Governance Institutions and Economic Development

Emerging China, India, East Asia and Brazil

Kartik C Roy

• Publisher: WSPC
• Year: 2018
• ISBN:
  9789813234567
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftspolitik

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"Roy's book is a rich and detailed study of various facets of economic and social development in ten countries, both democratic and authoritarian. Researchers and students will find here a wealth of information and statistics that can be mined to explore fundamental questions around state interventionism and modes of governance, around democratisation, authoritarianism and economic development, around the factors driving the differential developmental performance of specific countries, and around the desirability of economic growth at all costs. It also provides a very useful starting-point for considering the future of Asia as China's economic, political and military strength continues to grow."

Jude A Howell
Professor London School of Economics (LSE), London, UK
From the Foreword

With over three decades worth of research and analysis, Roy compares ten countries — India; Brazil; Indonesia; China; Japan; South Korea; Singapore; Vietnam; Thailand; and, Malaysia — in the role of the state in economic development. Comprising of a rich body of work on state intervention and developmental states, Roy postulate on the idea of 'virtuous' and 'vicious' interventionist states.

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--> Readership: Researchers in economic development and those studying the role of governance in economic development. -->
Keywords:Governance;Economic Development;India;Brazil;Indonesia;China;Japan;South Korea;Singapore;Vietnam;Thailand;Malaysia;Developmental Economic;Interventionalist States;Virtuous;ViciousReview:0

CHAPTER 1

Economic Growth,
Economic Development and
Human Development

Economic Growth and Economic Development

Although we tend to use the terms “economic growth”, “economic development” and “development” interchangeably, there are fundamental differences in their connotations.

But these terms and also interlinked, for example, economic growth refers to an absolute increase in a country’s national income as well as an increase in the rate at which a country’s national income rises (Perkins et al., 2006; Todaro and Smith, 2009). If this rate of economic growth remains consistently higher than the rate of population growth or if the rate of economic growth remains constant but the rate of population growth continues to fall well below the constant rate of economic growth (steady state of growth), the per capita income continues to rise. In western countries, while the rate of economic growth has historically been maintained at a steady state, the rate of population growth has remained significantly below the neutral (steady-state) rate growth of the economic growth. As a result, per capita income has consistently risen.

In the two prominent emerging Asian economies, China and India, the rate of economic growth has remained quite high, but while China was able to drastically reduce the rate of growth of its population by the effective application of ‘one child policy’, India’s population growth-reduction policy based on adoption of methods of Malthusian positive checks by couples on a voluntary basis to limit population growth failed to achieve spectacular results. Hence, the rate of increase in per capita income was higher in China than in India. Therefore, if the quantity and market value of all goods and services produced in a country in the current year, is higher than those of the previous year, then we can term this rise as economic growth.

Economic Development

While economic growth does not automatically ensure that it would improve the living standards of large numbers of people in low-income countries, in absence of a substantial rise in national income, transfer activities of economically and politically powerful as well as of economically poor but politically powerful people involving redistribution of national wealth away from the economically and politically poor toward them will rise, thereby consistently lowering per capita income of the country (North, 1987b, 1990).

The rise in transfer activities signals the rise of informal market activities, corruption and underground economy. Such transfer activities are most visibly present in all countries in Africa. They are also present in China, Burma, South Asia and in many Latin American countries.

Economic development refers to the planned re-direction of the emphasis away from agriculture to greater emphasis on industrial and services sectors. This re-direction will raise the share of the industry (large, medium and small scale) and of micro-scale firms as well as raise the share of the service sector in GDP.

In the medium stage of economic development determined by the size of the per capita income in terms of US dollar in a country, the share of medium- and small-scale manufacturing production in the total industrial production attains preponderance. However, at the most advanced stage of economic development, the share of the services sector in a country’s GDP becomes the largest (Roy et al., 2012). This trend can be noticed in not only the Organisation for Economic Cooperation and Development (OECD) countries but also India after the emergence of the four global information technology giants — Infosys, Wipro, Tata Consultancy Services (TCS) and Mahindra Tech (formerly Satyam) — and several others as leading contributors to India’s GDP from the services sector, although India’s development is at a stage which is well below that of the advanced countries.

In terms of job creation, although, medium- and small-scale industrial units continue to absorb large number of semi-skilled and skilled unemployed labor, the contribution of the services sector to the country’s total employment also rises significantly.

