Table of Contents

Preface xv

International Development Resources on the Internet xxiii

Part 1 Development and Growth

1 Patterns of Development 3

Three Vignettes 3

Malaysia 3

Ethiopia 5

Ukraine 6

Development and Globalization 8

Rich and Poor Countries 10

Growth and Development 13

Diversity in Development Achievements 15

Approaches to Development 16

The Study of Development Economics 18

Organization 19

Summary 20

2 Measuring Economic Growth and Development 23

Measuring Economic Growth 24

Measuring GDP: What Is Left Out? 25

Exchange-Rate Conversion Problems 27

Economic Growth around the World: A Brief Overview 32

tared diamond: guns, germs, and steel 34

Economic Growth, 1970-2010 36

What Do We Mean by Economic Development? 38

Measuring Economic Development 40

Human Development Defined 41

Why Use Logarithms? 43

What Can We Learn from the Human Development Index? 44

Millennium Development Goals 46

Targets of the Millennium Development Goals 47

Is Economic Growth Desirable? 50

Summary 53

3 Economic Growth: Concepts and Patterns 55

Divergent Patterns of Economic Growth since 1960 56

Botswana's Remarkable Economic Development 59

Factor Accumulation, Productivity, and Economic Growth 60

Calculating, Future Values, Growth Rates, and Doubling Times 61

Saving, Investment, and Capital Accumulation 64

Sources of Growth Analysis 66

Characteristics of Rapidly Growing Countries 74

1 Macroeconomic and Political Stability 75

2 Investment in Health and Education 77

3 Effective Governance and Institutions 79

Institutions, Governance, and Growth 80

4 Favorable Environment for Private Enterprise 82

5 Trade, Openness, and Growth 83

6 Favorable Geography 84

Summary 87

4 Theories of Economic Growth 89

The Basic Growth Model 91

The Harrod-Domar Growth Model 94

The Fixed-Coefficient Production Function 94

The Capital-Output Ratio and the Harrod-Domar Framework 96

Strengths and Weaknesses of the Harrod-Domar Framework 98

Economic Growth in Thailand 101

The Solow (Neoclassical) Growth Model 103

The Neoclassical Production Function 103

The Basic Equations of the Solow Model 104

The Solow Diagram 108

Changes in the Saving Rate and Population Growth Rate in the Solow Model 109

Population Growth and Economic Growth 112

Technological Change in the Solow Model 113

Strengths and Weaknesses of the Solow Framework 116

Diminishing Returns and the Production Function 117

Explaining Differences in Growth Rates 118

The Convergence Debate 121

Beyond Solow: New Approaches to Growth 125

Summary 127

5 States and Markets 129

Development Thinking after World War II 130

Market Failure 133

Fundamental Changes in the 1970s and 1980s 137

Ghana After Independence 139

The Declining Effectiveness of Government Intervention in the Market: Korea, 1960s-2010 143

Structural Adjustment, the Washington Consensus, and the End of the Soviet Model 144

