PATHWAYS TO

ECONOMIC
DEVELOPMENT

OXFORD
 This short introduction combines
theoretical analysis and historical and
contemporary experience to explore
alternative paths to economic
development.

Distinguishing between growth of

income and production, poverty
and distributional issues, happiness,
and human functioning and
capabilities, this work examines
India’s performance on the pathways
to development. It further analyses
the main obstacles and discusses
the primary strategies, reviewing
debates about the role of the free
market and the state, autarkic and
open economy approaches, and a
focus on growth versus distribution
_ and human development, among
others. This concise study argues
- against.a doctrinaire neoliberal
strategy and favours a balanced
approach that pays careful attention
to country- and time-specific factors.
Lucid and jargon-free, this book will
interest academics, policymakers,
and general readers alike.
OXFORD
INDIA SHORT
INTRODUCTIONS
PATHWAYS TO
ECONOMIC
DEVELOPMENT

The Oxford India Short

Introductions are concise,
stimulating, and accessible guides
to different aspects of India.
Combining authoritative analysis,
new ideas, and diverse perspectives,
they discuss subjects which are
topical yet enduring, as also
emerging areas of study and debate.
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Coalition Politics in India

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The Civil Services in India

S.K. Das

Affirmative Action in India

Ashwini Deshpande

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A. Vaidyanathan

Panchayati Raj
Kuldeep Mathur

Caste
Surinder S. Jodhka

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A part of the Oxford India Short Introductions series,
this book belongs to a cluster of nine titles around
the theme ‘Economics and Development’. I have
deliberately kept these two words separate. We tend to
forget that the non-economic aspects of development
have an important bearing on the economic aspects.
The focus of the theme is how a country like India
faces and solves (or fails to solve) various questions
related to its quest for sustainable development.
Moreover, every book within this cluster presents
the reader with a quick recapitulation of the relevant
theory so that opinions can be disentangled from
conclusions based on theory.
Anindya Sen, Professor of Economics, Indian
Institute of Management Calcutta; General Editor for
the cluster on “Economics and Development’, OISI

Other Titles in the Cluster

International Trade and India

Parthapratim Pal

Capital Flows and Exchange Rate Management

Soumyen Sikdar

Trade and Environment

Rajat Acharyya

Monetary Policy
Partha Ray

Indian Cities
Annapurna Shaw
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OXFORD
INDIA SHORT
INTRODUCTIONS
PATHWAYS TO
ECONOMIC
DEVELOPMENT

AMITAVA KRISHNA DUTT

OXFORD
UNIVERSITY PRESS
OXFORD
UNIVERSITY PRESS

Oxford University Press is a department of the University of Oxford.

It furthers the University’s objective of excellence in research, scholarship,
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Published in India by
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© Oxford University Press 2014

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First Edition published in 2014

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 For Arnav,
with the hope that he and his generation
will take the right paths
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 Contents

List of Tables and Figures x

Preface. xi

Introduction 1
Meaning and Measurement of Development 12
Domestic Economic Aspects of
Development 51
International Aspects of Development 98
Non-economic Aspects of Development 123
Strategies for Economic Development 151
oS Conclusion
SN 184

Bibliography 195
dex 1201
 Tables and Figures

Tables

Selected Production and Human Development

Indicators, Selected Countries 43
Selected Poverty, Inequality, and Happiness
Indicators, Selected Countries 48
Selected Environmental Indicators,
Selected Countries 50

Figures

Per Capita GDP, Constant 2000 (US$): Brazil,

China, India, Kenya, South Korea 45
Log of Per Capita GDP, Constant 2000 (US$):
Brazil, China, India, Kenya, South Korea 46
Vicious and Virtuous Cycles of Poverty ey)
 Preface

This book is the result of many years of thinking, read-

ing, writing, and teaching about economic develop-
ment. During these years I have incurred many debts.
I should thank students at the University of Notre
Dame, especially those in the Minor in International
Development Studies, and at FLACSO, Ecuador, for
discussing many development issues with me and for
helping me to formulate many of the ideas presented in
the book. Many friends and colleagues have influenced
my thinking about the ideas discussed in the book, and
some have provided comments and encouragement in
the course of writing it. Anindya Sen has been par-
ticularly generous with his comments on several drafts,
and Amiya Bagchi, Lance Taylor, and Tony Thirlwall
have been very encouraging. The comments of three
Preface
anonymous referees for Oxford University Press have
helped to improve the book’s content and presentation,
although they have not always agreed with my views
and emphases. Research assistance from Avirup Dutt
and Jamie Long is gratefully acknowledged. I should
thank the editorial team of Oxford University Press for
their patience and encouragement. Finally, my families
in India and the US, and especially Harolyn and Arnay,
and our pet, Cora, have helped in many ways, not the
least by creating an environment in which I could
enjoy writing the book.
Since the book is meant to be a short introduction,
it is addressed primarily to the interested general reader
and to students and scholars approaching development
studies and development economics for the first time.
However, I hope my colleagues in economics and
political science will find some of it of some inter-
est to them. To keep the text brief and uncluttered,
I have abstained from providing references to many of
the claims I have made or summarized in the book.
The interested reader is referred to the readings listed
at the end of the book for more details.
 1
Introduction

India’s per capita income was about Rs 64,000 (for

2010),' which translates into approximately US$1,400.7
This is considerably lower than those of the US
(US$47,000) and Japan (US$43,000), or even Mexico
(US$9, 100), Brazil (US$10,700), and China (US$4,400),
and is closer to the average for Ghana and Sudan.
India is ranked 138 out of 190 countries listed by the
World Bank. Since most things that people buy are
cheaper in India, with reference to prices in the US, a
US dollar can buy more in India than in the US. If

' All data in the book pertains to the year 2010, unless
specified otherwise.
2 Towards the end of March 2014, when this book
was prepared for the press, US$1 was roughly equal to
Rs 60.
 we convert rupees into Purchasing Power Parity (or
PPP) dollars to take this into account, India’s per capita
income is US$3,400, compared with $47,310 for the
US, $34,600 for Japan, $14,400 for Mexico, $11,000 for
Brazil, and $7,640 for China, and closer to those for
Guyana andVietnam. India ranks 126 out of 181 listed
countries.
Development
Pathways
Economic
to
Countries with low average levels of production
and income such as India are usually described as less
developed, underdeveloped, developing, or economi-
cally poor countries. They are less developed not just
in terms of average income, but also in terms of literacy
rates, life expectancy at birth, and child mortality, as we
shall see later. Beyond numbers, even a cursory exami-
nation of living and working conditions of most of the
people in India’s cities and villages reveals the huge
difference in levels of economic prosperity between
rich countries and countries like India (though there
are vast differences in conditions for different people in
both sets of countries as well).
This book will provide a short introduction to the
pathways available to less developed countries (hence-
forth LDCs for short), such as India, for becoming
more economically developed. For the most part, it
will examine general conceptual and analytical issues,
and also illustrate them with reference to the case of UOIJINPO

India and, to a lesser extent, other relevant countries.

The paths to development are neither obvious nor
easy. If they were, perhaps, there would not be any
LDCs. There are many academic, policy, and popular
debates about whether there is a magical path to
development that is available for all places and times,
about what that path looks like and, more reasonably,
whether there are optimal or even workable paths for
specific times and [Link] provide a flavour of these
debates, we briefly mention some that attract a great
deal of attention.

1. What should the role of the state be in develop-

ment? Should it actively promote development?
Or is the state the problem and not the solution,
and development best left to private initiative
and free markets?
2. Should countries try to increase their inter-
actions with the rest of the world, that is,
go global, or should they focus more within
their borders and delink from the rest of the
world?
 3. Should countries promote growth over other
objectives, should they focus on poverty and
what are sometimes called social indicators
such as those related to health and education, or
should they reduce income inequality?
. Should development efforts in a country
Development
Pathways
Economic
to be concentrated on a particular sector of the
economy, whether broad ones such as agricul-
ture, manufacturing, or services? Or should they
be concentrated on some narrower sectors, like
heavy or basic industries, or technologically
simple manufacturing sectors?
. Should countries concentrate on increasing
the supply of resources, goods, and services or
should they try to increase the demand for the
same?
. Should the focus be on the micro level of
individuals and small communities, or should
it be on the broad sectoral, economy-wide, or
macro levels?
. Should countries focus on increasing the
amount of resources such as capital and labour
or increase the efficiency and utilization of
these resources?
 8. Should countries concentrate on creating the
right institutions—what may be called the UONINPOAU

rules of the game—and if so, what are they?

Or should they try to overcome problems with
appropriate policy prescriptions that directly
affect the behaviour of individuals and groups,
without worrying primarily about institutions?

Three aspects should be noted regarding these ques-

tions. One, they do not provide a comprehensive list,
but reflect only some of the more important debates.
For instance, another issue which has been debated is
whether small or large organizations—industrial firms
and agricultural farms, for example—are best for devel-
opment. Two, although some of them may seem to be
closely related and often are in actual debates, they are
conceptually distinct. For instance, those who favour
minimal government intervention in the economy also
want to remove government restrictions on imports
and foreign capital inflows and, therefore, favour
globalization. However, greater export openness may
require greater, rather than lesser, government inter-
vention, in the form of active government assistance to
exporting industries, including initial protection from
 foreign competitors. Three, it will probably come as
no surprise—at least to those familiar with the ideas
of the Buddha and Aristotle—that extreme positions
on these questions are misguided, and the best option
is to follow a middle path. Yet, it is useful to focus on
extreme views because the debates are often waged in
extreme forms. Moreover, a discussion of the extremes
Development
Pathways
Economic
to
is illuminating for understanding why they are prob-
lematic, why some of them are not really opposites,
and for providing guidance on how to find the right
middle ground in specific conditions.
Answers to the questions just posed obviously
depend on what we mean by development. Chapter 2
will examine the meaning and measurement of devel-
opment. Although development is often conceptual-
ized and measured in terms of average real income (as
we have in the opening paragraph of this chapter) and
the pace of development is usually measured by the
rate of growth of per capita income, that chapter will
argue that this measure, although useful, misses a great
deal and discuss alternative concept and measures. In
addition to this, Chapter 2 will briefly examine how
well India is doing in terms of these concepts.
 To analyse the issues posed by these questions, we
then proceed by discussing the major obstacles to UOIJINPo

development to explain why poor countries are poor

and examine examples of policies for overcoming
these obstacles. Chapter 3 will explore the main obsta-
cles that have been emphasized in narrow economic
discussions, arising from factors internal to a country
and Chapter 4 will turn to those factors which are
related to economic relations between the country
and the rest of the world and which emphasize the
role of the country in the global economy. Chapter 5
will take a broader perspective, focusing on obstacles
arising from social, political, cultural, and geographi-
cal factors, as well as what have been called institu-
tional ones. The obstacles to development, as may be
expected, are many, and our discussion will focus on
issues that are particularly relevant to the Indian and
similar contexts. Chapter 6 will then return to the
debates on pathways to development to address the
questions and issues regarding alternative strategies of
development, and briefly appraise the paths taken by
India and some other countries in the past and at pres-
ent. Chapter 7 will furnish some concluding remarks.
 The approach we adopt here to analyse the pathways
to development—focusing on a number of debates
on alternative strategies which attempt to overcome
some of the major obstacles to development—is
not the only way of examining different paths. An
alternative is to examine the development experiences
of particular countries—those
Development
Pathways
Economic
to which have developed
successfully and those which have not—for instance,
the US, Japanese, Chinese, and Ugandan paths, to draw
lessons from their experiences.
Yet another way is to
distinguish between alternative strategies or ‘models’
which recommend the use of different configurations
of policies, such as neo-liberal, heavy-industry first,
growth-with-redistribution, and socialist strategies.
While these methods might have some uses for this
short introduction, they can turn our attention to
debates about what a country actually did (and how
what it did may have changed over time), what the
composite strategies really comprise of, and whether
they truly are alternatives.
Some further thoughts may be presented. First, how
should we study in greater detail the problems of, and
solutions to, poverty and the lack of development?
What are the appropriate methods? Should we use
mathematical models, statistical techniques, historical
analyses, and case studies drawing on actual experi- UOIJINPOA

ences in LDCs? Although questions regarding method

are not examined at length in this book in order to
focus on more substantive issues, they are not unim-
portant, and Chapter 7, among other things, will briefly
comment on them.
Second, in examining development, why focus on
economic development? What is signified by the term
‘economic’? Doesn't ‘development’ also depend on
other factors, including what we may call the social,
the political, and the psychological? As we will see in
the next chapter, we do it to narrow the scope of our
analysis and avoid addressing distracting controversies.
However, we will not discuss development on narrow
‘economic’ terms either, broadening our analysis, espe-
cially in Chapter 5.
Third, is economic development a good thing? Some
scholars of development have questioned whether it
really is. They have argued that what they call the
‘development project’ is a means of socially construct-
ing differences between the superior people and
nations who are perceived as being developed and
the inferior, underdeveloped ones, and this allows
 development experts to teach the ‘other’ to learn from
them and follow their footsteps on the trails they have
blazed (Escobar 2011).They have also pointed to many
instances in which expert advice and action in the name
of development has produced disastrous consequences.
There is much that is valid in what these critics argue,
and it
Development
Pathways
Economic
to is advisable to be aware of their admonitions.
Nevertheless, the criticisms arguably apply to particu-
lar conceptions of, and paths to, development, as we
will discuss in the next chapter, and not to the idea of
improvement itself. Starvation, disease, and other forms
of misery and suffering in many parts of the world is
real, not entirely or even largely imagined, and carefully
interpreted and implemented, economic development
can seek to reduce them.
We conclude with the acknowledgement that
a short book such as this cannot even begin to pro-
vide a thorough survey of development economics,
to cover its theories, empirics, and broad strategies
and policies. Readers who want detailed coverage
can consult a wide range of sources. They may start
with short recent reviews of some of the main issues
in development economics in Dutt and Ros (2008)
and Thirlwall’s (2011) balanced and comprehensive

10
textbook-treatment of the subject. Those who are in
uOTJINpos
search of analytical treatments using mathematics can
consult Ray (2011) for a broad mainstream neoclassical
perspective and Taylor (1983) for what can be called
a heterodox structuralist perspective. This volume
concentrates on some key ideas and concepts, and
the main debates about strategies, with some personal
(I hope, acceptable) opinions mixed in.

11
 2
Meaning and Measurement
of Development

What does development mean and how can we mea-

sure it? Presumably, it refers to something good, to
some sort of improvement. Although, as noted in the
previous chapter, there are critics of the “development
project’ because of its allegedly misguided application
of western concepts such as ‘modernization’ to other
societies, these reservations arguably relate to some
specific conceptions of development, rather than to
the idea of improvements in any sense. But these criti-
cisms also point to some of the complexities involved
in conceptualizing development.
These complexities can be understood in terms of
some preliminary questions. First, what is the appropri-
ate unit for which we ought to examine development?
For individual people, groups of people, for inanimate
objects, and conceptual systems like a nation? Second,
since development implies improvement, in terms of
what indices or measures or in what spaces should
we conceptualize it—in terms of single indices such
as income and production, utility (that is, how people
feel), or some combination of measures? Third, should
we confine ourselves to what actually happens, or
outcomes, or also in terms of some characteristics of fo
juaudojaaa
suruvayy
Juawmainsva
puv
people and societies—such as laws or the way the
society is organized? That is, should we follow what
ethicists call a consequentialist or a deontological
approach? Fourth, according to whom should we eval-
uate whether improvements are occurring? According
to the individuals, groups of people, or entire societies
undergoing it, or according to impartial observers or
development experts? Fifth, what is the appropriate
domain of development? Should we look at a variety
of factors, say the social, political, and psychological,
among others, or focus only the ‘economic’ and, if so,
what is included in that term? Finally, is development
an end in itself or a means to something else? Much of
the literature conceptualizes development as intrinsi-
cally good, as an end in itself, while recognizing that

13
 many aspects of development may be instrumentally
good as well, a means to other aspects of development.

Income, Production, and Growth

We may start with the most widely used indicator of

development, that is, levels and growth rates of income
Development
Pathways
Economic
to
and production. Figures for individuals relate to the
income received by an individual. Aggregate figures
typically measure the market value of all final goods
and services produced (which is roughly equal to
total income). Since the aggregates depend on the
size of the country in terms of population, they are
divided by population to obtain per capita figures,
and to abstract from the effects of changes in prices
(or inflation), they are measured in constant prices or
real terms. Comparisons across countries are made
using what are called Purchasing Power Parity (PPP)
values to take into account the fact that what people
buy costs different amounts in different countries
when expressed in terms of a common currency
using actual exchange rates. Five hundred rupees, for
instance, will buy someone more, on average, in
India than in the US (where it is less than US$20

14
when converted at the exchange rate) because the
prices of many things in the US—for instance, food in
similar restaurants, and services such as haircuts—are
higher than they are in India (although, internationally,
traded goods such as shirts are closer in price).
Production and income can be taken to show how
well a person or a country as a whole is doing. If
people receive more income or produce more, they
can obtain more goods and services and therefore fo
juaudojaaaq
suiuvay
juawmasnsvayy
puv
have the possibility of having a higher standard of
living or well-being in some sense. However, though
income and production provide people and countries
with the means of becoming better off, they do not
imply that they are actually better off. Thus, increases
in per capita income and its growth can be taken to be
instrumentally good, but not intrinsically so. However,
this approach can be justified in a number of ways.
One invokes the argument that individuals prefer, and
feel better by, having more goods and services. Thus,
when income and production increase, they are better
off by their own reckoning, which implies an intrinsic
improvement. Most mainstream (often called neoclas-
sical) economists take this approach, assuming that
individuals have given preferences which reflect their

iS
 subjective feelings (or utility), that they obtain higher
utility when they obtain more of any good or service,
and that they maximize their utility. A second relates to
the idea that if people and countries have higher levels
of income, they have more resources, which allows
them to obtain what they have reason to value, such as
better education, better health, and better environmen-
Development
Pathways
Economic
to
tal conditions. A third relates to the idea that countries
which produce more have greater economic and pro-
ductive power, which may be intrinsically desirable for
the country as a whole. This last justification is related
not only to per capita income and production, but
also to total production, and perhaps to internation-
ally comparable currency measures rather than PPP
measures, since productivity and power arguably relate
to the value of goods and services produced at world
prices rather than in terms of domestic purchasing
power. The first two justifications, as we shall see, are
related to two other indices of development.
The approach has some obvious advantages, which
explain why it is so widely used. Statistics on measures
such as per capita gross national product (GNP), per
capita gross domestic product (GDP), and per capita
national income have been regularly collected over a

16
long period of time (for a variety of reasons, including
for tax purposes) and are widely available. Appropriately
measured, the numbers can be compared across
time and space, which means that we can use them
to say whether a country or people are undergoing
development or not, and whether one country is more
developed than another. Moreover, the concept is
appealing both to those who want development to refer
to something people value in a ‘subjective’ sense (given fo
juaudojaa
Suiuvayy
Juawainsva
puv

the relation between it and individual preferences), and

to those who want an ‘objective’ measure in terms of
physical units and market prices.
Despite its widespread use, however, the approach
has a number of flaws which make it problematic as an
index of development. Some major problems include
the following. For one, income and production may
not accurately represent the amount of useful goods
and services produced. They may be underestimated
because the figures typically do not include the goods
and services which are produced at home for consump-
tion, such as cooking, cleaning, and childcare, often
provided by women (although attempts are made to
include food produced for self-consumption in fam-
ily farms). They may be overestimated because some

v7
 goods and services produced, such as those purchased
by the government, may imply government waste and
inefficiency, and other purchases by consumers may
merely be the result of manipulation through sales
promotion activities of firms which provide little or
no satisfaction, and others may reflect natural resource
depletion (for instance, the ‘production’ of oil). Further,
Development
Pathways
Economic
to
the amount of goods and services is not the only thing
that is relevant for the well-being of people: the utility
obtained by people may depend on the amount of lei-
sure they enjoy, on the quality of natural environment
(for instance, whether the air they breathe is clean and
whether their health suffers because of water and air
pollution), and other aspects of society. Also, average
income and production do not show how the average is
distributed across people. This problem afflicts average
measures for a country, and not individual measures,
although it can also affect measures for households by
neglecting to take into account distribution within
households. In addition, how production and income
translate into well-being as ends—whether in terms
of utility or in terms of objective indicators such as
health conditions and the availability of education and
transport facilities—can vary across people, over time,

18
and from place to place. For instance, the amount of
goods and services people may need to survive with
good health may depend on general health conditions
(if they live in regions in which such conditions are
poor and where they are subject to health hazards
they may need more medicines than people who live
in healthier places) and whether these goods are pro-
vided by the government (for instance, governments
can supply education and health care in some places). fo
juaudojaaa
suiuvayy
Juawmasnsva
puv
The amount of income people need to maintain their
dignity or self-respect may well vary across time and
space depending on what consumption norms prevail,
which in turn may depend on average consumption
levels.
Given these problems, it is not surprising that
empirical work on subjective well-being or happiness
has not found a strong positive relation between per
capita income and happiness in countries over time,
and across countries, except at low levels of income
(contradicting the notion that more is better), nor is
there a one-to-one relation between per capita income
and other objective indicators like health conditions
(there being wide differences in these indicators across
countries at the same level of income).

19
 Finally, the approach can be said to be purely con-
sequentialist, focusing on what is actually produced or
received, rather than on whether people are vulnerable
(due to the fragility of conditions which yield output
and income) and whether they have rights and free-
doms of various kinds.
Pathways
Economic
to On a note of caution, the easy availability of statistics
Development
can make us forget that they often do not accurately
measure what they claim to measure, since the numbers
are sometimes imputed in rather arbitrary and possibly
biased ways, for instance, due to the under-reporting
of individual incomes, the exaggeration of total pro-
duction, problems with data based on surveys, and the
paucity and inaccuracy of price data.

Utility and Happiness

Why not conceptualize development directly in terms

of the utility that people obtain? Indeed, as noted ear-
lier, mainstream economists usually appraise economic
conditions in terms of utility levels. According to their
approach, a person is better off if he or she obtains
a higher level of utility according to his or her own

20
preferences, and a society is better off if the level of
utility of at least one person increases without anyone
else experiencing a reduction in utility.A society is in
a good state—an efficient or Pareto-optimal one—if it
is not possible to obtain a higher level of utility for one
person without reducing the level of utility of some
other person.
It seems reasonable to follow this approach. It evalu-
ates development according to what people prefer and fo
juaudojaa
suiuvayy
Juamasnsva
puv
how they feel, that is, according to their own reckoning.
It also takes into account not only the income people
receive and the goods and services they consume, but
all things that make people better off, including the
amount of leisure they enjoy and the state of the natu-
ral environment.
One immediate problem is that of finding out how
people really feel and whether they are feeling better off
or worse off.A large amount of survey data which asks
people questions of the form, ‘All things considered,
on. a scale of 1 to 10, how happy do you feel with your
life?’, now exists, mostly for more developed countries,
and increasingly, for LDCs as well. Although not as
easily and regularly available as income and production

21
 data—the figures come from surveys involving
relatively small samples—there have been calls for the
more systemati¢ collection of ‘happiness’ or ‘subjective
well-being’ data, and for their greater use for evaluating
development.
The approach has a number of additional short-
comings. There
Development
Pathways
Economic
to is no obvious way to aggregate the
measured happiness levels of individuals, since even if
one person’s stated level of subjective well-being may
be compared at different points in time, the levels for
different people cannot be compared. Although it is
possible to compare states in which some people are
better off and no one is worse off, since many real-
world changes involve gainers and losers, aggregation
becomes necessary, and average levels of happiness are
misleading. Cultural differences between people in dif-
ferent countries (for instance, whether they believe it
is acceptable to state how happy they are, and what
they mean by happiness) make it difficult to compare
happiness levels across countries. It is also conceptually
very difficult to know what exactly is being measured
by these numbers and whether they truly represent
people’s well-being as reckoned by themselves. People

22
have been known to give different responses depend-
ing on the general conditions prevailing when they are
asked (whether the day is sunny or cloudy), on pre-
cisely how the questions are put, and how adapted they
are to their individual conditions. The issue regarding
adaptation is particularly problematic because if people
who are poor adapt to their condition and ‘accept’
their lot, they are likely to be content, perhaps even
more so than people who are in far less impoverished fo
juaudoj
suiuvayy
Juawmadns
puv

circumstances (according to more ‘objective’ measures).

