policy work. Timothy Yeager (1999) argues that the main reason behind failed growth experiments is not the lack of well-functioning markets (along with the absence of excessive government regulations), which has traditionally been offered as the cure to the problem, but the absence of a correct institutional framework.

Various sources have been identified to explain countries’ different growth experiences. Such explanations are varied and wide ranging, such as differences in human capital, natural resource endowments, population density, degree of openness, market structures, government policies, technology, geography, integration (trade), and institutional differences. Some factors are exogenous (i.e., caused by factors outside the economy) while others are not. Certain factors, such as technology, were presumed to be exogenous but have since been found to be endogenously determined (i.e., caused by factors within the economy) or “embodied.” Other factors, such as institutions, were presumed to be a by-product of growth. However, this perception has changed and appropriate institutions are now thought of as an essential precondition for growth (North and Thomas 1973). One thing that is being recognized from failed and successful growth experiments is that a single explanation or a specific set of explanations does not fit all. What works for one country may not work for another. Why is it that some countries increased the size of the production pie, but only a few individuals within the country actually enjoyed this increase? Alternatively, in some countries, the bigger pie was evenly distributed, and in yet others the pie did not increase at all. Why is it that some economies can produce relatively more efficient institutions than others? How did Indonesia, before the Asian financial crisis (1997), manage to grow so rapidly in spite of weak institutions and distorted policies? How did some Southeast Asian countries manage to find their footing and begin the process of recovery soon after the East Asian financial crisis of 1997, while a country with a much stronger and more developed economy such as Japan remained crippled? How did China grow in spite of the absence of private-property rights? Why did countries such as India do poorly until the 1980s and then show remarkable growth, while Venezuela did well until the 1980s and poorly thereafter? This book is written with these different growth experiences in mind. It looks at different parts of the developing world and seeks to explain what worked where and what went wrong.

The following chapters attempt to identify and analyze which of these explanations are pertinent to which parts of the world, and why. In doing so, different parts of the world are targeted and an attempt is made to dig deeper into their development stories, instead of looking at set explanations and matching them to a “case study,” as is commonly done. Regional and country experiences create the development story; they present the puzzles that economists and policy makers try to solve. The pieces (explanations) look different in each case. Even if they appear similar, they fit (apply) differently in each case. Each puzzle comes with its own backdrop (history) and rules (institutions), so each puzzle/picture is unique. The trick is not just in finding the right pieces but in finding the pieces that are right for the relevant puzzle. The theme that remains central and common in the discussions is an emphasis on the historical experiences of countries. The underlying belief here is that the development paths that countries have taken and may yet follow are informed by their history. Understanding history yields the information that provides the key to the future and to understanding the present.

Growth Versus Development

What Is Economic Growth? What Is Economic Development?

Evolution of the concept of economic development started in the 1930s, when economists began to realize that most of humankind did not live in advanced capitalist countries. This thinking/reexamination was sparked by Colin Clark’s 1939 study, the first to make quantitatively evident the gulf between European countries and the rest of the world. Clark’s work was responsible for initiating interest in the concept of development, but the subsequent interest in growth experienced a lull, rekindled by Robert Solow’s neoclassical growth theory, in 1956, which is based on the assumption of diminishing returns. In the 1970s, interest shifted from growth theory to monetary theories, business cycles, and rational-expectation theories. In the early 1980s, interest in real factors gained in importance over monetary factors. In the late 1980s, “new” growth theory, which emphasized the role of human capital in the growth process, rekindled interest in growth theory. Paul Romer and Robert Lucas’s works on increasing returns to scale and endogenous growth marked a new era of interest in growth. Growth literature in the 1990s and early 2000s has refocused on the concept of total factor productivity, embodied or endogenously determined technology, the direction of causality between human capital and growth, and the role of institutions.

The existing literature shows that the concept of economic development is often confused with economic growth. It is difficult to distinguish between theories of development and theories of growth. Economic growth is the rise in national or per capita income or product typically measured by gross domestic product (GDP) or gross national product (GNP), where GDP refers to the production of final goods and services within a country while GNP refers to the production of final goods and services by the citizens of a country no matter where they live. An increase in per-capita GDP, while characteristic of economic growth, does not necessarily lead to a higher standard of living per capita if the growth is not evenly distributed. Economic development is a much broader concept than economic growth, though the two have been and continue to be used interchangeably in economic literature. One can think of economic growth as a precondition or a necessary condition for economic development. Typically, countries that are poor are also less developed, though a rich country does not necessarily have to be a developed country. Consider some of the oil-rich Middle Eastern countries that have experienced large increases in per-capita GDP, yet lag far behind in other areas of development.

As mentioned, after the end of World War II and the recovery in Western Europe, the world was made aware of the huge economic and social differences between the developed West and the rest of the world. The information revolution has made the world a seemingly smaller place and access to goods and services has become cheaper and more easily accomplished. One can think of these closer links in information as helping the world get “more connected,” which facilitates the faster flow of assistance and services. However, the information revolution has left behind those parts of the world that have yet to become involved. In many ways, people there, along with their needs, have become even more remote. Table 1.1 presents some basic economic indicators for selected countries for 2010, indicating that gaps in economic and social indicators continue to exist.

Table 1.1

Basic Economic Indicators, 2010

	GDP per capita^a	Population density^b	Population^c	Education^d
Argentina	9,067	15	40.6	98
Bangladesh	609	1,263	164.4	56
Botswana	7,513	3	1.9	84
China	4,393	143	1,338	94
Canada	46,060	4	34.2	100
Ethiopia	350	85	84.9	30
France	39,460	118	64.8	100
Germany	40,542	234	82	100
India	1,477	394	1,170	63
Mexico	9,580	56	108.5	93
Saudi Arabia	14,799	13	25.9	86
South Africa	7,280	41	49.9	89
Haiti	674	361	9.9	49
Brazil	10,710	23	194.9	90
United Kingdom	36,084	257	62.2	100
United States	47,084	34	309.7	100

Source: World Bank (2010).

a. GDP per capita is GDP divided by midyear population. Data are in constant 1995 U.S. dollars.

b. Population density is midyear population divided by land area in square kilometers.

c. Total population is based on the de facto definition of population (in millio...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Tables, Figures, and Maps
• Preface
• Acknowledgments
• 1. Introduction to Economic Development
• 2. European Emergence
• 3. East Asian Experience
• 4. Economies in Transition: Socialist to Market
• 5. Sub-Saharan Africa
• 6. South Asia
• 7. Latin America
• 8. The Middle East and North Africa
• 9. Conclusions
• Index
• About the Authors