Soviet Command Model to Market Economies: The Great Transition 148

Was the Washington Consensus a Success or Failure? 153

Summary 159

Part 2 Distribution and Human Resources

6 Inequality and Poverty 165

Measuring Inequality 166

Patterns of Inequality 172

Growth and Inequality 174

What Else Might Cause Inequality? 177

Why Inequality Matters 178

Measuring Poverty 180

Poverty Lines 181

National Poverty Lines in Bangladesh, Mexico, and the United States 183

Wily $1.25 a Day? 186

Dissenting Opinions on the Extent of Absolute Poverty 191

Who is Not Poor? 192

Poverty Today 192

Who Are the Poor? 193

Living in Poverty 195

Strategies to Reduce Poverty 197

Growth is Good for the Poor 198

Sometimes Growth May Not Be Enough 200

Pro-Poor Growth 201

Why Should Development Strategies Have a Poverty Focus? 202

Improving Opportunities for the Poor 205

Income Transfers and Safety Nets 206

Global Inequality and the End of Poverty 208

Summary 214

7 Population 217

A Brief History of World Population 218

The Demographic Transition 220

The Demographic Situation Today 224

Total Fertility Rates 225

The Demographic Future 227

Population Momentum 229

The Causes of Population Growth 231

Thomas Malthus, Population Pessimist 232

Why Birth Rates Decline 233

Population Growth and Economic Development 236

Population and Accumulation 237

Population Growth, Age Structure, and Dependency Ratios 239

Population and Productivity 241

Population and Market Failures 243

Population Policy 245

Family Planning 246

Authoritarian Approaches 249

Missing Girls, Missing Women 251

Population Issues for the Twenty-First Century 253

Summary 254

8 Education 257

Trends and Patterns 258

Stocks and Flows 259

Boys versus Girls 263

Schooling versus Education 264

Education as an Investment 267

The Rate of Return to Schooling 269

Estimated Rates of Return 272

First-Generation Estimates 273

Estimating Rates of Return from Wage Equations 275

Second-Generation Estimates 276

Puzzles 278

Returns to Schooling and Income Opportunities 279

Making Schooling More Productive 281

Underinvestment 282

Misallocation 282

Improving Schools 286

Reducing the Costs of Going to School 287

Mexico's Progresa 288

Inefficient Use of Resources 290

It Is about More than the Money 293

Combating Teacher Absence 294

Summary 298

9 Health 299

What Is Health? 302

Life Expectancy 305

Transitions in Global Health 307

The Epidemiologic Transition 308

The Determinants of Improved Health 310

Health, Income, and Growth 313

Income and Health 314

How Beneficent is the Market? A Look at the Modern History of Mortality 318

Health and Productivity 319

Health and Investment 320

Three Critical Diseases 321

Malaria, Yellow Fever, and the Panama Canal 322

HPV/AIDS 323

HIV/AIDS, Malaria, and Tuberculosis: Some Basics 324

Malaria 329

Making Markets for Vaccines 330

Tuberculosis 333

What Works? Some Successes in Global Health 335

Preventing HIV/AIDS in Thailand 336

Controlling Tuberculosis in China 336

Eradicating Smallpox 337

Eliminating Polio in Latin America 338

Preventing Deatlis from Diarrheal Disease 340

Lessons Learned 342

Health Challenges 343

Summary 344

Part 3 Macroeconomic Policies for Development

10 Investment and Savings 349

Using Investment Productively: Cost-Benefit Analysis 351

Present Value 351

Opportunity Costs 355

Shadow Prices 355

Welfare Weights 356

Barriers to Productive Public and Private Investment 357

Barriers to Doing Business 359

Foreign Direct Investment 363

FDI Patterns and Products 364

Benefits and Drawbacks of FDI 365

FDI and Growth 369

Policies Toward Foreign Direct Investment 370

Savings 374

Household Saving and Consumption 376

Corporate Saving 379

Government Saving 380

Foreign Saving 384

Summary 388

11 Fiscal Policy 391

Government Expenditures 393

Categories of Government Expenditures 394

Reining in Fiscal Decentralization in Brazil and China 398

Government Revenue and Taxes 399

Tax Rates and Smuggling: Colombia 401

Taxes on International Trade 401

Sales and Excise Taxes 402

Personal and Corporate Income Taxes 404

New Sources of Tax Revenues 404

Changes in Tax Administration 405

Fundamental Tax Reform 405

Tax Administration in India and Bolivia in the 1980s 406

Indonesian Tax Reform 407

Taxes and Income Distribution 411

Personal Income Taxes 412

Taxes on Luxury Consumption 413

Corporate Income and Property Taxes: The Incidence Problem 414

Economic Efficiency and the Budget 417

Sources of Inefficiency 417

Neutrality and Efficiency: Lessons from Experience 418

Summary 420

12 Financial Development and Inflation 421

The Functions of a Financial System 423

Money and the Money Supply 423

Financial Intermediation 426

Transformation and Distribution of Risk 426

Stabilization 427

Inflation 427

Inflation Episodes 428

Hyperinflation in Peru, 1988-90 431

Monetary Policy and Price Stability 432

Monetary Policy and Exchange-Rate Regimes 433

Sources of Inflation 435

Controlling Inflation through Monetary Policy 438

Reserve Requirements 439

Credit Ceilings 439

Interest-Rate Regulation and Moral Suasion 440

International Debt and Combating Recessions 441

Financial Development 442

Shallow Finance and Deep Finance 443

Shallow Financial Strategy 444

Deep Financial Strategy 447

Informal Credit Markets and Micro Credits Does Micro Credit Reduce Poverty? 451

Summary 453

13 Foreign Debt and Financial Crises 455

Advantages and Disadvantages of Foreign Borrowing 458

Debt Sustainability 459

Debt Indicators 460

From Distress to Default 463

A Short History of Sovereign Lending Default 465

The 1980s Debt Crisis 466

Causes of the Crisis 467

Impact on the Borrowers 469

Escape from the Crisis, for Some Countries 470

The Debt Crisis in Low-Income Countries 473

Debt Reduction in Low-Income Countries 474

The Heavily Indebted Poor Country Initiative 475

Odious Debt 476

Debt Relief in Uganda 479

Emerging Market Financial Crises 480

Domestic Economic Weaknesses 482

Short-Term Capital Flows 484

Creditor Panic 486

Model of Self-Fulfilling Creditor Panics 486

Stopping Panics 489

Lessons from the Crises 494

Summary 496

14 Foreign Aid 499

Donors and Recipients 501

What Is Foreign Aid? 501

Who Gives Aid? 503

The Marshall Plan 503

The Commitment to Development Index 507

Who Receives Foreign Aid? 512

The Motivations for Aid 514

China's Foreign Aid 515

Aid, Growth, and Development 518

View 1. Although Not Always Successful, on Average, Aid Has a Positive Impact on Economic Growth and Development 520