People may not have enough information to be good
judges of their conditions: People with poor health
conditions may be happy about their health, because
they are not trained to assess their health conditions
in a more informed manner. Moreover, which people
should be taken into account? Only those existing
now or also future generations when there is reason
to believe that what happens now (for instance, what
happens to the natural environment) can affect people
who are not yet born? Finally, the approach does not
take into account that fact that groups of people can
collectively value certain things and conditions in ways
which are not captured by individual feelings.
 Functionings and Capabilities

The problems associated with the approaches dis-

cussed so far have induced some development scholars
and ethicists, most notably, Amartya Sen, to focus on
achieving something and having things that people
value and have reason to value, such as being educated,
Development
Pathways
Economic
to
being healthy, not going hungry, and having dignity
and self-respect. The term ‘functionings’ is used to
refer to what extent people achieve things and condi-
tions that are considered to be valuable, and the term
‘capabilities’ to the ability of people to achieve these
functionings, rather than to actually achieving them.
An argument in favour of capabilities as against func-
tionings is that it is important for people to have the
substantive freedom to achieve certain things, rather
than being forced to achieve it if they voluntarily choose
not to do so (for instance, it is important for people to
have the real choice of getting adequate nutrition, and
not to actually get it if they choose to diet or even
fast for religious, political, or health reasons). However,
since it is conceptually difficult to ascertain when
people’s choices are ‘truly’ voluntary (for instance, an
alcoholic who chooses to drink), and it is harder to

24
measure capabilities than actual functionings, the latter
may be preferred for many applications.
The approach is preferable to the income and pro-
duction approach because it focuses on the ends and
not the means of development, that is, on intrinsically
valuable things, and it evaluates what is good in terms
of more objective concepts rather than subjective feel-
ings which are subject to adaptation.
There are, however, a number of problems with this juamdojaa
fo
suiuvayy
Juamasnsv
puv
approach. First, what are appropriate functionings and
capabilities? Some argue that there are some universal
goods that should be included while others believe that
the list should be chosen by societies, or even individu-
als. If we take the individual perspective, clearly not
everything every individual values can be included in a
list. But then how do we decide what will be included
and what will not without running into the problems
encountered for the utility approach? Sen has argued
for the need of careful and impartial reasoning and
public deliberation to resolve these issues, or at least to
narrow differences in points of view, and perhaps we
have to be content with this despite possible problems
related to asymmetries in power and influence. Second,
when we have decided what to include and how, how

25
 do we aggregate over them to represent them with
a single number? There are ways of arriving at some
numbers.
The widely used human development index
(HDI), in fact, aggregates over three elements—
income (after taking its logarithm to make its value
rise at a diminishing rate with income), education, and
health—by giving equal weight to each in a way that
Development
Pathways
Economic
to
many find more useful than focusing only on income.
Also, aggregation may not be necessary: we may focus
on the achievement of a set of basic needs, as advocated
by the basic needs approach that emerged in the 1970s,
looking separately at things such as education, health,
and nutrition. Third, this approach raises distributional
problems when we look at averages such as years of
schooling, which does not take into account how the
rich and poor and men and women are doing, in terms
of this functioning. However, the approach can be used
to examine such distributional issues in ways that may
be superior to the income and production approach in
some senses. Finally, there are certain goods, like free-
doms, rights, and the natural environment, which are
difficult to reduce to the functionings and capabilities
of individuals in a simple manner (even though the
capabilities approach provides a way of characterizing a

26
range of freedoms). This is because the goods relate to
procedures rather than outcomes and/or because the
unit for which development is examined is not the
individual, but rather collectivities such as countries.

Distributional Issues

Even if we are interested in evaluating how individuals

are doing, it is not practical to keep track of how every fo
juaudoja
suiuvayy
Juawmasns
puv
single person is faring, since doing so would require
us to gather and process too much information. Thus,
evaluations are often made in terms of averages for a
country, like per capita income or product, the aver-
age level of subjective well-being, the average years of
schooling, and the mortality rate. However, such aver-
age figures conceal important and relevant information
about how different people in a country are doing. For
instance, average per capita income and product may
be going up in a country even when the richest among
the population are experiencing higher incomes while
the great majority of people are receiving no gain or
even lower levels of income. Also, it is possible that the
average years of schooling in a country is going up
while some groups of people, for instance, women, are

27
 experiencing little or no improvement in this regard.
Thus, if we are concerned with the development of
people we need to go beyond average figures for a
country and examine how the variable is distributed.
Alternatively, if we are interested in whether a country
is developing, we may be interested in the extent and
changes in inequality within it, if we take the view that
Development
Pathways
Economic
to
inequality is a bad thing.
One way to address distributional issues is by exam-
ining how well the worst-off in a country or group are
doing. For instance, we may want to know whether the
people with the lowest levels of income are able to at
least achieve some minimal level of consumption nec-
essary for meeting basic subsistence. This level, usually
called the poverty line, is difficult or even impossible
to define precisely, so that different levels are used, for
instance, US$1, US$2, and US$5 a day, adjusting for
purchasing power differences across time and place,
and national governments use their own definitions.
For a given poverty line, one can count the number
of people (or families) who are poor and calculate the
poverty rate as the total number who are poor as a
ratio of total population. We may take a decline in the
poverty rate of a country as showing that development
is taking place. We can also look at the worst off in
terms of other concepts, such as education and health
conditions, and examine whether their conditions
are improving. The focus on the poor can be justi-
fied—if it is not obvious—in terms of sympathy for
the deprived (perhaps motivated by religious consider-
ations), in terms of impartiality, or in terms of the phi-
losopher John Rawls’s influential difference principle.
This principle follows from the idea that individuals, juaudojaa
fo
suiuvay
puv
Juamasnsv
under a veil of ignorance where they do not know
their positions in the economic hierarchy, will be led
by self-interest to adopt an arrangement of society in
which the resource position (in a broad sense) of the
worst-off individuals will be made as high as possible
because each individual realizes that he or she can be
in that position.
Another approach to the problem is to take into
account inequality of income or other measures such
as functionings and capabilities. Inequality of income,
for instance, is often measured by the Gini coefficient
which is based on the average difference between the
incomes of every pair of individuals in the country, and
is related to the Lorenz curve, which shows what per-
centage of total income is received by what per cent of

29
 the population.A country which experiences a decline
in inequality can be said to be developing, other things
constant. However, some ethical philosophers take the
view that equality of income or resources is not neces-
sarily a desirable goal, since it does not take into account
the different contributions that people make to society,
or reward greater effort or better choices
Development
Pathways
Economic
to of people.
Arguably, however, in an uncertain world in which
the effects of choices and actions are not predictable,
existing levels of inequality are unlikely to be justifiable
by such factors; indeed, luck—including one’s social
position at birth—and the configuration of social,
economic, and political power have an important role
to play in determining inequality. Nevertheless, these
arguments do suggest that fairness and equality of out-
comes need not necessarily go hand in hand, and some
have been led to giving greater importance to absolute
poverty than to equality. However, since we may be
interested in absolute levels of functionings and capa-
bilities, and not just in incomes, and since the former
may well depend on relative income (for instance, one’s
dignity may depend on what one is able to consume in
relation to accepted social norms which are related to
average incomes), concerns about absolutes in terms of

30
capabilities and inequality in terms of income may be
closely related.
Another aspect of inequality which is relevant for
development is how much inequality there is in terms
of a metric like income or educational attainment for
different types of people distinguished by some other
characteristic, such as religion, ethnicity, gender, or
place of residence (different regions of the country
such as states or in urban versus rural areas); or caste, of fo
juaudoja
suiuvayy
Juamasnsv
puv
obvious importance for India. This kind of inequality,
sometimes called horizontal inequality to distinguish
it from vertical inequality which refers to, for instance,
how income is distributed among income groups, is
particularly problematic because it is much more dif-
ficult to justify it in terms of differences in choices and
effort, and often is the result of overt discriminatory
practices by individuals and groups, sometimes through
government actions.

Collective Goods, Rights, and Freedoms

Most of the approaches to development discussed so

far can all be thought of as conceptualizing develop-
ment in individualistic terms, either by looking at how

31
 individuals are doing on an average, or by taking into
account how they are doing relative to others. However,
development can also be thought of in collective terms
and, indeed, some conceptions of development cannot
be reduced to the individual level both with regard to
for whom and according to whom.
Pathways
Economic
to On the question of for whom
Development or for what, the full
meaning and significance of many ‘goods’ cannot be
fully captured in terms of how they affect individu-
als. Only groups of people can have sovereignty or the
ability to govern themselves in an agreed upon man-
ner, which can be referred to as collective capabilities.
Moreover, in talking about the natural environment,
one needs to go beyond humans to include other ani-
mals and trees and inanimate objects such as water, soil,
and air and, in fact, the entire ecological system. Groups
or countries can have laws and practices which provide
rights and freedoms because by their very nature, at
least in principle, they apply to everyone and, as noted
earlier, one can also think of equality and inequal-
ity as the attributes of societies. Although, obviously,
individuals can enjoy rights and freedoms, be unhappy
about being unequally treated without good reason,
and be happy if they enjoy sovereignty and clean air, in

32
some respects, it can be argued that the ethical status of
these goods cannot be reduced to the individual level.
On the question of according to whom, it is taken
as self-evident by some people that individuals are the
ones who decide what development means, since who
else can? Thus, utility reflects people’s own desires, and
more income is valuable if it gets them more of what
they want, and better health and education is valued
only because individuals take the view that it is valu- fo
juaudoja
Suiuvayy
juawmasnsv
puv

able. In the case of what economists call public goods,

such as national defence, which can be provided only
to groups without excluding people and which can
be enjoyed by all at the same time without reducing
the enjoyment of others, individuals can have per-
sonal preferences for them. However, although the
individualistic approach in this sense is sensible and
appealing for certain types of goods, it raises important
questions for other goods. Goods such as better health
and education are valuable not only because individu-
als may take them to be so, but also because we have
reason to take them to be so. Both the words ‘we’ and
‘reason’ in the preceding sentence are important. While
for individual preferences there may be no necessary
social aspect (though, of course, these preferences may

33
 be affected by social factors), decisions at the social
level are of a social or collective nature, since they
have to be agreed to—though not unanimously or
even through some clear voting procedure—through
social interactions and on the basis of shared under-
standings and values. So-called experts from different
fields (like health, education, and economics) can have
Development
Pathways
Economic
to
a role in these deliberations, although it should be kept
in mind that experts can have their own biases and
vested interests, and often have disproportionate power
in determining the outcome of these deliberations.
In this social interaction, choices need to be based on
reasons which are, in principle, capable of being
conveyed socially and adhering to some notion of
impartiality, and not simply on self-interests, feelings,
and opinions of individuals. Thus, functionings and
capabilities can have a social dimension because social
groups can have a shared understandings of what is
valuable, although they can also be given an individu-
alized interpretation in the sense that individuals can
value them with good reason.
Some aspects of three types of social or collective
goods may be briefly mentioned because of the atten-
tion they often receive. Regarding the environment,

34
or different aspects of it, although it can be considered
valuable because it provides utility for individuals, it
is not clear how the utility of people who are not yet
born can be taken into account, or how we can find
out how many people will exist at some future date so
that we can add their individual utility, or how we can
know the complex and uncertain interactions that exist
between economic activity and the environment and
between different aspects of the environment. Because fo
juaudoja
suiuvayy
Juawmainsv
puv
of these reasons, it would be sensible to proceed by
measuring different aspects of environmental quality
and treating improvements in them as representing
development as an intrinsic good, if only in a provi-
sional sense (because we do not know how they will
affect us individually). Moreover, what goals we set
ourselves regarding environmental quality requires
shared values and understandings, and not everyone
will be in agreement with them. Regarding freedoms
and liberties, there needs to be a shared understanding
of what kinds of freedoms require protection (such
as, the freedom to live and work where one chooses
without being prevented by other people or the state,
the freedom to associate with others without interfer-
ence, and the positive freedom to obtain health care and

35
 education), how the freedoms are defined, what to do in
cases where different freedoms come into conflict, and
how the freedoms are to be protected. Regarding rights,
the same considerations apply. Moreover, the freedoms
and rights have to apply to all in a society, unless there
is good reason to restrict them in some cases. Rights
and freedoms are also of interest because, unlike income
Pathways
Development
Economic
to
and production, utility and the achievement of some
functionings, which are concerned with consequences,
they are deontological in nature and therefore focus
on some aspects of development ignored by other
approaches. However, they are difficult, if not impos-
sible, to adequately quantify and aggregate, although
there have been many attempts to do so.
One other thorny issue concerns to what extent a
particular group of people within a country can define
development in their own way and develop according
to that definition when it is at odds with the definition
shared by much of the rest of the country. This issue
is particularly relevant for discussions on the rights
and condition of many indigenous peoples around the
world, such as the Scheduled Tribes and other Adivasis
of India, who have often been viewed as standing in
the way of ‘development’, interpreted as economic

36
growth and the improvement of material conditions.
A reasonable approach, which enables groups such as
these to ‘develop’ using their own notion of ‘develop-
ment’, raises several ethical and practical problems. Is it
ethically acceptable for groups to deny some capabili-
ties to some of their members, for instance, women?
Should one leave these groups alone when they are
located in areas rich in natural resources or particularly
suitable for the construction of dams which could lead fo
juamdoja
suiuvayy
Juamainsv
puv
to improvements in the material conditions of large
numbers of other people? Is it practical to expect
that groups can pursue their own development goals
when societies around them are following a different
path and spreading the effects of that more broadly,
for instance, through environmental damage and the
spread of consumerism? The issue actually is a more
general one, since the same questions arise regarding
individuals or any groups within a given country, and
for particular countries within a globalizing world. To
take it further, it raises questions about whether widely
accepted interpretations of the term ‘development’
can allow for the existence of alternative notions, an
issue which is related to problems raised by the critics
of development.

if
 Evaluating Development

What does our discussion of different approaches to

development imply about the questions raised earlier
regarding the different dimensions of development?
First, even though we may be most interested in the
development
Development
Pathways
Economic
to of individual human beings, there are
reasons why we can also focus on groups of people,
animals, the inanimate, and conceptual systems. Second,
there are strengths and shortcomings of all single met-
rics of development, such as income and production,
utility, functionings, and capabilities. Thus, no single
approach trumps the others and we need to take sev-
eral of them into account. Third, although actual
outcomes are important, we need to also take into
account procedural aspects of development, examin-
ing rights and freedoms as well. Fourth, any notion of
development needs to take into account the views of
the people involved in the process, rather than having
a few views of development thrust upon them by out-
side ‘experts’ or powerful groups. However, these views
need to be based on reason and have a social character.
Complex issues arise on how individuals and societies
can arrive at some workable agreements about what

38
development means or, at least, in the sense of what
direction to go. Fifth, development encompasses many
aspects of life, but there is something to be said for
being somewhat narrow. We will narrow our focus
in this book to economic development, rather than all
possible aspects of development. Aside from being
somewhat focused, this allows us to sidestep debates
about political and social development related to
democracy and governance (which are notoriously juaudojaa
fo
suiuvayp
juawmasns
puv
difficult to define and measure), and modernization
(which apart, from definitional and measurement
problems, leads to many controversies emphasized by
post-development scholars). However, while we will
focus on economic factors, we do so with some hesita-
tion, since it is not clear how one can decide what
is economic and what is not. Non-economic factors
will not be banished entirely, because they may well
be relevant for some concepts of development used
by economists, such as utility (which can depend on
non-economic issues such as the strength of com-
munity relations or the nature of political systems)
and functionings and capabilities (which can depend
on self-respect and dignity), and because they inter-
act with these and other even narrower economic

oh)
 concepts like income and production. Finally, regard-
ing means versus ends, we need to consider both.
Many aspects of development can be seen as means
as well as ends (for instance, improving education
can be an end because it enhances functionings and
capabilities, but can be a means to increasing income
and production).
Development
Pathways
Economic
to Also, how one thinks of the so-called
ends can and does change with time as new problems
emerge (for instance, as reflected in the attention given
to the natural environment in the last several decades).
Moreover, an excessive focus on means can cloud our
vision about what is truly important. For instance,
while we should not equate economic development
to economic growth in terms of per capita income
and production because it neglects distributional and
environmental issues, and ignores functionings and
capabilities, rights and freedoms, and collective goods,
we should not underestimate its importance. This is
because it has proved very difficult to improve other
aspects of development, such as functionings, in a sus-
tained way without long-term increases in production
and income and the distribution of income.
Given these answers, how do we evaluate devel-
opment? Clearly, since economic development has

40
many dimensions, no single indicator or narrow range
of indicators will do. However, even for a particular
concept of development, how do we assess whether a
country or other unit is doing well in terms of it?
One approach is to interpret the level of achieve-
ment and improvement as evidence that the country
is doing well and therefore developing. The level of
achievement is hard to evaluate without a point of
reference and an improvement is rather arbitrary, since fo
juaudoja
suruvayy
Juamadns
puv
it takes no improvement as the only point of com-
parison.
An alternative approach is to examine how the
unit is doing in comparison to some norm, such as,
how it is doing compared to an earlier period, how it
is doing compared to other comparable units, or how
it is doing compared to its potential. Since it is difficult
to ascertain the potential of a country or other unit—
although imaginative methods can be and have been
developed involving statistical and other methods—it
may be easiest to use the other two norms, especially
using other comparable periods and units, as a point
of comparison.
To illustrate, we examine a few indicators. Table 1
presents data on per capita GDP, PPP-adjusted per
capital GDP, the United Nations Development

AI
 Program’s (UNDP’s) HDI, and some health and
education indicators. In terms of per capita income
and production, LDCs such as India are far below more
developed countries like Japan and the US, although
the difference narrows somewhat in PPP terms because
of lower prices of many goods and services.
Pathways
Economic
to India is also far below Brazil, Mexico, and China,
Development
but compares favourably to neighbours Bangladesh and
Pakistan. These differences are also found in the HDI
and health and education indicators. (Some countries,
such as Brazil, have gross school enrolment rates over
100 per cent because some people who are not in the
secondary school age population can be enrolled.)
The table shows that although there is a positive rela-
tion between income and production measures and
other indicators, it is possible for some countries to
achieve high human development measures even with
low income and production levels, due especially to
successful public efforts. For instance, Cuba, with a
considerably lower level of per capita GDP than Japan
and the US, has high levels of functionings in terms of
health and education indicators. Nigeria lags behind
some other countries with comparable income and
production measures in terms of health and education.

42
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 Bangladesh has done well in terms of infant mortality
compared to India, but not in terms of education.
Figure 1 shows levels of per capita GDP in dol-
lar values at constant prices for a few countries. The
strong performance of South Korea is shown in the
figure: Starting below Brazil and at a level not much
higher than the other countries, Korea has experienced
Development
Pathways
Economic
to
significant increases in per capita GDP. Since it is hard
to see the curves for China, India, and Kenya, Figure
2 shows the logarithms of per capita GDP, indicating
the differences more clearly. The curves in this figure
also have the property that the slope of the curves
shows the growth rate of per capita GDP. This figure
shows China’s strong growth performance since the
mid-1970s, starting below all the other countries in
the 1960s, overtaking India and Kenya and approach
Brazil’s per capita production level and narrowing the
gap with South Korea. Brazil and Kenya show low
growth performance, whereas India’s growth rate has
increased since the mid-1980s.
Table 2 presents data on poverty, inequality, and
happiness measures for selected countries. The poverty
rates use the same poverty level, although adjusting for

44
 suiuvay
fo
juaudojaaa
puv
Juamasnsvay

1960196319661969197219751978

FIGURE 1 Per Capita GDP, Constant 2000 (US$): Brazil,

China, India, Kenya, South Korea
Source: The World Bank, World DataBank.

PPP, and show, as one would expect, higher poverty

rates for countries with lower per capita income and
production levels. However, some low-income coun-
tries do well compared to some others. Sri Lanka fares
better than its South Asian neighbours and Pakistan has

45
Development
Pathways
Economic
to

Lf 160. ss" SiS Se ty NOL OA EY GO

SSSSRKRRESCSKRRRKRRESSESE
GN ON SIGN SON “IGN, (ON ON ONT (GN ON TIONS ONT (ON GR Ca Con Gy 1
ae ee ee ee |

FIGURE 2 Log of Per Capita GDP, Constant 2000 (US$):

Brazil, China, India, Kenya, South Korea
Source: The World Bank, World DataBank.

lower poverty rates than does India. For reasons men-

tioned earlier, poverty rates are not necessarily good
measures of destitution and inequality measures may
be more enlightening. The Gini coefficient measures
shown in the figures are not strictly comparable across
countries, given different measurement methods; for

46
instance, some countries examine income and oth-
ers consumer expenditures. However, the high levels
of inequality in Brazil and South Africa stand out, as
does that for the US among more developed countries.
Although India’s is low by the standards of the Latin
American and African countries in the table, India’s
Gini coefficient has gone up from 30.8 in 1994 to 33.4
in 2005, and other evidence also points to increases in
income inequality in India. As noted earlier, there are Suiuvayy
fo
juawdoja
puv
juaumain

important dimensions to inequality other than vertical

inequality in terms of income. The table shows inequal-
ity in terms of education with the ratio of the female
literacy rate and the male literacy rate, with a lower
number showing greater inequality. Pakistan is at the
bottom of the list, followed by India, while Bangladesh
is doing better. China, Kenya, Indonesia, and South
Africa are doing better still, as are the Latin American
countries which, of course, have significantly higher
levels of per capita production and income. The table
also shows happiness indicators as a measure of utility
from the most recent year in which survey results are
reported in the World Values Survey. Among the coun-
tries shown, India has the lowest level of subjective well-
being, although those of Bangladesh and Pakistan are

47
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comparable. Some LDCs, such as Indonesia and
Nigeria, are doing well in terms of this measure,
better than Japan and close to the UK and the USA.
More developed countries are seen to be doing better
in the table, but among all such countries, there is no
clear relationship between income and happiness.
Finally, Table 3 shows some environmental indi-
cators. Freshwater withdrawals reflect geographical
features, but also provide some indication of water suiuvay
fo
juaudoja
puv
Juamains

shortage. India and, especially, Pakistan are seen to have

a problem on this score. CO, emissions are a measure
of air pollution and also show a country’s contribu-
tion to global climate change. In per capita terms, the
figures show that more developed countries like Japan,
the UK, and, especially, the USA, are the major sources
of emission, although South Africa and China are also
major polluters. However, as a ratio of production,
LDCs have high levels of emissions which imply prob-
lems for air quality as their income and production
increase unless they are able to reduce the pollution-
intensity of production, for instance, by switching to
technology that is less pollution-intensive, or a product
mix that is less polluting.