However, in countries with large population, at early and medium stage of economic development, the share of the agricultural sector in total employment may continue to outstrip the shares in employment of industrial and services sectors, unless thousands of small-scale and micromanufacturing firms are set up in the countryside. The only two countries which set up such small-scale manufacturing firms alongside agricultural field in the early stage of their development in the early 1950s are South Korea and Taiwan (Clark and Roy, 1997; Chai and Roy, 2006; Roy et al., 2012; Nafziger, 2006; Lynn, 2003).

This policy of setting up small-scale manufacturing units alongside agricultural fields enabled rural families, all of whom became landholders under Kuomintang’s rule, to switch after finishing their harvesting season to these manufacturing firms for nearly six months a year.

Hence, all able members of landholder families were engaged in productive employment throughout the year. It was through such employment creation in the rural sector that governments of Taiwan and South Korea were able to transfer the benefits of economic growth and economic development to the rural population. It was Gandhi (Narayan, 1962; Schumacher, 1962; Roy, 1986) who envisaged in his development plan for village republics, the need for the protection of existing small-scale manufacturing units and for the creation of thousands of small-scale manufacturing units which produce most of the basic consumer goods to satisfy the needs of the overwhelming majority of undivided Indian population. The objective was to enable poor villagers to be engaged in agricultural activities for six months a year and in manufacturing activities for the other six months of a full year. Since during Gandhi’s time, about 90 percent of Indian population lived in rural areas, the adoption of such a policy in the aftermath of India’s independence from the British Rule would have enabled the new government to realize Gandhi’s goal of achieving full employment in the country. Such a policy may sound like somewhat autarkic, but Gandhi never clearly specified import control measures in the form of tariffs, quotas and outright ban on import of luxury items of consumption. So, the application of visible measures of import restriction was not clearly advocated by Gandhi. His measure to achieve a drastic reduction in the consumption of imported consumer goods in Independent India was for people to voluntarily abstain from consumption of most of the imported goods. Gandhi began to practice abstinence in his own life, and the first mass movement against the consumption of foreign goods commenced with his “Dandi March” which symbolized the boycott of the consumption of imported salt and which may also have heralded the beginning of domestic production of salt.

To Gandhi, the primary goal of economic development would be facilitating the attainment of full employment of working-age population in the country; making the provision for the population of clean water, simple meals, simple and clean clothes and of simple as well as of clean houses, simple means of transport, roads and so on.

Gandhi’s plan could never be implemented throughout India after India’s independence for two reasons:

(i)Gandhi was assassinated in 1948 and

(ii)Nehru who took charge of the new government imposed on the country from 1956 onward one of the most repressive economic regimes that could ever be found in democratically governed India and in other such countries in the world. In a sense, since Nehru’s economic development policies were aimed at making India completely self-reliant by placing severe restrictions on importation of goods and services in the country and by according highest priority in the industrial development strategy, to the growth of heavy and capital goods as well as ancillary industries supplying inputs to these industries, the role of micro and small industries (Gandhi’s cottage industries) in transferring benefits of economic development to the vast majority of population of India via employment creation was relegated to the background in order of importance. Hence, under Gandhi’s development plan, the transfer of benefits of economic development to the masses was more transparent and direct than that under Nehru’s plan (Bhagwati and Desai, 1971; Roy and Tisdell, 1992).

We have commented here on primary objectives of development plans of Gandhi and Nehru to indicate the differences between the connotations of the term “economic development” and “development”. Thus, as we have outlined above, the change in the structure of production and distribution refers to the change in not only the direction of production toward industry from agriculture, but also the direction of investment within industry toward certain preferred categories, as well as change in the direction of investment within the service sector from paper shuffling and inefficient bureaucracy, toward building up better social capital in the form of better schools, colleges, universities, teachers, hospitals, doctors, which will create the foundation for building up adequate human capital in a country. Furthermore, investment also is required to be directed to improve sanitation facilities, improve provision of clean water, for preventive health care, simple housing and of roads and other modes of communication and transports for citizens.

From Economic Development to Social and Human Development

A country’s development planning authorities cannot automatically ensure the realization of the second objective of economic development which relates to changes in the distribution of production toward social goods and the production of basic consumer goods in micro-, small- and medium-sized industries.

To realize this goal, the direct involvement of the state in the production and supply of these above-noted social goods, most of which fall under the categories of pure public and economic goods, becomes necessary.

