ps the most successful developing country, early modern Japan, received no foreign aid and virtually no foreign direct investment but was liberal in foreign trade and exchange and the world champion borrower of foreign technology. Japan, in the late 19th and early 20th centuries, directed its development planning, the creation of financial institutions, the officials and businesspeople sent to learn from abroad, the foreigners hired to transfer technology to government and business, the modification of for- eign technology (especially in improving the engineering of traditional artisans), and the capturing of technological gains domestically from learning by doing (Nafziger 1995 – see Chapter 3). In a similar fashion, today’s developing countries, when receiv- ing funds and assistance from DCs and international agencies, should be in charge of their planning and development so that they can benefit from learning through experience. The Nobel laureate Amartya Sen’s (1999) emphasis, on broadening choice rather than freedom from external domination, has some overlap with the Liberationists’. Sen argues that freedom (not development) is the ultimate goal of economic life as well as the most efficient means of realizing general welfare. Overcoming depriva- tions is a central part of development. Unfreedoms include hunger, famine, ignorance, an unsustainable economic life, unemployment, barriers to economic fulfillment by women or minority communities, premature death, violation of political freedom and basic liberty, threats to the environment, and little access to health, sanitation, or clean water. Freedom of exchange, labor contract, social opportunities, and pro- tective security are not just ends or constituent components of development but also important means to ends such as development and freedom. 22 “The relation between incomes and achievements, between commodities and capa- bilities, between our economic wealth and our ability to live as we would like” may not be strong and depends on circumstances other than individual wealth (see Sen 1999:13–14, Chapter 6 of this volume on capabilities, and Chapter 7 of this volume 22 Fogel and Engerman (1974, vol. 1, pp. 126–28) indicate that “the life expectation of U.S. slaves was … nearly identical with the life expectation of countries as advanced as France and Holland” and “much longer [than] life expectations [of ] free industrial workers in both the United States and Europe.” The Marxist economic historian Eugene D. Genovese (1974) agrees with Fogel and Engerman’s views and indicates that U.S. slaves were materially better off than Russian, Hungarian, Polish, and Italian peasants during the same period and most of the population of LDCs in 1974. Furthermore, literacy, life expectancy, and infant survival were probably as high among Southern slaves as Eastern European peasants (Genovese 1974). However, after the U.S. abolished slavery in 1863, planters could not reconstruct their work gangs by offering freedmen “the incomes they had received as slaves by more than 100 percent. Even at this premium, planters found it impossible to maintain the gang system once they were deprived of the right to apply force” (Fogel and Engerman 1974: vol. 1, 237–238). Sen (1999:27–29) uses this evidence as support for the contention that the goal of development is freedom of people to decide “where to work, what to produce, what to consume and so on” (ibid., p. 27). P1: ICD 0521829666c02 CB970/Nafziger 0 521 82966 6 October 13, 2005 13:48 46 Part One. Principles and Concepts of Development on entitlement). Still, democratic rights and liberties are correlated with economic and food security (see Chapter 7 of this volume on food in India and China). And low income, together with a deprivation of basic capabilities, contributes to hunger and poverty. Small Is Beautiful Mahatma Gandhi, nonviolent politician and leader of India’s nationalist movement for 25 years before its independence in 1947, was an early advocate of small-scale development in the third world. He emphasized that harmony with nature, reduction of material wants, village economic development, handicraft production, decentral- ized decision making, and labor-intensive, indigenous technology were not just more efficient, but more humane. For him, humane means for development were as impor- tant as appropriate ends . 23 Gandhi’s vision has inspired many followers, including the late E. F. Schumacher, ironically an economist who was head of planning for the nationalized coal industry in Britain. His goal was to develop methods and machines cheap enough to be acces- sible to virtually everyone and to leave ample room for human creativity. For him, there was no place for machines that concentrate power in a few hands and contribute to soul-destroying, meaningless, monotonous work. Schumacher believed that productive activity needs to be judged holistically, includ- ing its social, aesthetic, moral, or political meanings as well as its economic ends. The primary functions of work are to give people a chance to use their faculties, join with other people in a common task, and produce essential goods and services (Schumacher 1973). Schumacher stressed that LDCs need techniques appropriate to their culture, abun- dant labor, and scarce capital and these might frequently involve simple labor- intensive production methods that have become economically unfeasible to DCs. These technologies are intermediate between Western capital-intensive processes and the LDCs’ traditional instruments. Yet intermediate technology may not be suitable when (1) an industry requires virtually unalterable factor proportions; (2) modify- ing existing technologies is expensive; (3) capital-intensive technology reduces skilled labor requirements; and (4) factor prices are distorted (see Chapter 9). Are Economic Growth and Development Worthwhile? Economic development and growth have their costs and benefits. 