49
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 3
Domestic Economic Aspects
of Development

To gain insights into how LDCs can develop, we need

to understand what prevents development. Economists
and other social scientists have identified a variety
of obstacles to development, the major ones among
which we discuss in this and the following two chap-
ters. In this chapter, we discuss those domestic factors
that have been traditionally emphasized by economists,
which can be called ‘economic’. In the next chapter,
we will examine international factors, continuing to
focus on economic factors, and in the following one we
will examine those that have been emphasized mostly
by other social scientists, so that we call them ‘non-
economic’ (although recognizing that the boundary
between them and the economic factors is blurred).
 Vicious Cycles of Poverty

A fruitful starting point for analysing obstacles to devel-

opment is the concept of the vicious cycle of poverty,
which states that poor countries stay poor because they
are poor (where the word poor is used broadly to refer
to the
Development
Pathways
Economic
to less developed in a variety of senses). Although
the idea is simple and appealing, it raises a number of
questions and issues.
First, the concept is not very useful unless we can
come up with specific mechanisms which make poor
countries stay poor. Development scholars have sug-
gested a number of mechanisms—such as low levels of
saving and poor health conditions—which can explain
the vicious cycle of the form: poverty implies some
conditions which imply its persistence. Thus, poverty,
in the sense of low levels of income, implies that people
cannot save to add to their wealth or invest to increase
future production and income because they devote all
their income towards meeting subsistence needs.
Poverty, in the sense of having low levels of education,
implies that people have low levels of income, which
then makes it difficult for them to afford education for
themselves and their children. Much of the rest of this

52
and the two following chapters can be interpreted as
spelling out some of these mechanisms in more detail.
Second, the approach needs to go beyond just saying
that poverty creates the conditions which reinforce it,
because it is possible that if some small steps can be
taken to reduce poverty, the conditions for its existence
will weaken, and a cumulative development process will
be set in motion. What appears initially to be a vicious
cycle can turn out to be a virtuous one. Two cases can fo
sjaadspy
juaudo
Jsawmo
n1mouo

be contrasted, as shown in Figure 3. The figure shows

the relationship between the level of some development
variable, y, which we can, for the sake of concreteness,
take as income or health conditions, and the changes in
it over time, which we denote by y (with the dot over

Ye Yo \Y) Yu \ Y

FIGURE 3. Vicious and Virtuous Cycles of Poverty

DS
 the variable denoting changes over time). When y is
positive, y increases over time, while when y is negative
y falls over time. Both cases show that when y increases
y first increases and then decreases, eventually becoming
negative, after the level shown as y,, The negatively-
sloped segment may exist because at least for some
indicators of development (such as, say, life expectancy),
Development
Pathways
Economic
to
perpetual increases are not possible. However, for
other indicators there may be no negatively sloped
segment; for instance, income can increase indefinitely.
Whether or not the curve eventually has a negative
slope and crosses the horizontal axis is not important
for our purposes. What is crucial is what happens at
lower levels of y.
In case (a), the relation is such that at low levels of y,y
is negative. Thus, when y increases, although its decline
becomes smaller or its rise larger (since the relation
between y and jy is positive), y falls over time. This can
happen, for instance, because at low levels of output
farm families eat a large part of their crop to meet their
subsistence needs, not sowing enough to increase their
output in the next year, making production fall over
time. It is only when production increases beyond a
certain level, y., (where the subscript C denotes critical

54
level), that farmers are able to sow more than the
previous year, and output begins to increase, so that y
is positive. If the individual, family, or the economy as a
whole, starts with a low level of y, say y, (which is zero
in the figure, but can also be a very low amount), and
some change makes their output rise to a level less than
Y~Y will fall over time back to y,. However, if somehow
y is pushed beyond y,, it will rise over time and reach
the high level y,, (or continue to increase indefinitely if sjaadsp
fo
juaudoj
Isamo
a1mo0u0

the curve does not eventually cross the horizontal axis).

In case (b), the relationship is such that if y increases
by even a little above y,, it will continue increasing tll
it reaches y,, (or increase continually). In case (a), it is
reasonable to think of the economy being trapped at
a vicious cycle at y,, whereas in case (b), any upward
movement from y, results in a vicious cycle upwards.
The crucial issue for the idea of the vicious cycle is
whether increases in y lead to y becoming negative
or positive. The existence of a vicious cycle requires
that the relationship resembles case (a) rather than case
(b). If a vicious cycle exists, development is difficult
because considerable effort may be required to push the
economy beyond y_; otherwise the economy reverts
back to its low-level trap.

aD
 Third, since different development variables—such
as health and education indicators—may be caus-
ally related, for instance, bad health prevents children
from going to school, and poor education results in
unhygienic practices, it is sometimes not sensible to
think of the dynamics of a single indicator in isola-
tion.
Development
Pathways
Economic
to Several implications follow from this observation.
One, a vicious cycle for, or involving, one indicator
may block overall development even in the absence
of a vicious cycle for another one considered in iso-
lation. For instance, if the dynamics of health 1s like
case (a) above—considered in isolation, for a given
level of education—while that of education is like
case (b), also for a given level of health, the overall
dynamics can exhibit a vicious cycle. Two, if there are
several interacting vicious cycles, the effort required
in breaking out of the resulting vicious cycle may be
very high since effort is required on both health and
education fronts.
Fourth, we have not specified at what level (for
instance, micro or macro) the cycles apply. In general,
obstacles to development can arise at different levels: at
the level of individuals or families or small groups, what
is called the micro level; at the level of the economy

56
as a whole, called the macro level; at some interme-
diate level of broad sectors or large groups; or at the
world or global level. Micro-level obstacles can be
analysed without necessarily referring to the broader
economy or society in which they operate, but can
also sometimes be used to examine overall problems
with the economy and society since, for some issues
and some situations, the whole behaves like the sum of
its parts. However, there are many obstacles that require fo
juaudo
sjoadsp
m1m0u0
Iusamo

analysing interactions between different individuals or

small groups, or how individual behaviour affects, and
is in turn affected by, sectoral or macro conditions,
which requires us to go beyond the micro level. For
instance, in a famous example discussed by Rosenstein-
Rodan (1943), individual firms, in contemplating
increases in their production, may not expect to find
buyers and sell enough to be able to warrant the expan-
sion, and are therefore discouraged from expanding
production. However, if a large number of firms which
produce different products expand production more or
less simultaneously, the employment and income that
they generate can create the demand for each other.
Thus, a sufficiently large increase in total production
spread over many firms, perhaps with government

57
 spending, can generate enough demand to make
further increases in output profitable. Cycles can also
appear due to the interaction of different broad sectors
which can only be analysed at the systemic level. For
instance, the interaction between an agricultural sector
with surplus labour and a manufacturing sector with
increasing returns to scale (to be discussed later in this
Development
Economic
Pathways
to
chapter when we consider sectoral issues) can lead to
vicious cycles which require a large expansion of the
manufacturing sector to reap sufficient advantages of
large scale production (Ros 2001). It should be noted
that although analysis at the sectoral or macro level is
crucial for understanding many obstacles to develop-
ment, it can be misleading or incomplete if it does not
take into account how individual people or groups
behave. Finally, some issues, such as global climate
change, require analysis at the global level, although
how countries are affected by them may depend on
factors internal to them.
Fifth, although the curves show a simple relation
between y and y, it should be recognized that they actu-
ally incorporate a number of different causal mecha-
nisms influenced by behavioural relations involving
choices people make (which can be at least partially

58
affected by social norms), the objective circumstances
in which people find themselves and their expectations
about the future. For instance, in the cycle in which
income determines education and therefore a change
in income, the level of income can affect whether
or not people send their children to school through
a number of different channels, including whether
people can afford to send them to school (in terms
of schooling and other related fees and whether they sjadsp
fo
juaudo
I14sawm
a1mouo

need their children to work instead of going to school),

the availability of schools close by (which depends on
average income which in turn affects government rev-
enues), people’s expectations regarding whether their
children’s income will increase as a result of obtaining
education, and on whether the increase in education
actually increases income in the future due to the
availability of suitable jobs. These observations imply
that it may be possible to break out of vicious cycles
in some cases by shifting the curves by affecting their
underlying relationships, thereby reducing the level of
Y~ tather than by requiring a large increase in y to go
beyond y,..
Finally, to go from general ideas about vicious and
virtuous cycles to specific mechanisms, we can start

59
 by examining the process of production, taking into
account the fact that people receive income from the
production of goods and services which use resources,
inputs, or factors of production.
The factors of produc-
tion economists focus on are labour and capital. More
workers, by expending more labour, can produce more
output, as can better workers, for instance, those who
Development
Pathways
Economic
to
are more skilled. Capital is interpreted either as finan-
cial resources used to obtain the means of produc-
tion or the physical means of production themselves,
that is, machinery, equipment, factory buildings, and
infrastructure such as transport and communication
systems. With more and better machines and other
capital, it is likely that a given number of people can
produce more: consider farmers who install pump-sets
and tractors to increase agricultural production. There
are, of course, other inputs, such as natural resources
and land, which are particularly important in the pro-
duction of agricultural goods and produced inputs.
To study the relationship between income and produc-
tion (an example of the level of y) and their increases
over time (an example of y), we can examine how
given initial levels of income and production make
possible the expansion of income and production due

60
to increases in capital, in the quantity and quality of
labour and other inputs, and changes in how produc-
tively these inputs are used in production.

Saving, Investment, and

Capital Formation

We start with the accumulation of capital, long

stressed by economists. Many of them, including Adam fo
syadspy
juaudo
Iysamo
a1mouo0

Smith, David Ricardo, and Karl Marx, in stressing the

importance of capital accumulation in the growth
process, focused on the importance of saving. Consider,
for instance, farmers and other producers who receive
income by selling some of their output. They can use
this income for consumption purposes or save some
of it to buy capital goods and increase their ability
to produce more in the future. Early development
economists emphasized the role of saving, pointing out
that in LDCs poor people with low levels of production
and income (partly due to low levels of capital) are
unable to save much, having to devote most or all of
their income to meeting subsistence consumption
needs, and therefore cannot increase production over
time. What is true of individuals is true for the LDC as

61
 a whole. Increases in income are devoted to meeting
previously unmet basic consumption needs rather than
to increasing saving, creating a vicious cycle.
While the story of the poor farmer’s inability to save
arguably applies to many poor people, it is not a very
plausible explanation for low rates of capital accumu-
lation and growth in many LDCs.
Development
Pathways
Economic
to We find that even
people with very low levels of income in LDCs spend
on social and religious ceremonies and consumer dura-
bles, sometimes skimping on basic subsistence needs
such as nutritional food and proper health care, and
saving very little. Even people who are capable of sav-
ing—all over the world—often do not do so because
they seek immediate gratification rather than providing
for the distant future and because of social norms and
pressures to maintain status and social standing through
consumption. These tendencies are arguably exacer-
bated in LDCs because of lower access to banks and
voluntary employee saving accounts, and the powerful
influence of cultural norms (for instance, for religious
and marriage ceremonies). Moreover, not everyone
in the LDCs is poor—with some receiving incomes
high even by global standards—and organizations such
as private firms and the government may also save,

62
so that the argument does not apply to countries as a
whole. Indeed, for 2009, saving as a ratio of GDP in
many poor countries was higher (for instance, 54 per
cent in China and 34 per cent for India) than in many
rich countries (for instance, less than 11 per cent for the
US and 23 per cent for Germany), which can be partly
explained by the insecure conditions of lower-income
people who seek some financial security through sav-
ing. High saving rates in low-income countries often syvadsp
fo
juaudoja
I4saumoq
d1mo0Uu0rg

result from high growth rates in income—since con-

sumption increases do not, at least, initially rise as much
as income rises because consumption partly depends
on habits—so that high saving rates are likely to be
the result of, rather than the cause of, high growth
rates. Of course, even when people and organizations
like private firms save, this does not automatically lead
to investment, that is, the act of adding to productive
capital, which requires sufficient incentives in the form
of expected future profits. And even if some people and
organizations do not save, they can invest by obtaining
financing from others: for instance, poor street vendors
may be able to borrow to buy carts for carrying their
merchandise. Finally, even if investment does occur, the
machines and equipment may not result in significant

63
 expansion in levels of output because of inefficiencies
and excess capacity.
If the cause of low growth lies in a low rate of
capital accumulation due to low saving, the solution
to the problem can be found in encouraging people,
including the poor, to save more, for instance, by mak-
ing saving institutions more widely available, by pro-
Development
Pathways
Economic
to
viding greater incentives to save (such as higher interest
rates), by channeling income to people and sectors
that save more, and through government saving (that
is, by increasing government revenues while keeping
government spending low). Such efforts will allow
individuals, including the poor, to increase their future
income, and allow the economy as a whole to save
and invest more and experience a higher rate of eco-
nomic growth.
However, what if low capital accumulation is due
to insufficient incentives for investment? Some early
development economists, such as Nurkse (1967), argued
that in addition to the vicious cycle of savings there is a
vicious cycle of investment: firms in LDCs do not have
sufficient incentives for investment because low levels
of income prevent people from buying much, keep-
ing the demand for goods and services low. Moreover,

64
business firms in LDCs are exposed to problems such
the vagaries of weather and political and social instabil-
ity (and if we consider external factors, shocks due to
changes in the price of their exports and international
capital flows), which make future prospects uncertain.
Low and uncertain profit expectations keep invest-
ment at low levels, whether from their own saving
or from borrowed resources. In this situation, people
may consume their incomes instead of saving and fo
juaudoja
sjaadsy
r1mouorgq
msauoq
investing, implying a low rate of capital accumulation.
It is worse still if, rather than spend their income on
consumption, people save and hold on to money or
buy assets such as gold, land, and shares (which can
cause asset bubbles without promoting business invest-
ment), or even send their money abroad. The result
is a low level of aggregate demand (for consumption
and investment purposes) which reduces output and
employment along the lines emphasized by John
Maynard Keynes (1936) in his discussion of unem-
ployment in advanced capitalist countries. Although
such aggregate demand problems were not considered
relevant for LDCs in the early days of development
economics when saving and other supply-side con-
straints were stressed, it is now widely recognized that

65
 aggregate demand deficiency can reduce output and its
growth in many, especially semi-industrialized, LDCs,
partly due to the fragmented nature of goods and
financial markets and partly due to the many and com-
plex sources of uncertainty pervading these economies
(Dutt 2013). Under these conditions, efforts to increase
saving—by people (especially by increasing interest
Development
Economic
Pathways
to
rates and the cost of capital) or by the government (by
reducing government expenditure)—can paradoxically
reduce saving and investment (which has been found
to depend positively on output) by reducing aggregate
demand, output, and income.
Investment can also be low because of the lack of
financing. Many economists have been concerned
with the problems that exist in LDCs because of the
high levels of uncertainty which make lenders unwill-
ing to lend (just as they make firms unwilling to
invest) for fear of default by borrowers, especially to
the poor with few assets, and hence, collateral, to offer.
The only source of loans for many potential investors
is the informal market, such as from moneylenders
who charge very high interest rates, thereby reduc-
ing the incentive to invest. For the poor, microcredit
organizations have found that it is feasible to lend to

66
groups of the poor, especially women, who have low
rates of default because they monitor the behaviour
of other members of their group. Organizations such
as the Grameen Bank, founded by Mohammed Yunus
in Bangladesh, and the National Bank for Agriculture
and Rural Development which lends to banks
which in turn provide microcredit in India, have
proliferated in many LDCs. Despite low default rates,
however, it is unclear how effective such practices have fo
juaudoj
syadsp
a1mo0u0r
Isamoq

been in increasing investment by, and raising income

for, the poor. The overall flow of finance to potential
investors can be expanded by encouraging the devel-
opment of banks and other organizations, and markets
in bonds and stocks, as well as by establishing govern-
ment banks. However, financial markets in which
private individuals and organizations operate in search
of financial returns have occasionally exhibited a high
degree of instability in rich countries and especially in
LDCs: in boom times optimism about the future leads
to large increases in borrowing and lending, often to
finance the purchase of speculative assets which cre-
ate asset bubbles rather than for productive investment,
and this euphoria gives way to financial crashes, which
then leads to pessimism and contraction. It is argued

67
 that this volatility can be controlled only with care-
ful government regulation, which may be beyond the
power of regulators in LDCs. Other economists and
policymakers blame the problems of financial markets
on government over-regulation, which keeps interest
rates low, discouraging saving and the flow of the funds
which enter financial markets, and prevents the alloca-
Development
Economic
Pathways
to
tion of finance to the most profitable uses to promote
investment and growth.

Population, Education, and Health

While the greater availability of capital is likely to result

in increases in total as well as per capita production and
income, this is not necessarily the case when the number
of people in the economy increases, for instance, due to
population growth. Even if an increase in population
increases the quantity of labour and this leads to an
increase in total production, it does not necessarily
follow that production and income per person also
increases. Increases in population can change the age
distribution of the population, for instance, increasing
the proportion of children in the population and
decreasing that of the working population, which

68
results in a fall in income and production per person.
It has also been observed that in many LDCs there is
surplus labour in the sense that significant number of
potential workers are unemployed or underemployed
(due to the lack of sufficient amounts of capital and
other inputs or the lack of aggregate demand), so that
further increases in the number of workers merely
increases the amount of labour surplus rather than
increasing total output. fo
sjaadsp
juaudoj
Isawoq
n1mouor

At low levels of income, people tend to have more

children and larger families, implying that poor coun-
tries tend to experience high rates of population growth
(unless they are too poor to allow enough people to
survive). Faster population growth can occur because
people find it advantageous to have more children, to
ensure that some of them will care for them in old age
(since poor countries usually do not have government-
sponsored services to care for them) and because with
low levels of education and the lack of employment
opportunities, women, who bear much of the burden
of childbirth and childrearing, have a smaller say in
decisions regarding whether or not to have children.
Larger families and faster population growth, in
turn, dilutes the resources available to families and

69
 keeps them in poverty, strains the economy as a whole,
reducing its ability to adequately feed, house, employ,
provide health care for, and educate the larger num-
bers, and ultimately strains the natural environment.
It is sometimes argued that population pressures can
stimulate technological change (as has sometimes been
observed in agricultural regions which switch to more
Development
Economic
Pathways
to
productive methods) and larger populations imply a
larger number of inventive geniuses (assuming that
geniuses comprise a constant fraction of the popula-
tion), but these effects are unlikely in situations where
population growth is very rapid, population density is
already high, and where educational and job opportu-
nities are scarce.
The combination of high and increasing popula-
tion growth rates and the dilution of resources by
growing populations means that a significant increase
in income may be required for population growth to
fall sufficiently as people become less poor and begin
to see the advantages of smaller families. Some LDCs,
including India, have experienced a reduction in over-
all population growth rates as a result of what is called
the demographic transition. However, many others,

70
including several in Africa, experience high population
growth, as do some states in India, such as Bihar.
Poor countries and people also have inadequate
resources to put into improving the availability and
quality of education, which results in low levels of
functionings and capabilities related to education. Even
when governments are able to set up schools, families
may have little incentive to keep children in schools
sjaadspy
fo
juaudoja
I4saMmod
s1mouor
when they believe—whether such beliefs are warranted
or not—that children will not be able to obtain higher
incomes by attending school, and can instead do more
for their families by working. Low levels of education,
in turn, keep incomes of people low since they are
unable to obtain better paying jobs. For the country
as a whole, low levels of education can slow down

technological change and constrain the expansion of

production due to shortages of labour with appropriate
skills; statistical evidence suggests that countries which
accumulate more ‘human capital’ as measured by, say,
average years of schooling, tend to experience—other
things constant—higher rates of growth.
Poor health also reduces the ability of people to work
effectively and reduces labour productivity, reducing

71
 income, and low levels of income lead to poor health
due to low levels of nutrition and inadequate resources
for preventative health care. The state in countries with
low levels of income cannot raise enough revenues to
fund adequate health services that can be effective in
improving public health. Poor health conditions reduce
the functionings
Development
Pathways
Economic
to and capabilities of people by reducing
the length of their lives (even resulting in the death of
large numbers of infants and children) and increases
human suffering due to illness and disability.
Low levels of functionings in terms of education
and health can perpetuate problems for each. Low
levels of education among parents can lead to poor
choices regarding education and inadequate home
support for it (although there are many poor people
who go to extraordinary lengths to educate their
children), while poor health, especially of pregnant
women, may have adverse consequences for the health
of children. Moreover, as mentioned earlier, low levels
of education and health also adversely affect improve-
ments in each other. Low levels of education lead to
inadequate knowledge about health matters, while
poor health prevents school attendance and adversely
affects education.

V2
 There are many obvious policies which can be
adopted to reduce these problems. Tough policies of
imposing penalties on large families by withdrawing
resources from them (as done in China) and steriliza-
tion campaigns (as in India in the past), aside from
violating some individual rights, have been known to
have undesirable consequences, such as the selective
abortion or neglect (and worse) of females, and the use
of coercion by government officials. In any case, less fo
syvadspy
juaudoj
I4samoq
I1mou0ry

drastic measures, such as the education and empower-

ment of women with the provision of resources for birth
control, and improvements in income and resources of
the poor, are less coercive and more effective in reduc-
ing population growth. The need for increasing gov-
ernment resources to education and health is obvious,
but fulfilling these needs is often neglected because of
other items, which often get priority, such as military
expenditure and subsidies to the politically powerful.
Even if resources are available, regions and people
who are the least politically powerful and who need
them the most may not be able to effectively demand
and have access to health and education facilities; or
the quality of services provided—due to teacher and
health worker absenteeism, for instance—may be poor.

WS
 Even when the resources are available, people may not
use them because of behavioural inertia (which is not
confined to the poor but even afflict the well-off in
rich countries) and because of the lack of incentives
(in the absence of job prospects). Raising productivity
by improving education and health conditions may not
even increase income if there is an overall lack of capital
Development
Pathways
Economic
to
and effective demand and, instead, increase unemploy-
ment or underemployment.

Efficiency and Technology

Many economists criticize the overemphasis on
resources, especially capital, and focus more on how
these resources are used, that is, their level of produc-
tivity and the rate of productivity growth.
Low levels of productivity of resources (beyond
what is due to the low quality of these resources, for
instance, because of poor education and health) can be
caused by a variety of factors. They can be due to the
absence of incentives for people and organizations to
produce as much as they can (for instance, due to the
lack of demand), the lack of other resources required
for production such as electricity and imported raw
materials (because of shortages in power supply or

74
foreign exchange), and because of laziness or avoidable
mistakes. These problems are usually not emphasized
by mainstream economists, who typically assume that
people and organizations are self-interested maximizers
(in the sense of achieving their highest levels of income,
profits, or utility), that they can substitute between
different inputs, and because prices adjust to increase
demand. Some analysts do take into account the fact
fo
sjaadsp
juaudo
INsamoc
mmouor
that individuals and organizations may not actually be
‘rational’ maximizers (if any precise meaning can be
attached to that term): for instance, in some situations
with insufficient competition, they do not exert much
effort,sometimes they simply do not have enough infor-
mation to make appropriate decisions, and the actions
of organizations may reflect the interests and power
of different people and groups who comprise them in
ways that are not in the best for the organization as
a whole.
Rather than focusing on productive efficiency, that
is, the efficiency of resources in a given use, mainstream
economists stress what is called allocative efficiency,
tive
that is, the allocation of resources between alterna
by
uses (that is, the production of different goods and
total
different firms) in a way that maximizes the value of

75
 production. The analysis is conducted using standard
neoclassical economic theory, which sees economic
agents and firms as ‘rational’ maximizers who pursue
their self-interest, operating in smoothly functioning
markets. Efficiency is defined in terms of the notion of
Pareto optimality, which states that a situation is efficient
if it is not possible to make any individual better off (in
Pathways
Development
Economic
to
terms of his or her own reckoning) without making
someone else worse off; in other words, there are no
opportunities to make costless improvements in people’s
well-being. The efficiency of free market outcomes is
demonstrated using the so-called fundamental theorem
of welfare economics which states that if all markets
are perfectly competitive, under certain conditions
(to be mentioned later), the free market outcome is
efficient in the sense of being Pareto optimal. Perfect
competition refers to situations in which, among other
things, markets have many buyers and sellers, so that
none of them can individually control prices, which
are instead determined by impersonal forces of market
demand and supply. Basically, free markets lead to the
optimal allocation of resources: if there is a shortage in
some markets, the price will rise in that market, and
conversely if there is an oversupply. Suppliers, observing

76
higher prices, have an incentive to produce more, while
less will be produced in markets with lower prices, and
consumers also receive signals to buy more of cheaper
products where there is an oversupply. Thus, the price
mechanism shifts resources across sectors to achieve
allocative efficiency.
Some mainstream economists assume that actual
economies come close to the conditions required for
the welfare theorem to hold, and therefore argue that fo
juaudo
syadspy
mmouor
Iysauo
in fact the obstacles to development are created by
government restrictions and, controls—for instance,
taxes and subsidies, price controls, and the govern-
ment ownership of enterprises—which interfere with
the free operation of markets. However, other econo-
mists—including many who follow the mainstream
approach—argue that the assumptions of the theorem
are, in fact, not satisfied in actual economies, especially
in LDCs. Some examples of violations of the condi-
tions include the following. First, there are departures
from perfect competition which cause inefficiency; for
instance, monopolistic or oligopolistic producers (that
is, markets with one or a few sellers) may produce less
than what is efficient for the economy because they
restrict their production levels in order to keep up the

WY
 Second,
price of their product and, hence, profits high.
firms
there are externalities in the sense that people and
affect others adversely or positively without either pay-
ing or being paid. For instance, firms may emit too
much pollution which makes other firms and people
worse off because the latter—rather than they—bear
the costs of pollution.
Development
Economic
Pathways
to
There may be imperfect infor-
mation, in the sense that buyers and sellers do not
possess all the relevant information to make decisions
which lead to efficient outcomes. For instance, lenders
may not have information about what borrowers do
after they borrow (that 1s, whether or not they devote
the time and attention to engage in profitable activity
so that they can pay back the loans rather than default),
and thus, may not be willing to lend to them and
thereby allow them to increase production and prof-
its and receive interest payments. Going beyond the
standard mainstream approach, if one takes the future
to be uncertain (in the sense discussed by Keynes), so
that it cannot be predicted in objectively probabilistic
terms, people and firms may often not have the confi-
dence to increase production, investment, and lending,
and many mutually beneficial exchanges and activities
will not occur. Finally, there are public goods, such as

78
transport and communication services, for many of
which it is difficult to exclude those who do not pay
but use them, and which can be used by many at the
same time without compromising the ability of others
of using them, and which, therefore, will not be pro-
duced in efficient amounts by private producers. If such
market failures exist in LDCs, and especially if they
are quite commonplace, then having free markets with-
out much government interference will not necessar- fo
sjaadsp
juaudo
INsaMo
r1u0u0I

ily result in efficiency. Many obstacles to development

may be explained in terms of such market failures.
For instance, the presence of the free rider problem
and the prevalence of positive externalities imply that
private individuals and organizations will not under-
take many activities which can promote growth and
reduce poverty.
It may be sensible to focus on increasing productivity
over time, and indeed some have questioned whether it
is useful to distinguish between attempting to become
more productive now and attempting to increase the
growth of productivity over time. Such as increase
in productivity is associated with improvements in
technology, that is, technical methods by which inputs
are used to produce outputs, but also by changes in

719
 other factors such as norms regarding the pace of
work and the cooperation between different groups
and individuals involved in the production process.
Although the determinants of technological change
are complex, it can be argued that its rate depends on
the amount of research and development activity, the
quantity and quality of education, and the experience
Development
Economic
Pathways
to
that producers gain by producing and investing. LDCs
may be caught in vicious cycles because they do not
typically have the resources to invest significantly in
research and development and education, and they lack
incentives to increase output and investment because
of small and slow-growing markets and other factors.
Changes in work norms and industrial relations are also
likely to be adversely affected by low wages, implying
that workers have fewer incentives to increase their
productivity and cooperate with employers.