Controlling River Blindness in Sub-Saharan Africa 524

View 2. Aid Has Little or No Effect on Growth and Actually May Undermine Growth 526

Food Aid and Food Production 528

View 3. Aid Has a Conditional Relationship with Growth, Stimulating Growth Only Under Certain Circumstances, Such as in Countries with Good Policies or Institutions 533

Donor Relationships with Recipient Countries 535

The Principal-Agent Problem 536

Conditionality 537

Improving Aid Effectiveness 540

Summary 543

15 Managing Short-Run Crises in an Open Economy 545

Equilibrium in a Small, Open Economy 546

Internal and External Balance 547

Real Versus Nominal Exchange Rates 550

The Phase Diagram 553

Equilibrium and Disequilibrium 556

Pioneering Stabilization: Chile, 1973-84 559

Stabilization Policies 560

Applications of the Australian Model 564

Dutch Disease 564

Recovering from Mismanagement: Ghana, 1983-91 566

Debt Repayment Crisis 567

Stabilization Package: Inflation and a Deficit 569

The Greek Debt Crisis of 2010-12 571

Drought, Hurricanes, and Earthquakes 574

Summary 575

Appendix to Chapter 15: National Income and the Balance of Payments 576

Part 4 Agriculture, Trade, and Sustainability

16 Agriculture and Development 583

Unique Characteristics of the Agricultural Sector 584

Structural Transformation 587

Two-Sector Models of Development 590

The Labor Surplus Model 591

Surplus Labor in China 598

The Neoclassical Two-Sector Model 599

Debates Over Surplus Labor 602

Evolving Perspectives on the Role of Agriculture in Economic Growth and Poverty Alleviation 604

Agriculture and Economic Growth 604

The Nutrition Linkage to Economic Growth 608

Agriculture and Poverty Alleviation 610

Agricultural Growth as a Pathway out of Poverty 613

Summary 617

17 Agricultural Development: Technology, Policies, and Institutions 619

Characteristics of Traditional Agriculture and Agricultural Systems 620

Agricultural Systems 621

Diagnosing the Constraints to Agricultural Development 622

Raising the Technical Ceiling 627

The Green Revolution 628

Recent Trends in Agricultural Productivity 632

A Model of Induced Technical Change in Agriculture 635

Raising the Economic Ceiling 637

Food Production Analysis 638

What to Produce? The Product-Product Decision 638

How to Produce It? The Factor-Factor Decision 641

How Much to Produce? The Factor-Product Decision 643

Fertilizer Subsidies in Malawi 645

Market Access 651

Cell Phones and Agricultural Development 651

Institutions for Agricultural Development 653

Land Reform 656

The World Food Crisis of 2005-08 658

Causes of the Crisis 659

Consequences of the Crisis 661

Summary 663

18 Trade and Development 665

Trade Trends and Patterns 667

Who Trades? 671

Comparative Advantage 674

The Benefits of Trade 677

Winners and Losers 681

Trading Primary Products 683

Empirical Evidence on Primary Export-Led Growth 687

Export Pessimism 688

Declining Terms of Trade? 690

Dutch Disease 693

Dutch Disease: A Geometric Presentation 697

Nigeria: A Bad Case of Dutch Disease 700

Indonesia: Finding a Cure 702

The Resource Trap 703

Breaking the Resource Curse 705

Summary 707

19 Trade Policy 709

Import Substitution 711

Protective Tariffs 713

Import Quotas 714

Effective Rates of Protection 715

Trade Protection and Politics 718

The Two-Country Model with a Tariff 719

Production Subsidies 720

Exchange-Rate Management 722

Outcomes of Import Substitution 724

Export Orientation 725

Removing the Bias against Exports 727

Favoring Exports 728

Building Export Platforms 730

Is China's Exchange-Rate Policy Unfair? 731

Trade Strategy and Industrial Policy 734

Trade, Growth, and Poverty Alleviation 736

Trade Reforms and Poverty Alleviation 739

Key Issues on the Global Trade Agenda 741

Increased Global Competition and the Rise of China (and India) 741

Does Outward Orientation Create Sweatshops? 743

Labor Activists and Labor Outcomes in Indonesia 746

Expanding Market Access 747

Multilateral Trade Negotiations and the WTO 750

Temporary Migration: Another Dimension of International Trade 753

Summary 755

20 Sustainable Development 757

Will Economic Growth Save or Destroy the Environment? 759

Concept and Measurement of Sustainable Development 761

Saving for a Sustainable Future 765

The Malthusian Effect of Population Growth on Adjusted Net Savings in Ghana 768

Market Failures 769

Externalities and the Commons 770

Policy Solutions 773

Property Rights 773

Government Regulation 774

Taxes, Subsidies, and Payments for Environmental Services 776

Taxing Water Pollution in Colombia 777

Marketable Permits 779

Informal Regulation 781

Policy Failures 782

Policy Failures and Deforestation in Indonesia783

Poverty-Environment Linkages 785

Global Climate Change 792

Summary 800

Index 803