24 Economic growth widens the range of human choice, but this may not necessarily increase happiness. Both Gandhi and Schumacher stress that happiness is dependent on the relationship between wants and resources. You may become more satisfied, not only by having 23 The U.N. Economic and Social Commission for Asia and the Pacific (1992:1) argues that an integrated approach to development recognizes that “people are both a ‘means’ and an ‘end’ of development.” 24 Much of the material in this section is from Lewis (1955:420–435). P1: ICD 0521829666c02 CB970/Nafziger 0 521 82966 6 October 13, 2005 13:48 2. The Meaning and Measurement of Economic Development 47 more wants met, but perhaps also by renouncing certain material goods. 25 Wealth may make you less happy if it increases wants more than resources. Furthermore, acquisitive and achievement-oriented societies may be more likely to give rise to individual frustration and mental anguish. Moreover, rootlessness and alienation may accompany the mobility and fluidity frequently associated with rapidly growing economies. BENEFITS What distinguishes people from animals is people’s greater control over their envi- ronment and greater freedom of choice, not that they are happier. Control over one’s environment is arguably as important a goal as happiness, and in order to achieve it, economic growth is greatly to be desired. Growth decreases famine, starvation, infant mortality, and death; gives us greater leisure; can enhance art, music, and philosophy; and gives us the resources to be humanitarian. 26 Economic growth may be especially beneficial to societies in which political aspirations exceed resources, because it may forestall what might otherwise prove to be unbearable social tension. Without growth, the desires of one group can be met only at the expense of oth- ers. Finally, economic growth can assist newly independent countries in mobilizing resources to increase national power. COSTS Growth has its price. One cost may be the acquisitiveness, materialism, and dis- satisfaction with one’s present state associated with a society’s economic struggles. Second, the mobility, impersonality, and emphasis on self-reliance associated with economic growth may destabilize the extended family system, indeed the prevail- ing social structure. Third, economic growth, with its dependence on rationalism and the scientific method for innovation and technical change, is frequently a threat to religious and social authority. Fourth, economic growth usually requires greater job specialization, which may be accompanied by greater impersonality, more drab and monotonous tasks, more discipline, and a loss of craftsmanship. Fifth, as critics such as Herbert Marcuse (1966) charge, in an advanced industrial society, all insti- tutions and individuals, including artists, tend to be shaped to the needs of economic growth. Additionally, the larger organizational units concomitant with economic growth are more likely to lead to bureaucratization, impersonality, communication prob- lems, and the use of force to keep people in line. Economic growth and the growth 25 Still evidence in both Western and non-Western societies indicate a “positive relationship between income and SWB [subjective well-being for individuals] within countries” (Diener 1984:553), yet no evidence that people on the whole become happier as per capita income rises over time (Firebaugh 2003:221–222). “Because happiness depends on one’s income relative to the income of others, … then happiness varies directly with one’s own income and inversely with the incomes of others. A person whose income is constant will feel poorer when others’ incomes rise” (ibid., p. 222). 26 Aristotle, who lived during the fourth century b.c.e. , believed that economic wealth and surplus helped enable philosophy, the arts, and virtuous activity. P1: ICD 0521829666c02 CB970/Nafziger 0 521 82966 6 October 13, 2005 13:48 48 Part One. Principles and Concepts of Development of large-scale organization are associated with an increased demand for manufac- tured products and services and the growth of towns, which may be accompanied by rootlessness, environmental blight, and unhealthy living conditions. Even though the change in values and social structure may eventually lead to a new, dynamic equilib- rium considered superior to the old static equilibrium, the transition may produce some very painful problems. Moreover, the political transformation necessary for rapid economic growth may lead to greater centralization, coercion, social disrup- tion, and even authoritarianism. Thus, even if a population is seriously committed to economic growth, its attain- ment is not likely to be pursued at all costs. All societies have to consider other goals that conflict with the maximization of economic