Poverty and Inequality

So far we have focused mainly on income, production,

and growth due to increases in the amounts of resources
and the efficiency with which these resources are used.
Other aspects of development, such as functionings

80
and capabilities, were only briefly mentioned. But
development also refers to other things, such as poverty,
inequality, and the environment.
As discussed in the previous chapter, poverty and
inequality (in income and in other indicators such as
health and education) can be considered to be intrin-
sic aspects of development. In addition, poverty and
inequality are related to other aspects of development.
Obviously, high levels of income poverty imply low fo
juamdoj
syadsp
mmouory
Iysamog
levels of health and education among the poor. Less
obviously, poverty and inequality can affect economic
growth.A fair amount of empirical work suggests that
countries with lower levels of income poverty and
inequality tend to experience higher rates of income
growth and various plausible mechanisms to explain
this have been proposed (The World Bank 2005).
Higher incomes for the poor and lower levels of income
inequality, which imply a lower income share of the
rich with a higher saving rate and a higher one for
the poor who consume most of their income, increases
the market for goods and output and the utilization of
capacity in countries in which growth is determined
by aggregate demand, and this can increase investment
incentives and the rate of capital accumulation and

81
 ies
growth. This will not happen, however, in countr
in which growth is determined by saving and which
do not face aggregate demand problems, where more
income equality can actually reduce saving, and hence
investment and growth. High levels of inequality and
poverty also imply low levels of health and education
for many people, resulting in low levels of productiv-
Development
Economic
Pathways
to
ity and its growth. Moreover, because of the absence
or low levels of assets, the poor do not get access to
credit and the ability to increase their income through
productive activities which require financing; thus,
high levels of poverty reduce the overall rate of growth
of the economy. Finally, high levels of inequality can
lead to lower levels of productivity in activities which
require greater cooperation and trust between people
with different income levels and results in political
unrest and redistribution with possible adverse conse-
quences, which can reduce levels of output and growth.
However, for activities of relatively smaller groups
where benefits from the activity accrue to everyone
whether they contribute or not—such as village
irrigation projects—high inequality levels may over-
come what is called the free-rider problem (in which
no one contributes because they want a free-ride on

82
the contributions of others) by giving the rich the
incentive to get things done since they are the major
beneficiaries of such activities; in such cases inequality
can promote higher output levels and growth.
LDCs have high levels of poverty and often have
high levels of inequality. Obviously, low per capita
income, given the distribution of income over income
groups, implies a high incidence of income poverty,
and higher inequality in income given average income fo
syadsp
juaudoj
musamoq
a1mouorg

levels is also associated more with income poverty.

Higher income countries are typically associated with
lower levels of absolute income poverty, and increases in
income are typically, though not invariably, associated
with decreases in the income poverty. The problem
is that income inequality can increase with increases
in average incomes. The Kuznets curve, named after
Simon Kuznets, who examined the relationship using
empirical data, suggests that as average income increases
(comparing different countries or within a country
over time), income inequality first tends to rise and
then fall. Explanations of this relation rely on sectoral
shifts in income and employment—for instance, shifts
from peasant agriculture where most people have low
incomes to capitalist manufacturing in which wages

83
 are initially low and profit high, and then to services
in which especially high skilled workers can get high
wages; the spread of education initially confined to a
few and then broadening, rising wages due to increases
in the demand for labour brought about by the expan-
sion in output and the diminution of the subsistence
economy, a sector which provides a source of cheap
Development
Economic
Pathways
to
labour, and ameliorative and redistributive government
policies, especially in so-called welfare states. The curve
provides an optimistic picture for those who value
equality; even though it gets worse in terms of inequal-
ity when an economy experiences income growth,
subsequently it will get better. However, the Kuznets
story does not hold everywhere and a little reflection
on the nature of the relationship between average
income and income inequality makes it clear why
this is so. The relationship is affected by the speed and
direction of technological change: rapid technological
change which increases the productivity of labour may
slow down employment growth and exert downward
pressure on wages, and what is called skill-biased tech-
nological change can increase the ratio of the wages
of high-skilled to low-skilled workers. It also depends
on the degree of openness of the education system

84
(including the availability of student loans and grants),
the distribution of assets (especially in poor, agrarian
economies), and the nature of government expenditure
and taxation policies, among other determinants.
Inequality can exist not only in the form of inequal-
ity of income between the rich and the poor (an
example of what is called vertical inequality), but also
inequality of income and other indicators of func-
tionings and capabilities between different groups of py
syaads
fo
juaudojaa
Isaumogq
aumo0u0ry

people, such as different ethnic groups, people living

in different parts of the country, and between men and
women (which is referred to as horizontal inequality).
Consider gender inequality, a problem that is reflected
in their significantly lower income, asset ownership,
and functionings, for instance, in terms of nutrition
and education, of women in most LDCs and indeed
even in higher infant and child mortality among
girls (due to neglect and worse conditions). The
problem emerges not only from the uneven balance
of power within the family but is also reflected in
social norms and legal institutions and the distribution
of political power among men and women. This is a
major problem for about a half of humanity and, addi-
tionally, results in problems for development in general,

85
 for instance, by resulting in high population growth
rates and adversely affecting the education and health
of children.
Policies to reduce poverty include cash transfer pro-
grammes to the poor (which also attempt to address
other related problems by imposing conditions, such
as the school enrolment of children), improvements
Development
Economic
Pathways
to
in the availability of education, health, and food for
the poor, employment guarantee schemes which pay
low wages to provide employment to those who can-
not find employment at a higher wage (like India’s
rural employment guarantee scheme), and providing
micro-credit to the poor (which often provides group
loans to the poor, especially women). Inequality can be
addressed by these measures, making education more
accessible to lower income groups, by transferring
income through government fiscal policy, by transfer-
ring assets, for instance, land through land reforms,
and through affirmative action and other preferential
policies for disadvantaged groups. Poverty and inequal-
ity can also be reduced by making economic growth
more inclusive, for instance, by ensuring that output
growth occurs in sectors where its effect on employ-
ment growth is high.

86
 The Environment

The natural environment has various dimensions,

such as clean air and water, land quality, forests, ani-
mal stocks and biodiversity, weather conditions, and
global climate. As mentioned in the previous chapter,
we can take improvements in environmental qual-
ity to be an intrinsic aspect of development, so that
environment degradation can be seen directly as a fo
juamd
syadsp
a1mo0u
a14sau
development problem. Moreover, environmental dam-
age can adversely affect other aspects of development.
The lack of suitable supplies of water and the loss of
soil nutrients and soil erosion has a negative effect on
agricultural productivity, damage to common property
resources can affect an important source of livelihood
in LDCs, pollutants in the air and water cause major
health hazards and reduce life expectancy, and a high
level of pollution requires resources to be devoted
to amelioration, adversely affecting the amount of
resources that can be devoted to capital accumulation
and growth. Such problems are likely to affect the poor
most adversely and worsen inequality because the poor
are particularly vulnerable to the problem (since they
are more likely to draw on common property resources

87
 for food and fuel and live in areas more susceptible to
environmental damage) and least able to cope with it
(for instance, with medical treatment), in turn due to
their low levels of income.
Environmental problems exist all around the world,
but are more severe in LDCs. Environmental degrada-
tion is often attributed to the problem of externalities:
Development
Economic
Pathways
to
self-interested individuals damage the environment (by
polluting, for instance) because, while it takes effort
on their part not to do so, their actions do not hurt
themselves much. However, the damage done by each,
when aggregated, affects the overall environment and
hurts them all. Government intervention in the form
of effluent fees and other regulations are required to
reduce the damage done, but this requires the will
and the ability to enact and enforce laws. People and
governments in LDCs have more immediate concerns
in providing for basic consumption needs and seem
to be less concerned about environmental problems in
the future, and are less able to enforce environmental
regulations. Moreover, even when individuals use their
own land, they may overuse it and damage its quality
to meet subsistence needs, and the absence of suitable
infrastructure and income earning opportunities may

88
make people in LDCs, especially the poor, pollute and
stress common property environmental resources more
than in rich countries. Finally, it has been argued that
weaker property rights leads to more environmental
damage, an issue we will take up in more detail in
Chapter 5.
These considerations suggest that as LDCs experi-
ence increases in average incomes, they will experi-
ence less environmental damage. However, increases in fo
juaud
syadsp
a1mou
Iusau

production and consumption also tend to exacerbate

environmental damage due to pollution caused by pro-
duction (for instance, the emission of pollutants in the
air, which can even lead to global warming due to the
accumulation of greenhouse gases) and the use of natu-
ral resources for production and consumption (such as
cutting trees and the depletion of nutrients in the soil).
Some studies have found an inverse U-shaped relation
between some measures of environmental damage
(such as the stock of pollutants in the air or the flow
effluents released) and per capita income, and by anal-
ogy with the income-inequality relation mentioned
earlier, the relation has been called the environmental
Kuznets curve (EKC). It suggests that while, at first,
income growth results in more environmental damage,

89
 eventually, conditions improve, as countries get richer
because they are more willing and able to contain the
damage through regulations, better enforcement, and
the development of cleaner and less resource-intensive
technology. The optimism implicit in the EKC may
not be justified, however. First, some indicators of

environmental damage, such as carbon dioxide emis-

Development
Economic
Pathways
to
sions, do not exhibit a negatively sloped segment.
Second, the downward-sloping segment may in part
be explained by shifts in the production of ‘dirty’
goods to LDCs. Third, many LDCs may have a long
road ahead of them before they reach that segment.
Finally, there may be pressures from different groups
in society to make light of the problem (since it can
reduce profits and consumption) as seems to have
happened in some rich countries.
Standard methods of reducing environmental dam-
age, by overcoming problems due to externalities,
involve using pollution taxes, restricting pollution with
quantitative standards, and creating markets using trad-
able permits, which allow holders of permits to pollute
(and inducing those potential polluters who can reduce
their pollution, for instance, by adopting less polluting
technology) to reduce pollution to a desired level. To

90
the extent that environmental damage is due to the
tragedy of the commons, the privatization of common
property resources has sometimes been recommended.
However, this overlooks the informal and custom-
ary solutions some communities have developed that
maintain their common property resources which are
used by them (Ostrom 1990). Moreover, some envi-
ronmental problems, which are the result of poverty
(such as the overuse of private land and the commons fo
juaudo
sjaadsp
muouorg
I14samo

for the sake of survival), the lack of infrastructure (such

as sanitation), and information about the effects of cer-
tain activities (such as the production of excessive solid
waste), require policies to reduce poverty and improve
infrastructure, and, generally, to raise public awareness
regarding the problem.

Sectoral Constraints

While we have so far examined overall obstacles to

development, sometimes obstacles which afflict par-
ticular sectors of the economy can have a negative
effect on the economy as a whole. For such obstacles
we need to understand how the development of par-
ticular sectors may be constrained, and how the lack

91
 of development of these sectors affects the rest of the
economy. Some sectors may be particularly useful in
stimulating other sectors, by creating a demand for
their products—what has been called backward link-
ages—and by supplying them with inputs, what has
been called forward linkages, as stressed by Hirschman
(1958). Some
Development
Economic
Pathways
to sectors may be particularly important
for providing production experience, which generates
technological improvements that can spill over into
other sectors.
One sector which has received a great deal of
attention is the agricultural sector, given its large size
in the economy of many LDCs in terms of its share in
total employment and total output, and the incidence
of poverty in rural areas. It is argued that the sector
is constrained by a variety of factors, including the
system of land tenure, low levels of technology, and
absence of irrigation and other infrastructure. Many
have stressed institutional factors arising from the
insecurity of tenure of tenants which prevents them
from making long-term improvements in the land and
the widespread use of sharecropping contracts which
reduces the incentives of tenants to increase production.
Especially farmers with very small landholdings are

92
argued to be incapable of having access to technology
and using scientific methods of cultivation, including
the use of high-yielding varieties of seeds. Irrigation
takes on the nature of public goods in the sense that if
people from one farm cut a small canal or reservoir for
irrigation purposes, others can use it, and this prevents
any one of them from undertaking such projects.
Governments can overcome such problems, but in
fo
sjaadsy
yuaudo
Isamoc
mumouo
LDCs local governments may not have the resources to
undertake such projects because of the small amount of
financial resources at their disposal.
Ifagricultural production does not expand, it is likely
to create an obstacle for overall development, not only
because of the large size of that sector in many LDCs,
but also because its lack of development affects other
sectors. For instance, if agriculture is stagnant and food
prices are high, as stressed by W. Arthur Lewis (1954),
in his highly influential dual economy model, workers
in the manufacturing sector have to be paid higher
wages to allow them to purchase the food to meet
their basic needs (otherwise they will not be willing to
work for wages in manufacturing and instead, remain
in agriculture) . squeezes profits and reduces sav-
This
ing, investment, and capital accumulation, since profits

93
 are an important source of saving and investment. If
the expansion of the manufacturing sector is held back
by investment incentives rather than the supply of
savings, high food prices due to a stagnant agriculture
also make workers spend a large part of their income
on food, and exert little demand for manufactured
goods, resulting in a low market for such goods, which
Pathways
Development
Economic
to
dampens investment incentives. Stagnation in agricul-
tural production and income can also result in food
insecurity, especially among the poor, and especially
for countries which are unable to import food when
needed, due to the lack of foreign exchange.
Manufacturing sectors have usually been viewed
as the sectors which promote development in LDCs.
Capital formation in manufacturing firms of vari-
ous sizes has been viewed as important generators
of income and employment and for yielding profits,
which can be reinvested for further capital accumula-
tion. They have also been seen as sectors which exhibit
increasing returns (due to lower average costs of pro-
ducing in bulk) and in which production experience
and learning-by-doing results in technological change,
which can spill over in other sectors, like other manu-
facturing sectors, agriculture, and services. Different

94
types of manufacturing industries and industrial firms
are viewed as having different types of advantages:
high-technology and capital good sectors for gener-
ating technological change, and simple manufactured
consumption goods sectors and small and medium-
sized firms for generating employment and creating a
demand for the products of sectors such as agriculture
as intermediate inputs and for consumption goods
demanded by [Link] small informal sector firms, fo
spadsp
juaudoj
Iysawod
amouorg

often hiring few or using only the labour of owners,

may be too small for generating enough income for
their owners and for reaping the benefits of scale
economies.
The capital goods sector within manufacturing
has attracted a great deal of attention from planners
and policymakers in the early days of India’s plans. In
a closed economy, high growth through saving and
investment not only requires devoting a high propor-
tion of income to saving and investment rather than
to consumption, but also the physical production of
necessary amounts of capital or investment goods. This
problem was stressed by the doyen of early Indian
planners, P.-C. Mahalanobis (1953), on the basis of a
model similar to Feldman’s model for Soviet planning,

95
 to justify the emphasis on the capital goods sector
in India’s Second Five Year Plan, which came into
. capital goods sector is
operation in the mid-1950sThe
unlikely to attract private investment in LDCs because
of the uncertainty regarding profits, high installa-
tion costs, and complex and expensive technological
needs. Even for an open economy, the lack of foreign
Development
Pathways
Economic
to
exchange can limit the possibility of importing such
goods, and the failure to build up these sectors has an
adverse effect on technology development.
Another sector that has been emphasized 1s the infra-
structure sector. In addition to irrigation in agriculture,
important components of infrastructure include elec-
trical power, transport, and communications facilities,
all of which are important for production and mar-
keting of goods and services. Like irrigation, they
have public good characteristics, and they often do
not attract much private investment because of high
startup costs, which may take years to recoup, and for
which the returns are highly uncertain. Governments
usually take a leading role in building these sectors,
but their ability to do so in LDCs is often constrained
by the lack of financial resources, given their low tax-
able capacity.

96
 Specific sectors can be supported by government
policies including fiscal incentives such as subsidies, tax
concessions, and government purchases. Other inter-
ventions include the subsidization of credit through
government and other financial institutions (as done
in South Korea), government assistance with sector-
specific technological knowledge and inputs (such as in
capital goods, technologically intensive manufacturing
fo
syradsp
juamdoj
Iusamod
mmouorgy
sectors, and genetically modified high-yielding seeds in
agriculture, which has been an important component
of what has been called the Green Revolution in many
countries, including India), and in some cases by the
establishment of state-owned enterprises where private
investment is lacking (as in South Korea and India).
For agriculture, improvements in conditions of land
tenure and the redistribution of land with the imposi-
tion of land ceilings has been seen as improving both
distribution by changing the ownership and pattern of
use of land and as improving efficiency—by provid-
ing appropriate incentives to poor farmers (Banerjee,
Gertler, and Ghatak 2002).

Ss
 4
International Aspects
of Development

It is frequently asserted that countries are becoming

increasingly interconnected.
This phenomenon, usually
referred to as globalization, is reflected by the increasing
flows of goods and services, money, people, and ideas
between countries, and is caused by a number of forces,
including technological changes in transport and com-
munications, changes in policies that control the level
of interactions, and economic growth in many parts of
the world. Our discussion of the economic aspects of
development in the previous chapter, which assumed
that the economy is a closed one in the sense that it
does not interact with other countries, completely
ignored this phenomenon, and therefore provided a
necessarily incomplete view of the economic aspects
of development.
 It would seem that several of the obstacles to
development discussed in the previous chapter can
be overcome if one takes into account the economy’s
interaction with the rest of the world, for example,
through international trade, payments, and technol-
ogy transfers. For instance, the problem of inadequate
capital accumulation due to low levels of saving can
syvadspy
fo
juaudoja
Jpuoyvus
be overcome by borrowing internationally and pay-
ing back the loans after investments yield returns, or
through foreign aid in the form of grants. Indeed,
some analysts argue that by linking their economy to
the global economy, LDCs can overcome many, if not
all, of their development problems. However, others
argue that many of the problems of LDCs actually
arise in the relationship of the national economy to
the world economy and that the development of LDCs
is, in fact, constrained by these external problems.
Thus, some argue that the influx of corporations from
rich countries into LDCs destroys their domestic
industries and leaks profits back to the richer countries
rather than allowing capital accumulation in LDCs.
We can examine these issues by discussing in turn’
international trade, international capital and labour
flows, technology transfers, and some other forms of
interaction.

ee,
 International Trade

Many economists that trading with other

believe
countries fosters development in LDCs. There are
many ways in which this can happen. Producers in
LDCs can find markets for their products, overcoming
the problem of aggregate demand for goods because
Development
Economic
Pathways
to
of small markets within their borders caused by low
levels of income, and the absence of domestic demand
for some products (like crude oil) because they do
not have the technology to process them for final use.
LDCs can import goods and services from abroad
when they are unable to produce them because they
lack the resources and do not have the technological
knowhow; thus, they can buy machinery and equip-
ment abroad and set up industries which use them as
capital goods.
Beyond these obvious ways, economists stress the
benefits of specialization according to comparative
advantage. Since countries have different amounts of
various resources and differ in their technological
capability of producing different things, they can pro-
duce some things better than others. Countries can,
therefore, benefit from exporting those goods and

100
services, in the production of which, because of their
resources and technology, they are comparatively bet-
ter suited. The argument based on technological dif-
ferences was formalized by David Ricardo, an English
classical economist in the nineteenth century, using the
example of two countries, two goods, and one factor
of production, labour. Suppose England and Portugal
sjaadsp
fo
juaudojaa
Jvuoyvus
can both produce clothing and wine, but less labour is
required to produce a unit of clothing in comparison
to a unit of wine in the UK as compared to Portugal,
then under conditions of the full utilization of labour
in each country and free trade (that is, trade without
government restrictions) in goods, Portugal will export
wine to the UK and the latter will export clothing to
the former. Moreover, both countries are likely to be
better off in the sense of consuming a higher market
value of the two goods. This will happen even if one
country is absolutely more productive in producing
both goods. This argument was later extended, in
the twentieth century, by the Swedish economists Eli
Heckscher and Bertil Ohlin, who focused on resource
endowment differences between [Link] illustrate
this approach suppose there are two goods, say airplanes
and toys, which can be produced by two countries, say

101
 the US and China—using two factors of production,
say high-skilled and low-skilled labour, which do not
move internationally—and that the US has relatively
more skilled labour than China, and airplane produc-
tion makes more intensive use of skilled labour than
toy production, which makes more intensive use of
low-skilled labour. Then, if the two countries have
Development
Economic
Pathways
to
identical technologies in the production of both goods
(to abstract from Ricardo’s argument for explaining
comparative advantage) and similar demand patterns
for the two goods, then the US will have a compara-
tive advantage in producing planes and China in toys,
trade will involve the US exporting planes to China
and China exporting toys to the US, and both coun-
tries will be better off due to free trade than if they
restricted trade or did not trade at all. These approaches
highlight how countries, including LDCs, can allocate
their resources better when they engage in free trade
to maximize the value of goods and services available
to them, and thereby, have higher levels of income and
value of production and the resulting benefits that can
come from that.
In addition, economists argue that exposing domes-
tic producers to foreign competition—with imported

102
goods and in global markets—can make them produce
more efficiently, encourage innovation, and reduce
their monopoly power, which keeps prices excessively
high. Moreover, increasing trade allows countries to
specialize more and thereby reap the advantages of
large scale production rather than producing too
many things at high costs. Finally, increasing trade can
fo
juaud
spads
jpuoy
increase the exposure of LDCs to foreign goods, which
may allow them to improve their own technology.
While there is much to be said for these develop-
ment benefits from international trade, these argu-
ments and the theories on which they are based
ignore a number of issues. Consider, for instance, the
Ricardian and Heckscher-Ohlin approaches, which
continue to underpin most economists’ thinking
about trade between rich and poor countries. Among
other characteristics, these theories are static in the
sense of taking factor (or input) endowments and
technology as given rather than changing over time;
they also assume that all factors are fully utilized, and
that trade is balanced between countries and indi-
vidual countries can trade any amount they want to
at given world prices (the so-called small country
assumption).