The classical economic school believed that since the attainment of high rate of economic growth consistently over a long period of time in a country can be made possible by the application in production of such factor inputs as skilled labor, improved technology, improved management of production process, better transport facilities and so on which will make the labor cost per dollar worth of output decline, as well as make the average cost in dollar per unit of output decline and make the total factor productivity rise, the effect of this attainment of high rate of economic growth would ipso facto be felt in significant improvements in economic development indicators in all sectors of the economy and in automatic transmission of benefits emanating from improved performance of economic development indicators to social development which leads to human development.

Contributions of Economic Development

Under economic development, the industrial development tends to increase the production of iron and steel, other metal products, industrial machinery, cement, motors and so on, which are used to build roads, various means of transports, factory buildings, school buildings, furniture, hospital buildings, hospital equipment and also many types of consumer goods, etc. But the theory also assumes that these infrastructures will automatically create properly educated teachers, properly educated doctors and nurses, all of which will create better educated and healthy children, a highly skilled workforce, improved sanitation facilities, provision of clean water, adequate shelter for the population, adequate supply of foods and of basic consumer goods such as clothes, household equipment among others.

This assumption of the theory is based on the assumption of the presence of a free-market economy in all countries. But this assumption is invalid in developing countries where the operation of the free-market principles leads to significant market failure, which prevents the market mechanism from allocating resources efficiently. For example, economically and hence politically weak families tend to lose out in competition with the economically rich and hence politically powerful families in making provision for their children of proper foods, clothing, education of high quality, better health care and employment commensurate with their academic qualification and skills. Market failure may allow teachers with poor academic qualifications but with strong link to the government to be appointed in schools, colleges and universities and to be awarded very high level of salaries which they do not deserve, doctors with poor skills to be allowed to work in hospitals and receiving high salaries which they do not deserve.

Such examples highlight important facts that “economic development” is different from “development”, which primarily refers to social development which effectively means human development.

The Interventionist State and the Society

However, the state’s intervention in the market may not be limited to its actions to correct market failures and to make provision for the production and supply of goods, as in their attempt to correct market failures the state’s agents, viz. ministers, bureaucrats and political party leaders, may begin to intervene in production and distribution of all kinds of economic and social goods to the society with the primary objective of collecting rent for which the rent-paying society does not receive any official receipt from the state’s — formal agents. So the state intervention in the operation of market forces does indeed expand the size of the underground economy and contract the size of economic benefits in terms of employment generation and social benefits in terms of the supply of social goods to the citizenry.

In all developing countries, when the democratic form of government administers those countries’ affairs this rent-seeking behavior of the government tends to assume more serious proportion than in countries where there are autocratic forms of government primarily because the autocratic forms of government, in order to stay in power, are required to continuously prove to the society that by holding the political power they have provided substantial economic and social benefits to the society by successfully applying economic policies to achieve high rate of economic growth and by distributing reasonably fairly, benefits of economic growth to the overwhelming majority of the population.

On the other hand, the need for providing the proof to the society of the government’s legitimacy to stay in power is weakened in a country governed by a democratically elected government, because the government and the political party holding reins of the government can stay in power even by contributing very little to the social and human development of country by simply forcing its formal (public servants) and informal agents (illiterate and unemployed youths) to engage in vote rigging when national elections are held to elect representatives to form the country’s government (Huntington, 1968; Roy et al., 2012).

In democratically governed developing countries with large population and many provinces, some provinces may receive benefit from economic growth while in others the political party holding the power can continue to stay in power for a long time by maint...

Table of contents

• Cover Page
• Title
• Copyright
• Dedication
• Accreditation
• Foreword
• Preface
• Contents
• About the Author
• List of Figures
• List of Tables
• Chapter 1 Economic Growth, Economic Development and Human Development
• Chapter 2 Broad Features of Economic and Sectoral Growth in Emerging States
• Chapter 3 Governing Education in Emerging States
• Chapter 4 Covering Health Care in Emerging States
• Chapter 5 Managing Population and Employment in Emerging States
• Chapter 6 Managing Empowerment in Emerging States
• Chapter 7 Enabling Governance Institutions in Emerging States
• Chapter 8 Supreme Happiness and Freedom as Supreme Development: Marx, Gandhi, Schumacher and Sen
• Chapter 9 Conclusions
• References
• Index