103
 If we depart from the static framework, problems
can arise for LDCs. Education and skill formation can
suffer in LDCs. If the assumptions of the Heckscher-
Ohlin-Samuelson approach are satisfied, the expansion
of trade leads to the increase in the production of
goods in which countries have a comparative advan-
tage. The result is an increase in the price of factors of
Development
Economic
Pathways
to
production used intensively in these industries, that is,
their abundant factor, since the demand for that factor
increases at home with the growth of production at the
expense of imports. Since LDCs are relatively abun-
dant in low-skilled labour and high-income countries
are relatively abundant in high-skilled labour, the high-
skilled wage will rise in the rich country and fall in
the poor countries. This can increase incentives for
obtaining education to increase skills in rich countries
and to reduce them in poor countries. Thus, if growth
is positively affected by an expansion of education,
and to the extent that education improves individual
functioning, development may be hampered in LDCs
due to trade liberalization. Moreover, comparative
advantage is likely to make rich countries specialize
in more technologically sophisticated goods and ser-
vices and poor countries specialize in products that are

104
simpler, and to the extent that experience in the pro-
duction of the former type of good results in greater
technological learning, trade is likely to slow down
technological change in poor countries. Thus, increas-
ing international trade can bring about short-term
benefits but cause long-run developmental problems.
Further, when trade increases due to the reduction
fo
juau
syaad
jvuoy
of trade barriers, the production of some goods, those
in which the country does not have a comparative
advantage, falls and people and other factors of
production that are employed in these sectors will
not be used any more. This is not a problem because
under the assumptions of the theory—that all factors
are fully utilized due to changes in the price of these
factors—they will be employed in other sectors which
would be expanding production, including that for
exports. If, however, we depart from the assumptions
that all factors are fully utilized and that countries
may not be able to export whatever they want to at
the going world price (because the world demand for
their products is limited due to low quality and the
lack of market penetration abroad), unemployment
and underemployment can increase. Moreover, if we
depart from the assumption that international trade is

105
 balanced, the country can run a trade deficit, that is, it
can find that it imports more than it exports, which is
possible by borrowing from abroad. If they are limited
in their access to foreign credit or other forms of
foreign capital inflows, and therefore foreign exchange
is limited, they may have to reduce their imports of
those goods which
Development
Economic
Pathways
to can allow them to increase their
production and grow faster, for example, intermediate
materials like oil or capital [Link] will have more
to say about trade deficits and international capital
movements later.
For now, we can add that trade liberalization can be
problematic if it results in poor countries continuing
to specialize in a few simple manufactured goods or
primary products: they are likely to face a long-run
deterioration and volatility in their terms of trade, which
can cause fluctuations and long-term worsening of their
foreign exchange positions. Many of their products,
especially primary goods and traditional manufacturing
exports, often face limited world markets because the
demand for them does not increase by much when
world income increases (they have what economists
call a low income elasticity of demand). Although there
is some controversy regarding this, the terms of trade

106
for LDCs—the average price they receive for their
exports as a ratio of the average price they pay for their
imports—has shown a general tendency to decline if
one leaves out some specific goods like petroleum,
which has exacerbated the problem of trade imbalances.
This has been called the Prebisch-Singer hypothesis,
after two pioneering development economists who
fo
spadsp
juaudo
jpuoyvu
first emphasized these problems in the 1950s (Singer
1950; Prebisch 1950). The result has been shortages
of foreign exchange which, by limiting imports of
essential capital and intermediate goods, has restricted
growth. Also, the volatility of the terms of trade in
response to fluctuations in world market conditions
creates problems for those LDCs which specialize in
the exports of a few goods, given the fact that they
are sold in markets which are competitive and hence
subject to large price fluctuations, and sometimes also
subject to speculative price changes.
International trade can also have adverse effects
on the environment in LDCs. Since LDCs typically
adopt and enforce fewer environmental regulations,
it is likely that they have a comparative advantage in
the production of goods which cause more environ-
mental damage, and the expansion of these sectors can

107
 exacerbate environmental degradation, which results
in developmental problems.
Belief in the benefits of free trade leads to the policy
prescription of removing trade restrictions in the form
of import tariffs and quotas in order to maximize the
benefits from trade. International organizations, such
as The
Development
Pathways
Economic
to World Bank, International Monetary Fund
(IMF), and especially the World Trade Organization
(WTO), promote trade liberalization and bind LDCs
to reducing import tariffs. However, the problem with
generalized trade liberalization is that it can lead to
the kinds of development problems we have just dis-
cussed. Many LDCs, especially those in Latin America
and Africa, have experienced industrial contraction
because of such trade liberalization (Stiglitz 2002;
Chang 2007). It should come as no surprise that most
developed countries of today—including England, the
US, Germany, Japan, and South Korea—have, in the
past, adopted restrictive trade policies to promote their
industrial development (Chang 2007). For instance,
in its early days of industrialization, England adopted
protectionist policies at home, to protect its nascent
textiles industries, while forcing free trade and open

108
markets on its colonies, like the US and India, to expand
its exports, and later on the US and Germany adopted
protectionist measures to allow them to challenge
British industrial dominance. It is interesting to note
that the countries in Ricardo’s own example, England
and Portugal, experienced very divergent development
patterns, something than can, in part, be explained by
juaudo
syaads
fo
jpuoy
their pattern of trade specialization which, incidentally,
resulted from England’s military successes and enforced
agreements rather than free trade.
In recent years, many LDCs have experienced
considerable increases in the export of finished
manufactured goods and have become involved in the
production and export of intermediate goods and the
assembly of final products using imported intermediate
goods, as parts of what are called global production
networks. This increase in the production and exports
of manufactures goods, however, does not seem to have
changed the basic structure of trading relations between
the North and the South, with the latter producing
mostly simpler manufactured goods and technologi-
cally less sophisticated intermediates and performing
simple assembly operations.

109
 International Capital Flows

International capital inflows—involving foreign bor-

rowing, especially from rich countries—can support
economic development in LDCs by allowing them to
supplement their domestic saving to increase invest-
ment, capital accumulation, and growth, and to increase
Development
Economic
Pathways
to
the foreign exchange available to them to allow them
to import necessary intermediate inputs and capital
goods for expanding output and investment. Moreover,
access to international borrowing can allow LDCs to
overcome problems due to output and income fluc-
tuations—from weather conditions or terms of trade
fluctuations—by borrowing when times are bad and
paying back when times are good, avoiding painful
and inefficient consumption and investment volatility.
Capital inflows can take various forms, such as bank
borrowing, the purchase of stocks and bonds issued in
LDCs by foreigners, or what is called portfolio capital
flows, and foreign direct investment, when foreign
entities, usually transnational corporations, bring in
funds and maintain control over what is done with the
funds, for instance, by setting up production units in
LDCs;

110
 The problem with these lines of reasoning is that,
as is often observed, capital does not move much from
rich to poor countries, and that international capital
tends not to move when it is most needed by poor
countries, that is, during bad times. Although, it may
be expected that capital will move internationally from
capital-abundant rich countries to capital-scarce poor
sjaadspy
fo
juaudoj
jvuoyv
countries, in fact, flows of capital from rich to poor
countries is rather limited and confined to a few LDCs
that are already doing well. The reason for this has
been argued to be the lack of adequate infrastructure,
education, and other resources in LDCs, which keeps
the return to capital low, and the problem poor-
country borrowers have in convincing rich-country
lenders that they are not too risky, partly because of the
lack of suitable collateral and the possibility of default.
Moreover, many poor countries, such as China, seek to
protect themselves against foreign exchange problems
due to external and internal shocks by holding large
stocks of liquid assets issued by rich countries such
as the US, thereby lending to these rich countries.
Finally, some economists argue that poor countries are
unable to attract foreign capital because of government
policies, ranging from those which impose restrictions

111
 on capital flows, such as not allowing foreigners to
buy stocks and imposing taxes on such flows, to those
which create a generally inhospitable climate for
foreign investors by over-regulating the financial sector
and the economy in general.
Moreover, capital flows, especially bank lending and
portfolio flows, tend to be volatile and pro-cyclical.
Development
Pathways
Economic
to
When times are good, there is usually a surge in capital
inflows, which sometimes move into real estate and
stock markets, causing asset market booms rather than
financing productive investment.
This problem, which
is arguably endemic to financial markets everywhere,
is particularly problematic for poor countries which
do not have large financial markets that can absorb
the shocks and international financial flows where the
problem of uncertainty and the possibility of moving
funds to other countries are large. Large inflows, in
addition to creating destabilizing asset bubbles, result
in exchange rate appreciation, which make a coun-
try’s exports less competitive and imports cheaper,
worsening the trade deficit, and the resultant outflows
necessitate contractionary policies which reduce eco-
nomic growth and government ‘social’ spending on
the poor, which, in turn, adversely affects poverty and

112
inequality. Policies that have been recommended to
deal with these problems include careful regulation
and supervision and even government ownership of
banks and other financial institutions, macroeconomic
management (of fiscal and monetary policy), which is
anti-cyclical in nature, that is, following contractionary
policies when capital flows in and expansionary poli-
fo
juaudoj
sadsp
jvuoyvu
cies when it flows out, and restrictions on international
capital flows.
Given the volatility of these kinds of flows, LDC
governments have shown a preference for foreign
direct investment (FDI). Not only can FDI inflows be
a more stable source of foreign capital, which increases
saving and foreign exchange availability, but they can
also bring in better technology and managerial meth-
ods, directly increase investment (when it is in the
form of what is called ‘greenfield’ investment, that is,
creating of new production facilities), promote exports
(given the global market presence of the transnational
corporation involved), reduce imports of those goods
which can be produced in the country by these cor-
porations, and promote competition by challenging
the monopoly power of domestic firms. These gains,
however, are not guaranteed, as stressed earlier by the

113
 ‘dependency’ theorists in the 1960s and 1970s. FDI can
be an important conduit of technology transfer from
abroad because transnational corporations can bring
in advanced technology, and these improvements can
spill over into domestic firms because of the mobility
of workers between transnational and domestic firms
and due to subcontracting relationships, where domes-
Development
Economic
Pathways
to
tic firms have to meet quality standards to supply
inputs to transnational firms. However, these corpo-
rations often engage in assembly production without
bringing in, revealing, and developing new technology,
and bring in technology inappropriate to LDC condi-
tions (for example, mechanized methods when there
is need for labour intensive methods for employment
growth). Transnational corporations have, therefore, at
times been criticized for creating enclaves which are
virtually part of the more developed country where
it is headquartered rather than the LDCs where they
are located, and having few linkages with the rest
of the economy of the latter through increasing the
demand for inputs and technological spillovers. FDI is
often in the form of acquisitions of existing firms and
can also harm firms by competing with them, thereby

114
not increasing investment. They can result in a large
increase in imports of intermediate goods and sales of
their products internally rather than for exports, which
implies, when one takes into account the repatriation
of profits, that the foreign exchange implication of
FDI is unfavourable. They can also monopolize sec-
tors into which they enter, rather than encouraging
syaadsp
fo
juaudo
Jvuoyv
competition. Finally, they can introduce the more
environment-polluting production processes in LDCs,
where environmental regulations are weaker and less
strictly applied, exacerbating, in the process, environ-
mental problems in such countries.
Governments can increase the positive linkages and
weaken the negative effects through appropriate policies
which include restrictions on the sectoral allocation of
investment in order to direct it into high-technology
sectors, by actively encouraging technology transfer
agreements to domestic affiliates, by imposing export
and domestic content requirements, and by helping in.
the creation of an educated labour force. Global com-
petition and international agreements—for instance,
the trade related investment measures (TRIMs)
agreement of the WTO—limits the ability of most

115
 LDC governments to pursue such policies. They are
not impossible to pursue, especially for large coun-
tries and for groups of smaller countries that coop-
erate with each other. Not many LDCs receive large
amounts of FDI, and when they do, FDI seems to

follow growth (arguably due to expanding markets

and the spread of education and labour skills) rather
Development
Pathways
Economic
to
than, except in a few cases, causing development.
Reducing regulations on FDI often does not have a
positive effect on inflows; many countries which have
relaxed such regulations without experiencing some
prior economic improvements have received little or
no FDI.

International Labour Movements

Labour movements across countries, especially from

LDCs to rich countries, are highly restricted by immi-
gration policies in the latter and when there is some
movement, it is biased towards high-skilled workers
with low-skilled labour migration, often undocu-
mented, occurring mostly in countries with contigu-
ous borders (as in migration from Mexico to the US).
The movement of high-skilled workers, who receive

116
education in LDCs and then migrate to rich countries
where they receive higher wages, is often seen as a
problem of the brain drain for poor countries, slowing
down technological change and growth (for instance,
due to the departure of scientists and engineers), as
well as having an adverse effect on health and edu-
cation (due to the emigration of health professionals
fo
juau
sjaads
[puol
and teachers). However, for many LDCs, emigrants
transfer a large amount of remittances, which improves
the country of origin’s balance of payments (as in the
cases of India and Mexico) and health and education
conditions (by augmenting their family resources and,
sometimes, by pooling funds to establish schools in
their home areas). However, such inflows often increase
inequality and result in increases in conspicuous con-
sumption rather than in improving functionings and
investment for growth. Moreover, it has been argued
that successful diaspora entrepreneurs and engineers
living abroad can improve the image of their country
of origin and thereby increase exports (as seems to
have happened for the information technology sector
in India), and also bring about an increase in FDI and
portfolio inflows.

117
 Technology Transfers

Technology transfers from rich to poor countries pro-

vide an excellent opportunity to the latter for improv-
ing their technology and experiencing growth without
having to reinvent the figurative wheel. Indeed, many
countries that are now more developed initially
Development
Economic
Pathways
to
imported foreign technology to catch up with those
which were technologically more advanced. It has been
argued that the speed of technology transfers depends
on the gap between the level of foreign technology
and domestic technology, since the potential to learn
is greater. Some commentators argue that technology
transfers from high-income to low-income countries
will enable low-income countries to catch up in terms
of productivity.
However, it may not be a simple matter to transfer
technology since, as anyone who has been a student
knows, it is necessary to have the prerequisites to
obtain further knowledge. Much of this knowledge is
tacit, rather than fully codified, it needs to be adapted
to local conditions and applications require the ability
to detect and overcome problems, and these prob-
lems have become more severe as the complexity of

118
technology has grown (Amsden 2001).To make use of
this knowledge effectively, therefore, requires not only
an improvement in skills through education, but also
the development of what has been called technological
capability, which requires, among other things, experi-
ence in producing increasingly more technologically
sophisticated goods and the creation of research and
syaads
fo
juaudo
jpuoy
development facilities. Thus, the diffusion of tech-
nology across borders is not fundamentally different
from the process of innovation (Bell and Pavitt 1993).
Transnational corporations can bring in foreign tech-
nology and are often a major conduit for technology
transfers, but little of this takes place if the corpora-
tions mainly engage in assembly and low-technology
manufacturing to take advantage of low wages or if
they jealously guard their more advanced proprietary
technology. Moreover, the international extension of
patents and other intellectual property rights protec-
tion, for instance through the trade related intellec-
tual property rights (TRIPs) agreement of the WTO,
has raised the costs and possibilities of technology
transfers to LDCs, a problem that countries which
tried to industrialize by liberally transferring foreign
technology in the past did not have to face (Chang

119
 2007). It is unlikely that the Indian pharmaceutical
industry could have grown as much as it did in the
past if it had to abide by international agreements
regarding patents before the TRIPs agreement was
implemented.

Development
Economic
Pathways
to Some Broader Issues

Beyond the interactions just discussed, international

factors affect development in LDCs in other, broader,
ways. Closer links to rich countries through television,
internet, and other media, and through travel and the
presence of transnational corporations, has cultural
effects on attitudes, norms, and preferences of people
in LDCs. For instance, the observation of consumerist
lifestyles in rich countries can lead to a reduction of
saving rates in poor countries through the so-called
international demonstration effect and to a preference
for foreign brand names in consumer goods, increasing
imports and the importance of transnational corpora-
tions in the economy. Competition in global markets
can make LDC governments relax regulations on
environmental pollution and working conditions and

120
wages, leading to a race to the bottom to maintain and
enhance international competitiveness.
International influences can also affect the nature of
government policies in LDCs. Rich country govern-
ments which provide foreign aid and market access,
transnational corporations which sometimes have strong
bargaining power because of their large size, and inter-
juaudo
fo
sjoadsp
jvuoyp
national organizations like the IME The World Bank,
and the WTO, can have a major influence on policies
that have significant development impacts on LDCs.
These include lowering barriers to free trade and finan-
cial capital flows, reducing restrictions on the activities
of transnational corporations, and the protection of
intellectual property rights internationally. Although
LDCs join the international organizations voluntarily
and seem eager to join them because of the benefits
from membership—such as obtaining access to rich
country markets and help with international financ-
ing—the fact that they are dominated by rich countries
either formally or informally frequently induce these
countries to adopt policies which may not be in the
best interests of their people. This is not to say that
these policies are imposed on LDCs by overt force as

121
 they were in colonial times, or that the policies do not
have the support of some domestic groups, but they tilt
the balance towards their adoption.
These comments have made us go beyond narrow
economic forces by discussing aspects of political
economy. It is time we examined non-economic issues
more systematically.
Development
Economic
Pathways
to

122
 5
Non-economic Aspects of
Development

Many social scientists and, increasingly, more econo-

mists are looking beyond the boundaries of narrowly
defined economics to examine other obstacles to
development. Non-economists have long emphasized
climatic, political, social, and cultural obstacles to
development. For instance, the lack of development
has been related to cultural habits and practices that
discourage saving, investment, and entrepreneurial

activity, create a general apathy towards the pursuit of

material goals and militate against a ‘rational’ world
view, to political problems such as the behaviour of
despotic rulers who have little interest in economic
progress and impoverish their subjects with heavy
taxes, and political instability and violent conflict.
 Many scholars also argue that years of colonial rule
created conditions that perpetuate the lack of develop-
ment. Economists have recently taken a greater interest
in traditionally non-economic obstacles, distinguishing
between what some call ‘proximate’ causes of growth
and development which relate to such issues as capi-
tal accumulation
Pathways
Development
Economic
to through saving and investment, and
technological change on the one hand, and ‘funda-
mental’ causes on the other; among the latter, geog-
raphy and institutions, closely related to political and
social factors, have received increasing attention. In this
chapter, we examine some ‘non-economic’ obstacles
to development, although keeping in mind the fact
that it is not obvious where the boundary between the
economic and the non-economic lies.

History

Historical explanations of underdevelopment have the

common feature of pointing to some events in the
past that created conditions favouring development in
some places and the lack of development in others,
and arguing that these conditions tend to persist over
time. They differ in what specific events or conditions

124
explain the initial difference, that is, the original
‘virtue’ or ‘sin’, so to speak, and what forces explain
the persistence, perpetuation, or even exacerbation
of these differences. They also differ in the extent to
which they see the original event and the persistence
of its effects to be related to the interaction between
the differentially affected places.
Regarding initial events, it has been claimed by py
juaudoja
sjaads
fo
21u0u02a

some observers that events in Europe, such as the Black

Death which raised wages by reducing labour sup-
plies and thereby induced labour-saving technological
changes, or changes in religious attitudes due to the
Protestant Reformation, which favoured hard work
and thrift and resulted a new view of the relationship
between humans and nature, and fostered technologi-
cal innovation, brought about economic improvements
in parts of Europe, changes which did not occur
elsewhere. While these explanations do not involve
interactions between different parts of the world, other
explanations—such as those which stress the role of
colonization and involve the plunder and the looting
of resources, forced trade in goods and people as slaves,
and imposition of foreign rule and policies and insti-
tutions inimical to development in colonized regions,

125
 for instance, bring about patterns of trade specializa-
tion that made colonies export primary products and
import manufactured goods—emphasize interactions
due to which some regions of the world benefited and
others were hurt (Bagchi 2005).
Examples of mechanisms of persistence include the
purely economic one of increasing returns according
Development
Economic
Pathways
to
to which increased production leads to lower average
costs and greater efficiency, to broader ones involving
political economy and institutional factors. If some
regions of the world go ahead (due to ‘initial’ events)
in the production of those types of goods that
generate higher productivity growth, they experience
improvements in their economic position as they are
able to produce more and out-compete other regions
that find themselves specializing in the production
of simpler goods which do not generate such scale
economies; thus, slight initial advantages can lead to
a widening gap over time that become difficult to
reverse (Dutt 1990). Some regions that follow a certain
path may be locked into that path due to what has
been called network externalities—self-reinforcing
social tendencies which make individuals and firms do
things in a way that make them continue along that

126
path rather than follow more efficient alternatives.
An example of lock-in is the continued use of the
QWERTY keyboard in preference to the DVORAK
format which is supposed to be more efficient in terms
of typing speed, because people are habituated to
using that system and producers and technicians are
experienced in producing and repairing them (David
syadsp
fo
juaudoja
21um0u02
1985). The powerful groups which benefit from such
a denouement can successfully push for the adoption
of policies which maintain the status quo. For instance,
powerful traders who reap profits from international
trading activities may successfully oppose policy
changes that increase domestic production and restrict
international trade, as in the case of Latin America
(Bulmer-Thomas 1994).
Mechanisms such as these strengthen the case for
the careful study of historical events and processes
which make their results persist over time, but do not
imply that it is impossible to come out of the shadows
of history. Some countries have escaped situations of
poverty and economic backwardness, and it may be
possible to weaken the mechanisms which result in the
persistence of poverty resulting from historical events.
However, greater awareness of historical events and

127
 processes can point to the difficulties involved in, and
provide guidance on, what can be done to overcome
the negative forces of persistence.

Geography

Favourable geographical conditions, such as fertile soil

Pathways
Development
Economic
to
and favourable weather conditions allowed people in
prehistory to increase their production of crops and
domesticate animals, thereby launching civilizations
which could produce well beyond their basic (food)
needs (Diamond 1997). However, many regions which
enjoyed these conditions, such as the fertile crescent
of the Middle East, did not pioneer what is widely
considered to be modern economic development.
Nevertheless, a look at the world map does suggest
some role for geography: many of today’s LDCs are
located close to the equator, and many more developed
countries are found in temperate zones some distance
from it. Possible obstacles to economic development
include: hot weather which makes people unable to
work hard and provides breeding grounds for diseases
which lead to bad health and morbidity and, hence, low
productivity; and the property of being land-locked,

128
which hampers oceanic trade. Paradoxically, geography
can also kill with kindness: for instance good weather,
fertile land, and abundant natural resources can make
some parts of the world become self-sufficient, com-
placent, and insular and become easy prey to outsiders
who, lacking such ‘good’ fortune, had to look outwards
and develop their military prowess in order to plunder
py
sjaads
fo
juaudoja
21us0u02
and loot through conquest and domination, creating
the colonial nexus mentioned earlier. Moreover, the
abundance of resources, even today, leads people to
fight each other to grab their share of the extractable
bounty, while others who are not cursed by the exis-
tence of resources have to engage in productive activ-
ity, paving the way to economic development.

Institutions

Of late, it has become fashionable in mainstream eco-

nomics to argue that institutions are the fundamental
determinants of growth and development (Acemoglu
and Robinson 2012).The role of institutions in block-
ing development has, however, been long emphasized
by many economists and other social scientists, such as
Gunnar Myrdal,
who are called institutional economists.

129
 The word institutions has been used in many senses,
and sometimes described as the ‘rules of the game’ in
which individuals and groups in society operate. They
are most usefully defined as comprising of laws and for-
mal rules; informal habits, social norms, or conventions
which affect how people and groups behave, especially
with each other; and more or less formal organizations
Development
Economic
Pathways
to
of people or groups. Laws and rules include statutes,
bodies of case law, and constitutions. Informal norms
and conventions can be ingrained habits, though all
habits are not norms and conventions, only those that
are more or less widely shared. Organizations include
the courts, the police, civil service bureaucracies, firms,
trade unions, families, and official international organi-
zations. The need for combining these three aspects of
society into one concept comes from the fact that it is
impossible to understand each one and its role in the
economy without understanding the others.
In much of the mainstream economics literature
the institutional obstacle that has been emphasized
most in recent years is that of the absence of well-
defined private property rights. Although the literature
has stressed other institutions as well, such as those
which promote market freedom and market flexibility,

130
establish democracy (which we will discuss later),
improve governance, and reduce corruption, a flavour
of the issues involved regarding institutions can be
obtained with a brief discussion of private property
rights.
The establishment of private property rights has
been seen as a precondition for development since,
it is argued, that if property rights are not protected,
syaadsp
fo
juamdo
21m0u0
economic agents will have little incentive to produce,
trade, save, and invest, fearing that what they obtain
from these activities will be appropriated by others,
including the state. Moreover, it is argued that the
absence of well-defined property rights over resources
which is open for use to all results in what has been
called the tragedy of the commons. People use them
beyond what is required to maintain them for future
use, because they believe if they do not, others will
do so, leaving them nothing for the future; examples
include forest resources and fish stocks. It is also argued
that without the protection of intellectual property
rights, such as patents, which give innovators monopo-
ly power by at least temporarily stopping unauthorized
copying by competitors, the incentives for innovation
would disappear or at least decline, slowing down tech-
nological change.

131
 While the case for private property for providing
incentives for saving, investment, and growth is a
strong one, the issue is complex.
The concept of private
property rights involves many dimensions, including
the right of access without subtractive benefits, the
right to withdraw products, the right to manage and
to improve, the right to exclude
Pathways
Development
Economic
to others from access
and withdrawal and acceptable methods of doing
so, and the right to sell exclusion rights; different
configurations of these dimensions may have different
effects depending on how they affect the degree of
control rather than some definition of ownership
of the appropriate decision makers (Rodrik 2007).
Again, for property rights, formal rules can never
be completely specified but require interpretation
by the courts, their compliance depends on both
social norms and enforcement by organizations, and
changes in rules may well result in changes in norms
that reduce the control of relevant owners. In some
cases, as mentioned in Chapter 3, the imposition of
private property rights can be harmful for efficiency
when they replace informal institutional arrangements
that have been developed over long periods of time to
deal with common property resources (Ostrom 1990).

132
Moreover, attempts to secure property rights (as well
as promoting market freedoms) can have undesirable
consequences because the real world is unlikely to
satisfy the stringent conditions that market economies
need to satisfy for the first welfare theorem to hold,
which, as we discussed in Chapter 3, is the basis for
much of the mainstream approach. Externalities,
asymmetric information, and various kinds of market juamdo
syadspy
Jo
211uW0u

power abound in many economies (which institutional

changes are unlikely to overcome), especially in LDCs;
uncertainty renders the entire theoretical apparatus of
mainstream economics problematic.
The need for some kinds of private property rights,
such as those related to intellectual property, is espe-
cially problematic. In theoretical terms it is not clear
that patents and other intellectual property right pro-
tection speed up innovation: while they can provide
greater monetary rewards for innovation, they also
raise the costs of innovation by reducing access to the
fruits of other innovations which can serve as inputs
into innovative activity, and it diverts resources from
innovative activity to the protection of intellectual
property rights through legal means. There is, indeed,
little empirical evidence to suggest that intellectual

133
 property rights protection actually speeds up innova-
tion (Boldrin and Levine 2008). The problem posed by
the world-wide spread of intellectual property rights is
particularly severe for LDCs for which technological
change, to a large extent, involves transferring technol-
ogy developed in more developed countries.
Economic
Pathways
to Finally, institutions can have different effects regard-
Development
ing different goals of development. Property rights
strengthen a kind of rights, and their effect on efficiency
and growth has been emphasized in the mainstream
discussion. But they also affect distribution and func-
tionings such as being adequately nourished, which are,
in turn, related to efficiency and growth. For instance,
as mentioned in Chapter 3, land reforms which violate
the private property rights of some and redistribute
land and thereby extend private property rights for a
large group of people can improve asset and income
distribution, while also increasing efficiency in agricul-
tural production.

Political Factors

Almost everyone agrees that the state (and its com-

ponents, including politicians in government, the

134
judiciary and police, the military, and the civil ser-
vice) has a positive role to play in development. Some
stress its role in maintaining law and order, providing
national defence, enforcing contracts, establishing and
protecting various types of property rights, and creat-
ing a general environment in which private enterprise
can flourish. Others go further and argue that it has a
py
syaads
fo
juaudoja
21u0U09a
role in overcoming market failures, for instance, due to
externalities, the existence of public goods, monopo-
lies, and imperfect information (see Chapter 3). Yet
others argue that the existence of uncertainty prevents
private individuals and organizations from performing
activities like building up key industries, so that the
state has to provide a helping hand or even develop the
industries with state-owned enterprises. It is argued
by many that the state can and should improve the
well-being of those who are left in poverty or are
exposed to various kinds of insecurities by market
and social forces. However, political leaders may be
unwilling or unable to perform these roles, and may
even create barriers to development by attempting to
enrich themselves at the expense of the rest of society.
When the state acts in this way (or when other non-
state political institutions such as political parties fail

135
 to function appropriately) we can say that they create
political obstacles to development.
The most obvious example of a political obstacle is
a state which lacks the power to perform the tasks just
mentioned even at the most basic level. Such states,
sometimes referred to as ‘failed states’, lack the coercive
power, organization, and legitimacy to provide basic
Development
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Economic
to
services, such as maintaining basic law and order and
keeping transport systems in workable order, let alone
foster development. In some cases, this lack of power
manifests itself in political instability, accompanied by
civil conflict. The result is a situation in which the
future is extremely uncertain and in which private
incentives are at low levels and the state can do little
directly; a vicious cycle is created which weakens the
state further. But political obstacles can exist under
less extreme conditions. It is useful to analyse such
obstacles in terms of three aspects of the political
system of a country, although they are closely related:
the objectives of the state and its components; the
relationship of the state to the society at large; and the
organization of the state and other political institutions.
The objectives of the state and its components
may include personal enrichment and empowerment,

136
maintaining its power, improving the conditions of
those in society who are associated to them, and broader
developmental goals. These objectives, of course, may
not be mutually exclusive: for instance, an effective way
of maintaining power is by pursuing development goals
and winning general approval. However, it is worth
keeping such varied objectives in mind to avoid the
narrow and cynical view that those in power merely fo
juaumdo
syvadsp
21uM0u0I

try to enrich themselves through corrupt practices or

the naive one that they work only for the common
good. In some countries, states have been clearly
predatory and extractive and enriched political leaders
at the expense of society at large, and in others, such as
in South Korea and Taiwan, it has been argued to be
developmentalist (Evans 1989). In India, the state seems
to have both developmentalist and corrupt sides. While
corruption and rent-seeking may have pernicious
developmental effects, for instance by siphoning off
resources away from productive uses and by increasing
the incentives for unproductive behaviour, it need
not do so if, for instance, corruption directs resources
to those whose success leads to industrialization and
export growth, or if the personal aggrandizement or
the political power of leaders requires them to share

137
 their gains with the society at large, especially with
the poor.
The relationship of the state to the society at large
requires an examination of different groups in society,
which can be called classes, interest groups, or coali-
tions, and how they are related to those who occupy
important positions in different components of the state.
Development
Economic
Pathways
to
These groups can influence the state through political
support in the form of votes and other demonstrations
of political support, financial contributions, and direct
representation in governments. Those groups in society
who have more influence on the state can try to push
forward policies and institutions which, they perceive,
will further their own interests and block those that
they perceive will hurt them. Thus, what the state does
or does not do reflects both the power and interests of
different groups, and the effect of the state on devel-
opment depends on how what the state does actually
promotes development.
In some situations, groups that are numerically
strong can affect government policies by how they vote,
their opinions as reflected in polls, and through social
movements. In other situations those who are better
organized because they are smaller and more cohesive,

138
so that they are able to overcome what Mancur Olson
(1965) has called the problem of collective action
due to the free rider problem, have greater influence.
Usually, though, money talks and the powerful groups
are the ones with more income and wealth, because
they can buy the support of others in society, influence
government officials directly, and organize themselves
fo
fy
juaud
sjvads
21us0u
better. If the interest of powerful groups lie in increas-
ing their share of income and maintaining their power,
they are likely to block changes such as those which
reduce income inequality which, as we have seen
in Chapter 3, are likely to have a positive effect on
economic development. Sometimes power relations
may be more complex. Pranab Bardhan (1984) has
analysed the Indian situation and identified the domi-
nant groups as being: the industrial capitalists whose
power is based on their disproportionate ownership
and control of industrial capital; large and medium
landowners, whose power is based on the ownership
of land; and the educated elites who exercise control
over higher education and various elements of the state
bureaucracy. He argues that while each of these groups
is powerful, they are not powerful enough to pursue
their interests alone and have to form coalitions and

oe
 appease each other, and exercise multiple veto powers
to block policy changes and implementation. Examples
of such policies (or their absence) have been argued to
include: the expansion of subsidies to the dominant
groups, which reduces the ability of the state to increase
investment or improve the conditions of the poor; the
neglect of land reform in many parts of the country to
Development
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Economic
to
placate landowners; the maintenance of a large range
of government regulations to make it easier for bureau-
crats to benefit from corruption; to protect big business
against foreign competition; and to maintain a relatively
closed education system to maintain a high income
for those with more education. These configurations
of the relationship between the state and dominant
groups do not imply that no developmentist policies
are possible. Changes can indeed take place when
the state is very strong (and relatively autonomous
from societal pressures), paradoxically, when the state
is very weak and throws caution to the wind, when
dominant groups have large internal divisions, and
when it is supported by strong groups whose inter-
ests and broader social interests are closely aligned
(Kohli 2004). However, the analysis implies that
societal pressures may make it difficult for the state

140
to promote development even when it is willing to
do so.
Finally, the organization of the state and other
political institutions can have an important impact on
development prospects. One debate is about the rela-
tive merits of democracies and authoritarian regimes:
some argue that the authoritarian Chinese system has
been far more successful in promoting development, fo
fy
juaudoj
sysads
211uM0U09

both in the sense of reducing poverty and improv-

ing human development indicators and in promot-
ing growth, than India’s democratic system, while
others are convinced that India has a brighter future
because of its democratic polity while the Chinese
authoritarian system is on the brink of collapse. While
democracies are intrinsically more appealing because
of the greater political freedom they typically allow,
no clear relationship has been found to exist between
economic growth or economic development defined
more broadly and whether economies are more or less
democratic, but democracies seem to have a smaller
amount of variation in performance.
A number of reasons have been cited for why
democracies may have an advantage over authoritarian
regimes. For one, democracies are better at resolving

141
 conflicts by recourse to the ballot box, than authoritar-
ian regimes, where the main way in which govern-
ments change is by violent conflict which, through
death, physical destruction of capital and infrastructure,
creating greater uncertainty, and by diverting resources
to conflict rather than productive activity, blocks devel-
opment. Also, democracies are more likely to provide
Development
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Economic
to
better information to, and result in greater account-
ability among, government officials, and involve most
of society in having greater ‘ownership’ of policy inter-
ventions, helping their implementation. For instance,
as Amartya Sen (1999) has argued, famines are far less
likely to occur in democracies rather than in authori-
tarian regimes, because a free press is more likely to
provide information about problems and hold politi-
cians and government bureaucrats more accountable
in overcoming the worst consequences of famines, for
instance, with the government distributing food to
famine-afflicted areas. Beyond simply providing more
information, public discussion and debate is more
likely to result in a more well-reasoned crystalliza-
tion and articulation of the will of the people. Finally,
governments in democracies are likely to be more
responsive to the will of the people, and pursue policies
which are more likely to improve the well-being of the
majority of the people.
The general applicability of such claims, however, is
open to question. First, democracies need not resolve
conflicts peacefully. There are cases in which after
inequality grows due to a minority becoming richer
syaadsp
fo
juaudo
21us0Uu0
because of their privileged economic and political
positions, the majority can oust them from political
power through elections, inducing the more powerful
minority to retaliate by subverting democratic pro-
cesses (Chua 2004). Second, democracies are likely to
favour policies which focus on the short term because
politicians seeking reelection want to show quick
results. Third, while democracies may have a role in
reducing the chances of the occurrence of catastrophic
events such as famines, they may not be able to reduce
less catastrophic but debilitating problems such as
long-term malnutrition simply because the latter does
not make good press, as Sen has conceded. Finally, with
large wealth and income inequalities, democracies can
make governments less responsive to the needs of the
poor and the politically weak, by muting their ‘voice’
 in public discussion and debate. Moreover, because
of political inertia discussed earlier, the development
efforts of the state may be constrained.
In addition to the effect of general concepts like
democracy, other more specific issues about the politi-
cal and governance system, including the extent of
decentralization
Development
Pathways
Economic
to of the government, the nature of
the civil service, and the characteristics of political
parties, can have an effect of development. Like the
debate on democracy, there are no clear answers here.
For instance, decentralization in governance can lead
to better results by involving the people most affected
by policies to have a say in shaping and successfully
implementing changes, but it is possible that local gov-
ernments are more susceptible to capture by local elites.
In general, however, states are more successful with
development policies when civil service bureaucrats as
in South Korea (or political parties as in Taiwan) have
what Peter Evans (1995) calls ‘embedded autonomy’
that is, they are sufficiently embedded in society to
understand what is needed for development ‘on the
ground’ and are trusted by private sector groups, while
being relatively autonomous and not overly influenced
and constrained by powerful groups.

144
 Social and Cultural Factors

The attitudes and behaviour of individuals are obvi-

ously affected by social factors which influence how
they act individually and how they interact with
each other. A long tradition claims that certain types
of attitudes and behaviour are conducive to develop-
ment and others are detrimental to it, and that these fo
juaudo
siadsp
21us0u02

attitudes and norms—which can be thought of as an

aspect of institutions as mentioned earlier—are often
determined by shared religious beliefs. For instance,
Max Weber (1930) stressed the role of the Protestant
ethic in creating conditions for the rise of capitalism
and economic progress, by encouraging hard work,
saving and capital accumulation, and a general desire to
improve one’s position in this world rather than focus-
ing on the afterlife. Not all such norms and attitudes are
based on religious beliefs, however; they can be related
to culture more generally, which refers to patterns of
meanings that include actions, sayings, and meaning-
ful objects through which individuals communicate
with each other and share their ideas, experiences, and
values. Colonial administrators and those believing in
modernization theories argued that traditional values

145
 that stress spending on religious and cultural activities
rather than on investment and limited material needs,
downright indolence, and dishonesty create obstacles
to development. It was often argued that non-western
societies remained in poverty because of their social
norms which militated against accumulation, work,
trading, and business activity.
Development
Economic
Pathways
to
It has often been claimed that culture in general and
religious values in particular have constrained devel-
opment in many parts of the world, including Latin
America, China, and the Islamic world. The Indian
economy's low rate of growth used to be called the
Hindu rate of growth and at least one book about
the Indian economy referred to India’s development
problems as a Hindu equilibrium (Lal 2004). Earlier
writers had attributed the problems to Hinduism’s
stress on the afterlife and preoccupation with the doc-
trine of karma, which made people accept their lot as a
punishment for sins in past lives rather than overcome
their poverty through purposeful action, and to accept
inequality and poverty among others on similar terms
(Morris 1967). Particular emphasis has been placed
on the caste system, which has been argued to reduce
economic mobility, reduce expectations and incentives

146
for economic advancement, and the acceptance of
inequality (Nair 1962). Members of higher caste elites
have held political and economic power and maintained
a firm grip on education which, it has been argued,
led to a neglect of basic education and to an improve-
ment of higher education which has not led to eco-
nomic development because of the lack of jobs which
py
sjaads
fo
juaudoja
21mM0u0Ia
can utilize the skills of those with higher education.
Moreover, neoliberal economists have argued that it has
created a culture in which people of higher castes who
are part of the economic and political elites have held
the view that other castes have to be controlled and
regulated for their own good and for the good of the
nation as a whole, thereby encouraging a government-
controlled economy (Lal 2004).
The argument that religious and other factors are
embodied in norms that block development has a
number of problems. It has been observed that values
can change in response to other factors, sometimes
quite quickly. For instance, many norms, such as those
which result in low labour productivity and corrup-
tion, are the result of poverty and the absence of devel-
opment, and not so much the cause of them, and can
change when economic conditions change. Cultures

147
 have many aspects to them and it is easy to overstress
the role of certain aspects of them and to ignore others
which may be more favourable about development. For
instance, it has been claimed that Islamic culture 1s, on
the one hand fixated on afterlife and violent jihad rather
than materialist pursuits, and on the other, is supportive
of business
Development
Pathways
Economic
to and trading (the Prophet Mohammed him-
self was a merchant) and, as such, has a well-developed
sense of contracts (Chang 2007). Moreover economic
behaviour, policies, and institutions are not just affected
by cultural values but also power relations, economic
conditions, and the outcome of academic and policy
debates. Finally, the effects of social norms need not be
the same everywhere. High saving rates may be good
for some economies, but not necessarily for others in
which investment incentives and growing aggregate
demand are of great importance.
It is not surprising, then, that there are so many
ex-post explanations of economic performance and
policies in terms of values, and so many incorrect
ex-ante predictions based on them (Chang 2007). For
instance, Weber argued that the Confucian ethic was a
barrier to economic growth in explaining East Asia’s
economic stagnation, Morishima (1982) argued that

148
the Japanese version of Confucianism was conducive
to development and the Chinese version is not after
Japan developed, and now many people relate China’s
high growth to China’s Confucian ethic because it
stresses social order and the importance of education
and training.
There are some social factors that continue to be
fo
juaud
sjsadsp
21us0u
emphasized by some social scientists, including the
importance of what has been called social capital. Social
capital refers the collection of social networks which
can benefit individuals among whom connections are
strong, and can benefit entire groups and societies.
The
importance of social capital has been emphasized not
only for the smooth operation of markets by promoting
trust between trading parties that overcome the
problem of opportunistic violations of agreements and
contracts, but also for reducing conflict and promoting
cooperation among people in organizations which are
not based on market principles, for instance, in firms,
the success and productivity of which arguably depend
on harmonious relationships. Suggestions have been
made for increasing interactions between different
people and the fostering of social organizations and
communities. However, such claims sometimes ignore

149
 the natureof interactions and relations between
different people within the relevant entities, such as
firms, their relative power, and their possibly opposed
economic interests.

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to

150
 6
Strategies for Economic
Development

What strategies can be adopted by governments and

other organizations to foster economic development
in LDCs? What are the merits and disadvantages of
alternative strategies? What have been the policy expe-
riences of LDCs that have had success in economic
development compared to those which have failed or
at least not done as well? What approaches to develop-
ment have been adopted in India, what effects have
they had, and what are appropriate paths to follow?
Sometimes debates about issues of strategy have pro-
ceeded as if there are two or perhaps three alternative
paths to development, for instance, a neoliberal strategy,
a state-led autarkic strategy and some kind of a middle
path. Such debates have been unnecessarily divisive
 and arguably failed to improve our understanding of
the strengths and weaknesses of different strategies.
Often the middle path has been forgotten. Rather than
engaging in such broad debates, we may discuss strate-
gies in terms of the questions about alternative paths to
development mentioned in the introduction.
Development
Pathways
Economic
to

The State versus the Markets

Arguably the major debate regarding strategies of

development has been about whether economic devel-
opment is best promoted by harnessing the forces of
the free market or through state involvement. In the
early days of development economics after World War
II, the experience with wartime controls and planning
in more developed countries, the generally positive
growth results of Soviet planned industrialization, the
aspirations of the governments of newly independent
LDCs, and the US's desire to promote development by
providing foreign aid to LDC governments to confront
the spectre of communism, led to a heavy reliance on
the state as the driving force for development. This
was attempted through extensive government owner-
ship, planning, and regulation of the economy. After

152
over two decades of the experience with this dirigiste
development and its alleged poor results, the pendu-
lum of opinion swung to favouring a market-oriented
approach to development, a shift which received a
boost from the spread of so-called neo-liberal poli-
cies which attempted to minimize the role of the state
under Prime Minister Margaret Thatcher in the UK
JUaMdopa
saidarvar
sof
Mmouory
and President Ronald Reagan in the US. In India, a
planned, state-led pattern of development, in which the
public sector dominated the “commanding heights’ of
the economy, was in place from the early 1950s to the
mid-1970s but from then onwards, through the 1980s
and especially from the early 1990s, India embarked on
hiberalizing reforms, which opened up the economy
to the private sector, reduced government regulations,
and virtually dismantled the earlier industrial licensing
system or the ‘license raj’.
The case for free markets is usually made in terms
of Adam Smith’s (1776) notion of the invisible hand
and its modern mainstream neoclassical economics
formalization in terms of the fundamental theorem of
welfare economics, discussed in Chapter 3. According
to this view, under certain conditions, a free market
economy results in an efficient allocation of resources.

155
 Free markets also promote productive efficiency by
encouraging competition and make use of better
information possessed by private individuals, who have
better knowledge about what concerns them than
does the state. State regulations were argued to dis-
tort free market incentives, result in inefficiencies, and
promote
Development
Economic
Pathways
to corruption and activities which attempt to
secure government favours rather than production and
investment. Moreover, free markets expand economic
freedoms while state intervention reduces individual
freedom and interferes with the rights of individuals,
for example, to private property.
The case for state intervention is made with the
argument that the strict conditions that are required
for the fundamental theorem of welfare, such as “per-
fect’ information and the absence of externalities,
public goods, and large firms which can set prices,
as discussed in Chapter 3, are unlikely to hold in real
economies, especially in LDCs. Moreover, if the future
is uncertain—rather than just risky in the sense that
there are objectively calculable probabilities of future
events—the economy can experience macroeconomic
problems such as unemployment, inflation, and eco-
nomic fluctuations, which can be corrected by suitable

154
government policy. The government can also have
better information about macro issues and, in fact,
control the macro environment and overcome coordi-
nation problems like the one we encountered concern-
ing the shoe factory in Chapter 3. The government
can also reduce poverty and inequality, rather than
focusing only on efficiency like the free market does, saisajv
sof
juaud
nmouo
at least in terms of the fundamental theorem of wel-
fare economics, and expand the functionings and
capabilities of people, which can imply expanding
freedoms and upholding certain rights (to education
and adequate nutrition, for example), even though
government restrictions may reduce certain freedoms
and violate some rights.
The theoretical debates have been accompanied by
controversies regarding interpretations of actual policy
experiences around the world. The empirical case for
free markets has been made by pointing to the gen-
eral success of capitalist economies of Western Europe
and the US and the demise of the Soviet Union. The
case for government intervention is made by drawing
attention to significant instances of government sup-
port for economic development in Western Europe
and the US, and especially in Germany and Japan, and
 to the experiences of the Great Depression and the
global financial crisis of the first decade of the twenty-
first century, in which free markets are associated
with economic decline and government intervention
with recovery. Turning more specifically to LDCs in
recent times, the experience of the East Asian newly-
industrialized countries
Development
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Economic
to (NICs), such as South Korea
and Taiwan, were initially interpreted as demonstrating
the virtues of market-friendly strategies by the World
Bank, among others, but later scholarship suggests the
strong role of the state in these successful development
efforts in the form of state-ownership of enterprises,
government regulation and government allocation of
credit to key industries (Amsden 1989; Wade 1990;
Chang 2007). The poor performance of many LDCs,
including India (Bhagwati 1993), has been laid at the
door of state intervention. The more recent growth
acceleration in China and India has also been attrib-
uted to free market reforms, although it has also been
argued that the experiences of these countries included
state intervention, which made possible the creation of
an industrial base and technological upgrading and laid
the foundations for the more recent growth accelera-
tions. The growth successes are attributable to the fact

156
that they have liberalized guardedly and continue to
have among the most state-interventionist economies
among LDCs.
What these debates seem to overlook is the fact
that the market and the state are not substitutes but are
synergistic institutions which can strengthen the posi-
tive development effects of the other. The mainstream
juaudojaa
saisayvayg
sof
a1uouorq
neoclassical approach to markets does not usually rec-
ognize the fact that the state and society need to pro-
vide markets with appropriate underpinnings so that
private property rights are protected to some degree
and contracts are enforced, and ensure that the excesses
of market competition do not disrupt social stabil-
ity, without which market economies will collapse
(Polanyi 1944). Markets have many shortcomings, as
discussed earlier, which open up the possibility that
states can improve matters. But states can also create
problems and not merely solve them, by promoting
inefficiency and corruption and by furthering the
goals of powerful groups in society at the expense of
the less powerful, and ultimately at the expense of the
country as a whole. The state can promote develop-
ment if it can insulate itself from the pressures of these
elites, provide incentives to relevant groups in society

Sy
 and, in return, demand appropriate results, and act in
a pragmatic rather than doctrinaire manner, which
destroys individual initiatives that can further develop-
ment. In particular, the state can make use of market
forces, among others, to discipline social groups to
achieve desirable outcomes and provide incentives
to those whose activities can promote development.
Development
Economic
Pathways
to
There are no general formulae for the proper balance
between the markets and the state and exactly how
they can complement each other, since these depend
on the economic, political, and social context of every
country.A careful study and appraisal of these contexts,
coupled with careful analytical thinking, is required.

Autarky versus Openness

A second major development debate is over whether

LDCs should follow an autarkic or inward-looking
development path or one that is outward oriented
and seeks to increase links of the country with the
global economy, through greater openness to inter-
national trade, foreign direct investment, and other
forms of international capital flows.
After World War II,
there was a preference for a relatively inward-looking

158
approach, which accompanied the general strategy of
state-led industrialization. Many LDCs embarked on
import-substituting industrialization, attempting to
develop manufacturing industries under tariff barriers
and import quotas. In addition to the goal of industri-
alization, these LDCs were arguably reacting to their
colonial pasts, suspicious of the colonial pattern of saisajv
sof
juaumd
mmouo
trade in which they imported manufactured goods and
exported primary products, and of transnational cor-
porations which represented to them the new face of
colonialism. Moreover, policymakers in LDCs seemed
to believe that their prospects of increasing exports of
primary and simple manufactured goods were limited
(what has been called export pessimism), and foreign
exchange shortages and the import needs of indus-
trialization were seen as requiring foreign exchange
controls and licensing. From roughly the same time,
as the switch from state-led strategy to the market-
friendly strategy occurred, the autarkic approach gave
way to the more outward-oriented approach. Many
explained the shift as occurring due to recognition
of the inefficiencies and generally poor performance
of the inward-looking approach, the exhaustion of
the possibilities of import substitution, and the good

59
 performance of LDCs which were more outward ori-
ented, such as the East Asian NICs. Since the shift in
strategy generally involved the liberalization of trade
and international capital inflows, according to many
analysts, the switch from inward to outward orientation
was seen as a switch from state-led approach to a free
market one. However, the relationship between the two
Development
Pathways
Economic
to
debates is not a simple one: as the East Asian experience
shows, the outward-oriented strategy was pursued with
active state intervention rather than through the free
market and free trade approach.
India’s approach reflected the general trend, although
there were differences in timing and extent of change.
India followed a highly protectionist trade policy in
the early days after independence, in fact, pursuing
what can be called a policy of self-reliance irrespective
of cost. The move towards export promotion poli-
cies, for instance, by providing import tax concessions
and other incentives to exporters, was started as early
as the 1960s. Trade liberalization was under way by the
1980s and gathered steam from the 1990s. However,
during the 1970s, India became more restrictive
towards transnational corporations and while inter-
national capital flows were liberalized from the 1990s,

160
India’s capital account is among the more regulated in
the world.
The case for inward-looking development relies
on the arguments discussed in Chapter 4 which point
to the need for developing manufacturing industry
to foster technological change and to diversify the
economy away from primary production, for instance,
juaudo
sof
saidajv4
mmouo
due to the problems caused by deterioration of the
terms of trade and volatility; the dangers of foreign
direct investment caused by high profit repatriation,
deleterious effects on domestic entrepreneurship and
the inflow of inappropriate technology, and financial
and foreign exchange instability caused by volatile
international financial capital flows. The critics of
such inward-looking development prefer an outward-
oriented strategy because they argue that the promo-
tion of exports increases the demand for domestic
goods and brings in foreign exchange, exposes domestic
producers (both import competing firms and export-
ing firms) to international competitive pressures, the
absence of trade restrictions allows LDCs to produce
according to their comparative advantage, which lies
in labour-intensive goods resulting in rapid employ-
ment growth and reduction of poverty, less restrictive

161
 policies towards capital inflows results in the greater
availability of foreign saving which can finance both
domestic and foreign direct investment, and advanced
foreign technology is brought in, in the case of FDI. It
is claimed, using case studies and econometric analysis,
that LDCs which are more open to trade and interna-
tional
Development
Economic
Pathways
to capital flows tend to experience higher growth
and lower levels of poverty. However, the robustness
of the econometric studies has been questioned, and
it is pointed out that although in some cases restric-
tions on trade and capital flows have had poor results,
in others, as in the East Asian NICs, they have been
more successful, and this success has been followed by
some degree of trade and capital flow liberalization,
which makes it seem that liberalization and economic
success are causally related. An examination of the
history of many of the more developed countries of
today shows that these countries, including the UK,
USA, Germany, and Japan, followed protectionist trade
policies in the past to foster the development of their
industries, and then become ardent free traders and
champions of trade liberalization only after becoming
more developed, attempting to kick away the ladder—
in the words of the German economist Friedrich List,

162
who supported protectionism during the early stages
of his country’s development—to prevent LDCs from
following in their footsteps (Chang 2007).
The appropriate course to follow is neither
an inward-looking strategy which indiscriminately
imposes barriers on foreign trade and capital move-
ments or an outward-oriented one which reduces these
juaudoja
sa1dajv44S
s0f
21mo0Uu0r
barriers, but a judicious combination of the two suc-
cessful LDCs have used protectionist policies to give
their nascent, relatively low-technology industries some
breathing space to become internationally competitive,
after which their governments have exposed them to
foreign competition.
While promoting the exports of
these goods they have also provided tariff and other
forms of protection to relative high-technology indus-
tries until some of them have been able to compete
in international markets, and so on. These countries,
including the East Asian NICs and, more recently,
China, have sought to climb the technology ladder, and
have benefited by exporting relatively high-technology
goods. This is not a matter of choosing between import
reduction and export expansion, as simple static trade
theory models with full employment, balanced trade,
and two goods seem to suggest. Not all countries can,

163
 of course, proceed along this path with equal success: in
some cases the state is in no position, because it is too
beholden to powerful domestic groups, to force large
domestic firms to compete successfully in foreign mar-
kets, and others are too small and have small domestic
markets to allow effective import substitution and the
reaping
Development
Pathways
Economic
to of scale economies. Regarding foreign direct
investment, countries that have been very hostile to
transnational corporation and, indeed, dislodged them,
as India did in the 1970s, paid a heavy technological
price. However, other countries which experienced
large amounts of FDI inflows have benefited by care-
fully directing it to sectors which could benefit most
from foreign technology, and imposing restrictions on
entry into some sectors (such as service sectors like
retail and finance) in which the possibility of technol-
ogy gains is minor and adverse effects of monopoliza-
tion, profit repatriation and lack of government control
is high, and require and induce the foreign firms to
transfer technology to domestic firms as suppliers or
as partners. Regarding other capital inflows, while it
makes sense to encourage foreign borrowing with
long maturity periods, it may be sensible to take steps
to restrict short-term capital inflows and outflows

164
with taxes and other restrictions. Countries that have
successfully coped with volatile capital flows with
minimum damage to growth and equity—for instance,
during the global financial crisis of 2008—are those,
including India, that have maintained a high a degree of
government control over their financial sectors, main-
tained some control over international capital flows,
juamdoj
51894041
sof
mmouor
and pursued anti-cyclical monetary and fiscal policies,
maintaining high levels of aggregate demand with
expansionary macroeconomic policies during financial
crises involving capital outflows (Reddy 2011).

Growth versus Poverty, Inequality, and

‘Social’ Development

Early development economists and _ policymakers

focused on achieving high rates of growth of income
and production in LDCs. This is not to suggest that
they ignored the problems of poverty and inequal-
ity, but they arguably believed that if the economy
could be made to grow, poverty and even inequality
would automatically and eventually decrease. Most
countries, therefore, concentrated on increasing sav-
ing, investment, capital accumulation, and the rate of

165
 technological change, rather than focusing directly on
poverty reduction. With the recognition of the fact
that some LDCs, like Brazil, were experiencing rapid
growth with rising inequality and little poverty reduc-
tion, and many others were experiencing neither sig-
nificant increases in output nor reductions in poverty,
from around the 1970s, there was a shift in focus from
Development
Economic
Pathways
to
promoting growth to directly reducing poverty and
inequality and addressing the problem of basic needs
like food, health care, and shelter for the poor. This was
done by providing cash assistance and increasing income
opportunities for the poor, and with government poli-
cies that redistribute income to the poor. The success
of some countries, such as Sri Lanka, Costa Rica, and
Cuba, and states like Kerala in India, in terms of human
development indicators such as health, education, and
poverty reduction—without significant increases in
income—has been recognized. Moreover, as we noted
in Chapter 3, it has been argued that addressing the
needs of the poor, such as basic health, education, and
nutrition and reducing inequality promotes growth.
However, emphasizing either growth alone or pov-
erty, inequality, and other ‘social’ development indica-
tors without emphasizing growth is problematic. An

166
increase in the growth rate may not have a positive
effect on poverty and other ‘social’ indicators because
output growth need not promote employment growth
if labour productivity rises rapidly, and appropriate spe-
cific government policies may be required to affect the
lives of the poor since market processes often exclude
the poor. Attempts to reduce income poverty and
sad
juawdoj
sof
Mmouo
improve health, education, and nutritional conditions,
especially for the poor, may improve the conditions of
the poor to a limited extent, but do little to make a large
dent on the extent of poverty and reduce inequality,
and is unlikely to promote sustained growth. Without
sustained output and employment growth, improve~
ments in education will have limited effects on the
incomes of the poor and may even result in emigration
abroad (though resulting increases in remittances can
compensate to some extent, as discussed in Chapter
4). Moreover, without long-term and sustained eco-
nomic growth, government finances can come under
strain, especially after adverse external and internal
political and economic shocks, which can make it
difficult to sustain poverty-reduction and other social
programmes. In other words, the recognition that eco-
nomic development does not simply mean economic

167
 growth, as discussed in Chapter 2, does not imply that
the best strategy for reducing poverty and inequality
is by attacking them directly, without attempting to
create conditions for sustained growth.

Macroeconomic versus Microeconomic

Development
Pathways
Economic
to Approaches

Macroeconomic approaches focus on indicators and

policies at the macro or aggregate level, or at broad sec-
toral levels, while microeconomic approaches focus on
interventions, both public and private, at the small—
often village, or project—level. It is fair to say that early
development economics focused mainly on the mac-
roeconomic approach, on attempting to raise overall
investment and saving rates, on inter-sectoral resource
allocation, and on policy regarding trade and foreign
direct investment. More recently, the focus seems to
have become much more micro-oriented and involve
funding and promoting small educational and health
schemes, providing micro-loans to small enterprises,
and the like. The shift has come about partly due to the
limited success or even failure of some macro inter-
ventions, the growing importance of non-government

168
organization and aid donor institutions that focus on
small projects, and the growth of private charities and
volunteering work which, understandably, look for
greater personal involvement and results. In addition,
the rise in popularity of evaluation techniques for small
interventions (like randomized experiments which
randomly select small projects to assess their effective-
juamdoj
saisaqv
sof
21mouo
ness while ensuring that selected projects do not have
some special advantages that make them more likely to
fare well, for instance, by being located in more ‘devel-
oped’ areas), has favoured small projects. Moreover,
micro approaches that do not significantly alter the
status quo are less likely to be resisted by powerful
groups who may focus on preventing more macro
changes—involving, say, broad-based land reforms or
fiscal redistribution—to maintain their power.
A micro focus has many advantages over a macro
approach that neglects it. It can allow a more careful
evaluation and understanding of how policy interven-
tions work ‘on the ground’, so to speak. It is more
capable of involving the poor themselves and obtain-
ing a fuller understanding the needs and desires of the
poor and what precisely motivates them (Banerjee
and Duflo 2011), and is likely to involve the potential

169
 beneficiaries of ‘development’ initiatives in success-
fully implementing them. However, there are problems
with neglecting macro issues and of expecting that the
micro will simply translate into aggregate outcomes.
Improving school attendance by teachers may certainly
help to improve education, but it is not clear that it
will help to increase employment and reduce pov-
Development
Economic
Pathways
to
erty unless the students with education find jobs, for
which we require that employment prospects grow.
Further, policies that seem to ‘work’ at the micro
level need not have the same result at the macro level
because of what economists call fallacies of composi-
tion. For example, it may be relatively easy for a small
increase in microcredit loans to increase incomes of a
few self-employed entrepreneurs, but if there is a large
increase in such loans, excessive competition among
these small entrepreneurs who sell similar products
will very likely fail to increase incomes for them.
Moreover, some things that do not ‘work’ at the micro
level may well ‘work’ if done on a larger scale, for
instance, by generating sufficient aggregate demand or,
along the lines emphasized by mainstream economists,
positive externalities.

170
 Primary Production, Manufacturing,
and Services

As noted earlier, most early development economists

stressed the importance of reducing the dependence
of LDCs on primary production and developing the
manufacturing sector for the reasons discussed in saisaq
sof
juaud
21m0
Chapter 3. Many LDCs adopted policies to promote
the growth of their manufacturing sectors, sometimes
even focusing on capital goods sectors. In part, as a
result of these measures, manufacturing sectors in many
LDCs expanded and the share of primary products in
production and exports for many of them declined.
The criticisms of this industrialization strategy grew
louder over time, however, with the critics arguing
that it led to inefficient industrialization, low employ-
ment generation (especially in the case of capital goods
sectors), and a bias against agriculture, which resulted
in food shortages, stagnant primary goods exports,
and failure of significant poverty reduction (given
that most of the poor lived in rural areas). While some
argued that this was mainly the result of the early devel-
opment economists’ disdain for the agricultural sector

171
 as backward and traditional, others located the problem
in the political economy of ‘urban bias’ resulting from
the urban elite’s desire to concentrate resources in cities
to help themselves directly and indirectly by appeas-
ing urban voters (Lipton 1977). Moreover, it has been
argued that despite their primary sector orientation,
some countries, like Canada, Australia, and Argentina,
Development
Pathways
Economic
to
and some US states have done well in the past and
others, including some oil-rich countries, Botswana
and Chile, have more recently taken major strides by
exporting primary and exhaustible products. As time
went on development economists and policymakers
began to focus more on the agricultural sector, with
many countries experiencing productivity growth
with the Green Revolution, and some countries pur-
suing policies to increase employment in rural areas,
especially among the poor and sometimes in the non-
agricultural sector.
In recent years some LDCs, including India have
experienced a relative shrinkage of their manufacturing
sectors with an expansion of their service sectors.
The
share of the service sector in GDP for India, for instance,
was over 56 per cent in 2011, compared to 71 per cent
in Japan, 78 per cent in the UK, and 79 per cent in the

2
USA (all in 2010). While some have welcomed this as
reflecting the emergence of these countries as post-
industrial economies following the path of successful
more developed countries, others have viewed it as
showing the service sector’s role as a repository of
those who cannot find employment in manufacturing
and agricultural sectors and enter the informal service
juamd
sof
saisai
21mou
sector with low income and underemployment, and
as evidence of deindustrialization which has adversely
affected their technological dynamism. It should be
noted that China’s services share in GDP was 43 per
cent and South Korea’s was 58 per cent (despite the
latter’s much higher per capita income level).
Many of the protagonists of the debate on the strat-
egy of industrialization take unwarrantedly extreme
positions. Most of the reasons behind the early develop-
ment economists’ support of industrialization remain
valid, including those about technological change and
the external terms of trade. While it is true that there
are countries and regions have achieved high levels of
income and standards of living despite being primary-
sector oriented, they can be seen essentially as append-
ages of larger national or international economies with
which they were linked through migration, shared

17S
 institutions and capital inflows. Moreover, though
countries can experience economic improvements by
exporting exhaustible primary resources, like copper
(Chile), diamonds (Botswana), and oil (a number of
petroleum-exporting countries), such improvements
will be temporary unless the countries can success-
fully diversify their production structure by developing
Development
Economic
Pathways
to
manufacturing. Further, even before the exhaustion
of their resources, they are prone to terms of trade
instability and political problems including civil and
international wars. However, the industrialization
argument does not require the neglect of other sec-
tors like the agricultural one. Many of its proponents,
in fact, did not recommend the neglect of agriculture:
recall that Lewis (1954), who referred to that sector
as a subsistence one rather than the modern capitalist
sector, did discuss the possible dangers posed by rising
food prices due to agricultural stagnation for industrial
profits, capital accumulation, and growth. Indeed, as
discussed in Chapter 3, there are many ways in which
the agricultural sector contributes to economic growth
and development, which means that the neglect of
agriculture can be an important obstacle for economic
development. Regarding the service sector, it should

174
be recognized that all services are not the same. There
are some services, like some education and informa-
tion technology sectors, which can stimulate techno-
logical change, others, such as health care and most of
education—which promote functionings and capa-
bilities, while there are others, such as petty retailing
and peddling, that can provide some income to the saisaq
sof
juau
nmou
disguisedly unemployed and merely make a small dent
on income poverty.

Supply versus Demand

Should development strategies seek to increase the

supply of resources or the demand for them? This issue
has been debated at both the micro and macro [Link]
the micro level supply-siders [or those who Banerjee
and Duflo (2011) call ‘supply-wallahs’] argue that
improvements in education and health, and increases in
income and production, require building more schools
and health clinics, and increasing the availability of
inputs to producers, for instance high-yielding variet-
ies of seeds, fertilizers, better technology for farmers,
and that the increased availability of these resources
will automatically increase their use. Demand-siders or

7S
 demand-wallahs, on the other hand, argue that the way
forward is to increase the demand for these resources
and services, for instance, by providing incentives for
families to send their children to school with cash
incentives and school lunches and to farmers by rais-
ing food prices, and that when demand increases,
supply will follow. At the macro
Development
Pathways
Economic
to level, the dominant
mainstream approaches stresses the supply-side factors
behind growth, such as increasing capital accumula-
tion by encouraging saving and the effective supply
of labour through technological improvements by
encouraging research and development and the supply
of education, while others stress the role of aggregate
demand and recommend the use of expansionary fiscal
and monetary policies, greater distributional equality
to increase consumption demand, and measures to
improve business confidence to encourage investment.
Somewhat paradoxically, at the micro level, those
who are on the demand side are often in favour of
reducing the role of the government to increase private
incentives and those on the supply side favour govern-
ment provisioning, while at the macro level, supply-
siders usually seek to reduce the role of the state to
provide incentives for more savings by reducing

176
government expenditure
and greater efficiency by
reducing government regulation, while demand-siders
often recommend more government intervention
through expansionary macroeconomic policies and
redistributive policies. It would be incorrect, however,
to overemphasize these correspondences. Governments
can provide incentives to increase demand at the micro
juaudo
saisaj
sof
aiuuo
level and private non-government organizations can
provide health services. Governments can conduct
research and development to increase supply at the
macro level, and aggregate demand can be increased by
encouraging private investment through the relaxation
of burdensome industrial licensing policies.
In principle, both demand and supply sides are
important at both micro and macro levels, although
one of them may be worthy of more attention in some
spheres of the economy and in some places and periods.
In general, focusing only on the supply side at the
micro level results in the wastage of resources, which
people do not use or do not use effectively, while trying
to increase demand is often unlikely to automatically
increase supply, especially of an effective kind, through
market forces or private charities. At the macro
level, focusing only on the supply side by increasing

177
 government saving can result in stagnation due to the
lack of aggregate demand, and attempts to improve
technology can merely increase unemployment and
underemployment. The tendency of many economists
to relegate issues related to aggregate demand to the
short run and maintaining tight limits on demand
expansion in the longer run places undue faith in the
Development
Economic
Pathways
to
self-adjusting character of markets,in which wage-price
flexibility keeps the economy at the supply-determined
growth in the long run. It forgets that the long-run is
really an average of short run states of the economy.
However, focusing only on the demand side can lead
to inflationary pressures and mounting government
debt unless supply-side bottlenecks are overcome,
for instance, with the provision of infrastructure for
industry and agriculture, and through improvements in
education, skills, and work habits to meet increases in
aggregate demand.

Resources versus Productivity

It has been claimed, perhaps with some justification,

that early development economists and policymakers
concentrated on growth through capital accumulation

178
by focusing on increasing saving and investment and
foreign saving (especially through foreign aid), rather
than emphasizing the importance of efficiency and
technological change. Critics of this approach (Easterly
2001) argue that the focus on resource accumula-
tion led to a neglect of efficiency and incentives. As a
result, high rates of capital accumulation did not result
juamdo
sa1daqv
sof
aimou
in high rates of growth because of the low levels of
the efficiency and utilization of capital. A debate has
raged on whether resource accumulation or produc-
tivity growth is more important, that has received
added impetus from growth accounting, exercises
which attempt to quantitatively identify the roles of
the growth of the capital labour ratio and productivity
growth using econometric techniques. Whether the
rapid growth of the East Asian NICs was the result
of factor accumulation or productivity growth has
also been the subject of intense controversy (see
Young 1995).
The sharp distinction between resource accumula-
tion and productivity growth has been overdrawn.
There are important complementarities between the
two, and overemphasis on only one of them is likely
to result in poor growth performance and even be

We)
 self-defeating. Capital accumulation is a major driv-
ing force for technological change, for instance, due to
scale economies, and what is called learning by doing,
and technological change can be a major determinant
of investment, to make use of new techniques embod-
ied in machinery and to produce new goods. The
existence of these relationships does not mean that
Development
Pathways
Economic
to
specific measures to boost capital accumulation and
productivity growth are not required: it is important to
foster research organizations and favourable industrial
relations to make technological change more respon-
sive to investment, and to foster financial organizations
and keep aggregate demand buoyant to make invest-
ment respond to new technological opportunities.

The Primacy of Institutions

A final debate concerns the role of institutions—which

were discussed in Chapter 5—in development. While
early development economists, with some exceptions,
and policy makers did not emphasize institutions
and instead focused on economic factors in a narrow
sense, like saving, investment, and international capi-
tal flows, the importance of institutions and the need

180
for institutional change is now widely acknowledged.
Many mainstream economists—whose theories and
models once ignored institutions—now refer to insti-
tutions as the ‘fundamental’ or ‘deep’ (as opposed to
‘proximate’) determinants of economic growth and
development. Some go even further. Those who used
to insist that it is essential to “get the prices right’ by
juamdo
saisaqv
sof
numou
reducing government regulations and ownership,
now—in the wake of many failures of such neoliberal
policies due to financial and economic crises—argue
that one should first “get the institutions right’, for
instance, by strengthening private property rights with
laws and increasing the flexibility of markets, before
pursuing neoliberal reforms.
Although these ideas raise a number of issues, here
we note that the extreme views regarding institu-
tions in the context of designing appropriate devel-
oped strategies—that institutions can be ignored or
that institutional change of certain kinds must come
first—are unwarranted. That institutions are important
is now widely recognized, for instance, for effective
government activity, for the proper functioning of
markets, and indeed for basic social, economic, and
political stability. More controversial is the desirability,

181
 feasibility, and necessity of prior institutional changes
involving wholesale alterations in the legal environ-
ment (for instance, establishing clear private property
rights) and social norms (for instance, those which lead
to corrupt behaviour). First, on desirability, as discussed
in Chapter 5, some of the broad changes often recom-
mended—such
Development
Economic
Pathways
to as establishing clear private property
rights—involve ideas that are difficult to define, can be
compromised by changes involving social norms, and
can have adverse consequences. Second, on feasibility,
some of the changes are difficult to bring about and
implement. For instance, constitutional changes can be
blocked by powerful groups who perceive that their
interests will be adversely affected by them (although
there are some recent examples of countries, such
as Venezuela, Bolivia, and Ecuador, that have made
changes by forming Constituent Assembly through
direct elections). Third, regarding necessity, social
norms can be affected by changes in economic condi-
tions and by small changes in policies and behaviour.
For instance, norms regarding acceptable levels of cor-
ruption among some government employees (such as
the police who are more likely to accept small bribes
if they have low salaries) may be affected by income

182
levels, and those regarding work habits are likely to
depend on the effect of wages on motivations. Also,
some norms and conventions can be altered by gov-
ernment actions, for instance, by taking advantage of
what is called the status quo effect, stressed by behav-
ioural economists, which induces a particular pattern
of behaviour (such as increasing saving if employees
juaudojaa
sof
saisayvsjg
21mo0uo0r
are required to opt out of employee saving schemes—
implying that they save if they do nothing—rather
than opting into them). Participation rates of the poor
(who are unable to read) in elections can be altered
by simple innovations involving placing the pictures
of candidates on ballots (Banerjee and Duflo 2011).
Thus, prior institutional changes are not essential
for improved development performance. There is, in
fact, that little evidence to suggest that major growth
spurts are preceded by major institutional changes
(Rodrik 2007).

183
 7
Conclusion

Although there is some debate on the question of

appropriate pathways to economic development for
LDCs such as India, one influential view—that can

even be called the orthodox one—has it that the

appropriate strategy to follow is to reduce government
intervention in the economy to harness the forces of
the free market and to open up the economy to global
influences. Such a strategy, it is argued, encourages
effort and creativity among people, and allows LDCs to
learn from the best practices and draw on the resources
that the world has to offer, and therefore allows them
to become moreefficient, achieve rapid growth in
income and production per capita, and experience
economic development. To be sure, some analysts
and policymakers who support this general approach,
recognize that the resultant process is likely to exclude
the poor and increase inequality, so that market forces UOISNIIUO

need to be supplemented with state efforts and assis-

tance to reach out to the poor, by improving health
and education, especially among the very poor. Even
on this, some argue that the appropriate way to pro-
ceed is to create incentives among the poor rather than
through state provisioning or even foreign aid.
Not only is this approach seen to be the appropriate
one, but some argue that this is the approach that LDCs
will, in fact, follow. Thus, economic development will
occur inevitably and naturally in these countries, and
sooner or later, all countries will become rich (or,
broadly speaking, become economically developed).
Lucas (2000), for instance, has argued that in the
long run, actually by 2100, all countries will become
rich, because latecomers will grow faster than more
developed countries due to the fact that they can draw
on the successful policy and institutional experiences
(and resources and technology, already discussed in
Chapter 4) of the latter.
Perhaps Lucas and others like him are being overly
sanguine. Is it a simple matter for LDCs to develop
following the example of the successful strategies of

185
 more developed countries? Although Lucas and others
argue that the policies that successful countries of the
past followed were free market ones, there is much
evidence to suggest that they actually resorted to
protectionist policies and combined state intervention
with market competition. Moreover, it is not clear
whether
Development
Economic
Pathways
to strategies that ‘worked’ in one context will
necessarily succeed in others (due to differences not
only in local conditions, but also because of changes in
the nature of the global economy and power relations
in it), and that the path of the more developed countries
is a desirable one to follow (in view of its effects on the
environment, happiness and, more recently, inequality
within countries).
The orthodox view, which has been, and con-

tinues to be, espoused by the governments of most

more developed countries, powerful international
organizations like The World Bank, the International
Monetary Fund, and the World Trade Organization,
and has the support—inevitably with some variations
in emphasis—of most mainstream economists, has
been vehemently opposed by some who have gone
to the extreme of becoming anti-globalization and
anti-market, and have recommended strong state

186
intervention and emphasis on communities rather
uoIsnj
than markets. The critics, however, are less powerful,
represented in the governments of a few countries, and
include some heterodox scholars who seem to look
back wistfully to the earlier days of development eco-
nomics with its advocacy on inward-looking and state-
led development, although with a much stronger focus
on the reduction of economic and social inequality.
If these orthodox and heterodox positions are
extreme ones, is there a more sensible middle ground?
While it is easy to espouse a more reasonable middle
path, it is much more difficult to define it other than
in the negative sense as one that avoids extremes. This
book will have served its purpose if it has shed some
light on issues that can help to formulate desirable path-
ways to economic development in particular contexts.
These issues are complex ones. This is because of the
intricacies involved in defining and measuring devel-
opment as discussed in Chapter 2. It is also because
there are many different obstacles to economic devel-
opment, not just narrowly defined economic ones
examined in Chapter 3, but also those rooted in the
global economy, examined in Chapter 4 and in his-
tory, politics, and society as reviewed in Chapter 5.

187
 What complicates matters further is that the relative
importance of these obstacles is likely to vary over
time and place. Given these complexities, we have
argued in Chapter 6 that a sensible approach to choos-
ing appropriate pathways to development requires the
examination of a number of related but distinct debates
in the analysis of economic development, rather than
Development
Economic
Pathways
to
by seeking some sort of middle ground between over-
all alternative strategies. Choices have to be made by
becoming aware of the alternative views and choos-
ing wisely among them, taking into account detailed
knowledge and understandings of specific contexts
and conditions. A short book such as this one cannot
examine such contextual details, let alone form clear
conclusions about them, but can at least attempt to
provide some guidance regarding the main questions
to address.
In choosing desirable alternatives, it ought to be
remembered that the economic development experi-
ence of the last half century or so seems to show that
although there have been some improvements in terms
of some indicators in many countries of the world,
sustained long-term economic development is not
easy to achieve. In terms of per capita income, apart

188
from some oil-rich countries, very few LDCs—South
uoisnju0r
Korea, Taiwan, and Singapore, for instance—have been
able to join the ranks of the more developed countries
(taking a minimum US$18,000 in PPP and nominal
dollar terms in 2011 as criterion of this status). By
many measures, there seems to be divergence in terms
of per capita income among the countries of the
world, suggesting an increase in the inequality among
nations (Milanovic 2008). Improvements in the earlier
part of the period have, in some cases such as some
Latin American countries, been reversed, especially in
the so-called lost decade of the 1980s, and in many
African countries growth performance has often been
poor. China and, to some extent, India, have experi-
enced high rates of economic growth, but they were
ranked 96th and 126th in PPP terms, in terms of per
capita GDP in 2011, with 50 countries having per cap-
ita income in excess of US$18,[Link] be sure, major
improvements have taken place in many countries in
terms of basic health and education indicators, as well
as in terms of the reduction of absolute income poverty,
and there has been convergence in terms of these indi-
cators among countries. However, it is arguable that in
a global economy such improvements, while reducing

189
 human suffering to some extent in many parts of the
world, are unlikely to lead to sustained long-run eco-
nomic development, especially in view of the increases
in income inequality within many countries, including
China and India.
Given that only a few countries have achieved suc-
cess in terms of economic development according to
Development
Economic
Pathways
to
a broad range of indicators in the last half century, it 1s
tempting to conclude that luck is of great importance.
As the experiences of the recent developers like South
Korea and Taiwan suggest, luck has something to do
with it, given their geopolitical importance (which
induced the US to help them with foreign aid and
market access for their products) and political economy
conditions as discussed in Chapter 6. However, it can
be argued that there are ways of increasing the chances
of favourable outcomes by proceeding along the lines
outlined in this book.
We conclude by briefly noting two major barriers
to this. First, as discussed especially in chapters 4 and 5,
there are powerful groups in the global economy and
within LDCs that can severely constrain the ability
of these countries to embark on appropriate paths to
economic development. For instance, more developed

190
countries like the US and international agencies
UOISHII
have imposed trade and capital account liberalization
on LDCs which have often had damaging effects
on their economies, and forced the latter to adopt
stringent intellectual property rights protection, which
arguably make technology transfers more difficult.
Powerful elites within LDCs have blocked desirable
policy and institutional changes, such as land reforms
in agriculture. While these constraints often impose
major barriers, as mentioned in Chapter 5, there are
situations in which the state can find itself relatively
insulated against them, and can bring about changes,
especially those that take small steps. In addition, it
is sometimes in the enlightened self-interest of the
powerful groups to accept such changes, since they can
collectively benefit from them. Moreover, some of the
views which find support from powerful elites may
arise not in narrow self-interest, but because of their
limited knowledge and understanding of the problems
faced by, and the perspectives of, the less powerful, a
situation that can be altered with some effort. Finally,
power is exercised not simply through political means,
but also by influencing ideas, for instance, about the
benefits of free trade and free international capital

191
 flows. If these ideas are questioned and found to be
wanting, the constraints can weaken.
Second, the discussion of economic development in
the policy space seems to be dominated by economics,
which, in turn, is dominated by mainstream neoclas-
sical economics. Although it is not clear what exactly
mainstream neoclassical economics signifies, two of its
Development
Pathways
Economic
to
major characteristics appear to be the insistence that
theoretical analysis needs to be based on the optimiz-
ing behaviour of agents and the strong preference for
‘rigorous’ mathematical analysis involving theory and
empirical analysis. This is not the place for a thor-
ough discussion of the strengths and weaknesses of
this approach but a few comments on them may be
relevant, in view of its implications for the question
of how the problems of economic development are
best analysed. The optimizing approach has undoubt-
edly increased our understanding of many problems
plaguing LDCs, through the careful examination of
the objectives and beliefs of, and constraints and envi-
ronments faced by, individuals. However, by insisting
that all analyses needs to be based on it, the approach
has arguably, and perhaps unwittingly, characterized
people and the economy in particular ways. People are

192
 seen as ‘rational’ (an ambiguous term) rather than, as
behavioural economists have found from their study UOISHII

of actual behaviour, as making consistent ‘mistakes’,

Markets are seen as reasonably well functioning ones,
with only a few ‘distortions’ that lead to market fail-
ures, in order to make models based on the optimizing
model tractable; this arguably leads to an overly opti-
mistic view of the benefits of markets since removing
the distortions seems to be relatively easy. The empha-
sis on mathematical analysis arguably turns attention
away from complex phenomenon that are difficult
to formalize with mathematical models or to model
them in simplistic ways, leads to a tendency to ‘apply’
models to particular countries without careful reflec-
tion, and leads to an overemphasis on quantification
and what seems to be easily quantifiable, and formal
techniques, rather than to a focus on understanding
the main characteristics of particular contexts and how
individuals and groups behave within them. Although
the optimizing approach, mathematical modelling, and
the econometric analysis of available data can cer-
tainly contribute to our understanding of economic
development, there is also the need for alternative
approaches that study actual behaviour, understand

193
 the needs of people, especially the less powerful, and
that examine the nature, implications, and dynam-
ics of specific structures in LDCs. This also requires
greater attention to anthropology, psychology, history,
politics, and sociology, in addition to economics nar-
rowly defined. Although there is some evidence that a
few mainstream economists are going in this direction,
Development
Pathways
Economic
to
there is still a long way to go.

194
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200
 Index

Acemoglu, D. 128 Banerjee, A.V. 97, 169, 175,

Africa 47,71, 108, 189 183
aggregate demand 65-6, Bangladesh 42, 43, 44, 47,
81-2, 100, 178 48, 50, 67
agriculture 70, 87, 92-4, bank lending, international
172, 174 110
agriculture-industry Bardhan, P. 139-40
interaction 58, 93—4 basic needs approach 166
allocative efficiency 75—9 Bell, M. 119
Amsden,A. 156 Bhagwati,J.156
Argentina 162 Bihar 71
Australia 172 Black Death 125
authoritarian regimes Boldrin, M. 134
141-4 Bolivia 182
Botswana 172, 174
backward linkages 92 brain drain 117
Bagchi, A.K. 126 brands 120
Index
Brazil 1, 2, 42, 43, 44, 47, collective goods 31—4
48, 50, 166 colonization 124, 125-6,
Bulmer-Thomas, V. 127 129
bureaucracy 144 common property resources
a tePeegle Bs 2
Canada 172 comparative advantage
capabilities 24-6, 30-1, 72, 100-2, 161
155, 072, FES constitutions 130, 182
capital 60 Confucianism 148-9
capital accumulation 61, consequentialism 13, 19
178-80 corruption 137-8, 182-3
see also savings, Costa Ruca 166
investment credit 82
capital controls 112 Cuba 42, 43, 166
capital goods sector 95 culture and development
cash transfers 86, 166 123, 145-50
caste 31, 146-7
Chang, H.J. 108, 119-20, David, P. 128
148, 156, 163 decentralization 144
Children 71 deindustrialization 123
Chile 172, 174 demand-side policies
China, 2, 42, 43, 44, 45, 48, 75-7
49: 50763;'73, 111, 141, democracy 141—4
146, 149, 156, 163, 173, demographic transition
189, 190 70-1
Chua, A. 143 deontological approach 13,
CO, emissions 50 36
collective action 138-9 dependency theory 114
 development, meaning and xapuy
Environmental Kuznets
measurement of 11—40 curve 90
‘development project’ 9-10, environmental policy 90—1
12 Escobar,A. 10
Diamond,J. 128 Europe 125
dignity 19, 30 Evans, P. 137, 144
distribution 26, 27-31, exchange rate 14, 15, 112,
134 exhaustible resources 172,
divergence, global 189 174
Duflo, E. 169, 175, 183 expectations 59, 65, 146-7
Dutt, A.K. 10, 66, 126 export promotion 160, 164,
163
East Asia 148~9, 160, 162, exports 100—1, 106, 107,
179 109, 112, 113,115,117,
Easterly, W. 179 159, 161, 163
economic growth 14, 40, externalities 78~9, 88
44,71, 81-3, 86, 141,
148, 165-8, 178-9 failed states 136
Ecuador 182 famines 142
education 52, 56,59, 69,71, finance 63, 66-8, 82
72-3, 80, 84-5, 104—5, financial instability 67-8,
117, 147,170 112
education policy 73—4 financial markets,
employment guarantee international 111-12
scheme 86 fiscal policy 97, 112, 165
England 108-9 foreign aid 121, 152
environment 18, 35, 49, 50, foreign direct investment
87-91, 107~8, 115 (FDI) 110, 112-16

203
Index
foreign exchange 94, 96, globalization 98
106, 107, 110, 111, 113, government intervention
115, 159, 161 77, 88, 176-7
forward linkages 92 government policy 97,
free market approach 121-2
184-6 for foreign direct
see also neoliberal investment 115-16
approach for international capital
free markets 76, 153—4 flows 111-12
freedom 24, 35-6, 154, 155 international influences
free-rider problem 79, 82, on 121-2
138-9 see also education policy,
functionings 24—6, 30-1, 72, environmental
134, 155,175 policy, fiscal policy,
health policy,
gains from trade 101-3 macroeconomic
gender inequality 85-6 policy,
geography and development microeconomic
128-9 policy, monetary
Germany 63, 108, 109, 155, policy, population
162 policy
Gertler, M. 97 government saving 64, 66,
Ghatak, M. 97 178
Gini coefficient 29, 46-7 Grameen Bank 67
global financial crisis 156, Green Revolution 97
165 Gross Domestic Product,
global production networks per capita 41-5
109 growth accounting 179

204
 xapuy
happiness 19, 21-3, 47-8 income distribution 18
health 19, 23, 56, 71-3, 87, see also distribution,
117 inequality
health policy 73—4 increasing returns to scale
Heckscher, Eli 101 586129
Heckscher-Ohlin approach India 1, 2, 31, 36, 41-5,
101-3, 104 46, 47, 63, 67, 73, 86,
Hinduism 146-7 95-65 lel712 OMe
Hirschman, A.O. 92 139-50, 141, 146-7,
historical explanations 156, 165, 172, 189,
of underdevelopment 190
124-8 protectionism in 160
household production 17 state and market in
horizontal inequality 31, 47, 153
85-6 trade liberalization in
human capital 71 160-1
Human Development transnational
Index (HDI) 26, 42, 43 corporations in
160-1, 164
imperfect competition indigenous people 36-7
77-8 Indonesia 48, 49, 50
imperfect information 78 industrialization 108, 152,
import substitution 159 15991715 173
imports 74, 100, 102-3, inequality 29-31, 46-7,
106,210,913, 145,120, 80-6, 143-4, 166-8
159 and economic growth
income 14-19 81-3
per capita 1 gender 85-6

205
Index
global 189 inward-looking
see also distribution, development 158-61
horizontal inequality, irrigation 93
income distribution Islam 148
infant mortality rate 43, 44
informal sector 95, 173 Japan 1, 2, 42, 43, 48, 49, 50,
information technology 108, 155, 162, 172
117, 174
infrastructure 96 Kenya 44
innovation 103, 119, 125, Kerala 166
131,433, 134 Kohli,A. 140
institutions 129-34, 180-3 Korea, South 44, 45, 48, 50,
definition of 130 108, 137, 144, 156, 173,
intellectual property rights 189, 190
131, 133-4 Kuznets, S. 83
international borrowing Kuznets curve 83-5
110
international capital flows labour 60, 68-9
109-16, 164—5 Lal, D. 146, 147
international demonstration land reform 97, 134
effect 120 land tenure 92-3
international labor Latin America 47, 108, 127,
movements 116—17 146, 189
International Monetary laws 130
Fund (IMF) 108, 121, learning by doing 94-5
186 Levine, D. 134
international trade 100—9 Lewis, W.A. 93, 174
investment 63-6, 81—2 life expectancy 43

206
 xapuy
Lipton, M. 172 Mohammed, Prophet 148
List, EF 162-3 monetary policy 112, 165
literacy rate 43 Morishima, M. 148—9
lock-in 126-7 Morris, M.D. 146
Lorenz curve 29-30 Myrdal, G. 126
Lucas, R. 185-6
National Bank for
macroeconomic policies Agriculture and Rural
168, 170, 176 Development 67
see also fiscal policy, natural resources 18, 129
monetary policy neoclassical theory 11,
Mahalanobis, P.-C. 95-6 15=16575;.769 1575
manufacturing sector 94-6, 192-4
171 neoliberal approach 153
market failures 79, 135 see also free market
markets 152-8 approach
Marx, K. 61 neoliberal policies 181
mathematical economics Newly Industrialized
193 Countries (NICs) 156,
maximizers 75, 76 160} 162479
Mexico 1, 2, 42, 43, 48, 50, Nigeria 42, 43, 48, 49, 50
116,117 non-economic obstacles to
microcredit 66-7, 86, 170 development 123-50,
microeconomic policies 194
168-70, 175-6 Nurkse, R. 64
Milanovic, B. 189
modernization theory 11, Ohlin, B. 101
145-6 Olson, M. 139

207
Index
optimization 192-3 and the environment
see also maximizers 87-8
Ostrom, E. 91, 132 poverty line 28
outward-oriented strategy poverty rate 28, 44-5
159-61 power 16, 138, 139, 140,
169, 190-2
Pakistan 42, 43, 45, 47, 48, Prebisch, R. 107
49,50 Prebisch-Singer hypothesis
Pareto-optimality 21, 76 107
Pavitt, K. 119 price mechanism 76-7
perfect competition 76, 77 primary products 106, 126,
planning 95-6, 152, 153 159,171-2
Polanyi, K. 157 production 14-19
political economy 126-7 productive efficiency 74-5
politics and development productivity 79-80
123, 134-4 productivity growth 179-80
pollution 49, 78, 88, 89 see also technological
population 68-71 change
population growth property rights 89, 130-4,
determinants of 69 182
effect on economic see also common
development 69-70 property resources
population policy 73 Protestant ethic 145
portfolio capital flows 110 Protestant Reformation
Portugal 109 125
poverty 28-9, 80-5, 166-8 public goods 78-9, 93, 96
and economic growth Purchasing Power Parity
bi=3 (PPP) 1-2, 14-15

208
 xapuy
race to the bottom 120-1 Singer, H. 107
randomized experiments Smith,A. 61, 153
169 social capital 148-9
Rawls, J. 29 social norms 30, 59, 62,
Ray, D. 11 80, 85, 120, 130, 145-8,
Reagan, R. 152 182-3
Reddy, Y.V. 165 society 145—49
religion 145-8 and the state 138—41
remittances 117 South Africa 47, 48, 50
research and development Soviet Union 152, 155
80 Sri Lanka 43, 45, 166
Ricardian approach 103 state 134-44
Ricardo, D. 61, 101, 109 intervention 152-8, 186
rights 36, 73, 154, 155 and markets 152-8
Robinson,J.128 objectives of 136-7
Rodrik, D. 132, 183 and society 138-41
Ros, J. 10,58 see also government
Rosenstein-Rodan, P.N. 57 policy
state-owned enterprises 97
saving 52, 61-6, 82 Stiglitz, J.E. 108
saving rate 63 subjective well-being 19, 22,
school enrollment 43 47-8
sectoral constraints 91—7 supply-side approach 175,
self-respect 19 176=7
Sen, A.K. 24, 25, 142, 143 surplus labor 58, 69
service sector 172—3, 174-5 see also
sharecropping 92 underemployment
Singapore 189 structuralist approach 11

209
Index
Taiwan 137, 144, 156, 189, tragedy of the commons 91
190 transnational corporations
Taylor, L. 11 110, 112-16, 119, 120,
technological capability 121, 164
119
technological change 70, UK 48, 49, 50, 153, 162,
79-80, 84, 94-5, 103, 72
104—5, 113, 117, 133-4, uncertainty 66, 78, 96, 112,
173, 179-80 133, 154-5
see also innovation, underemployment 74, 105,
productivity growth 173, 178
technology transfers 114, see also surplus labour
118-20, 134 unemployment 74, 105,
terms of trade, international 178
106-7 urban bias 172
Thatcher, M. 153 USA 1, 2, 42, 43, 48, 49, 50,
Thirlwall,A. 10 63, 108, 109, 116, 152,
tradable pollution permits 1533 1554162,172=3
90 utility 16, 20-3
trade deficit 106
trade liberalization 104—5, Venezuela 182
108-9 vicious cycle 52-61, 62,
Trade Related Investment 80, 136
Measures (TRIMs) virtuous cycle 53-5
115-16
Trade-Related Intellectual Wade, R. 156
Property Rughts (TRIPs) weather 128
119-20 Weber, M. 145, 148

210
 xapuy
welfare economics, World Trade Organization
fundamental theorem of (WTO) 108, 115-16,
76, 77, 133, 153—4, 155 119-20, 121, 186
Western Europe 155 World Values survey 47
women 17, 67, 69, 73
World Bank 108, 121, 186 Young, A. 179

211
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Amitava Krishna Dutt is
Professor of Economics and
Political Science, Department of
Political Science, University of
Notre Dame, USA.

[The] book is a concise

introduction to ... economic
development. [Dutt] gives fair
treatment to classic contributions
to development thought as
well as recent fashions and
controversies. ©
"Lance Taylor,
Arnhold Professor of International
Cooperation and Development,
The New School for Social
Research, New York, USA

Jacket Design: Arati Devasher,

[Link]
PATHWAYS TO
ECONOMIC DEVELOPMENT
Dutt ... has all the ingredients Keynes listed for the “master
economist”... Dutt sets out his vision of the growth and
development process and the challenges faced by poor countries.
—Tony Thirlwall, Professor of Applied Economics,
School of Economics, Keynes College,
University of Kent, Canterbury

[fhe book] confronts the single-track prescriptions

of The World Bank, the International Monetary
Fund, and neoliberal economists ... also summarizes
debates around ... the route out of poverty.
—Amiya Kumar Bagchi, Emeritus Professor,
Institute of Development Studies Kolkata

OXFORD
UNIVERSITY PRESS

[Link]