growth. For example, because it wants its own citizens in high-level positions, a developing country may promote local control of manufacturing that reduces growth in the short run. The question is, What will be the tradeoff between the goal of rapid economic growth and such noneconomic goals as achieving an orderly and stable society, preserving traditional values and culture, and promoting political autonomy? RISING EXPECTATIONS Increasingly, as literacy rates rise, the previously inarticulate and unorganized masses are demanding that political elites make a serious commitment to a better way of life for all. These demands in some cases have proved embarrassing and threatening to elites, as the broad economic growth the lower classes expect requires much political and economic transformation. In the face of increasing expectations, few societies can choose stagnation or retar- dation. Increasingly, the LDC poor are aware of the opulent lifestyle of rich coun- tries and the elite. They have noticed the automobiles, houses, and dinner parties of the affluent; they have seen the way the elite escape the drudgery of backbreaking work and the uncertain existence of a life of poverty; they have been exposed to new ideas and values; and they are restless to attain a part of the wealth they observe. So most LDC populations want economic growth, despite the costs. And LDCs also want better measures of growth and development. The central focus of this book is to discuss how LDCs can achieve and assess their development goals. Conclusion Economic growth is an increase in a country’s per capita output. Economic develop- ment is economic growth leading to an improvement in the economic welfare of the poorest segment of the population or changes in educational level, output distribu- tion, and economic structural change. Although economists classify countries by income category, rankings by measures of the level of economic welfare form a continuum rather than a dichotomy. The third world of Africa, Asia, and Latin America is very diverse, ranging from the least developed countries with a low per-capita income and little industrialization to newly industrializing countries. P1: ICD 0521829666c02 CB970/Nafziger 0 521 82966 6 October 13, 2005 13:48 2. The Meaning and Measurement of Economic Development 49 The GNP of LDCs is understated relative to that of the United States because LDCs have a higher portion of output sold outside the marketplace, a smaller share of intermediate goods in their GNP, and a large percentage of labor-intensive, unstan- dardized goods having no impact on the exchange rate. The per-capita GNP of LDCs relative to the United States increases by one and one-half to more than four times when adjustments are made for purchasing power. Purchasing-power parity national income data are preferable, when available, because they are a more accurate reflec- tion of relative welfare. Per-capita GNP is an imperfect measure of average economic welfare in a country. For example, social indicators, such as the UNDP’s HDI, suggest that Chile and Poland have done better in meeting the basic needs of the majority of its people than South Africa, which has roughly the same average income level. The GDI, which adjusts HDI for gender inequality, does better in reflecting the adverse effect of gender disparities on social progress. Because the income shares of the rich are heavily weighted in GNP, its growth can be a misleading indicator of development. Alternative measures of growth are those giving equal weights to a 1-percent increase in income for any member of society, or those giving higher weights to a 1-percent income growth for lower income groups than for higher income groups. Economists who emphasize basic needs stress providing food, housing, health, sanitation, water, and basic education in LDCs, especially for low-income groups. However, despite the view that these needs are rights, resources may be too limited in LDCs to guarantee their fulfillment. Some economists wish to substitute the goal of liberation, or freedom from exter- nal economic and political control, for that of economic development, which they understand as implying economic growth dependent on Western techniques, capital, institutions, and consumer goods. However, the countries they choose as examples fall far short of the liberation they espouse. Amartya Sen contends that freedom of choice is the ultimate goal of economic life. The relationship between incomes and achievements and between wealth and satisfaction with life may be weak, depending on factors other than income. Is economic growth worthwhile? People increase their happiness, not only by hav- ing more wants met but also by renouncing certain material goods. However, eco- nomic growth gives us more control over our environment and greater freedom of choice. Yet the LDCs, faced with rising expectations, may not have the option of a no-growth society. TERMS TO REVIEW r apartheid r Asian tigers r basic needs approach r comparison-resistant services r developed countries (DCs) r disparity reduction rate r economic development r economic growth r economies in transition r first world P1: ICD 0521829666c02 CB970/Nafziger 0 521 82966 6 October 13, 2005 13:48 50 Part One. Principles and Concepts of Development r Fisher ideal index r Gender-related Development Index (GDI) r GDP (gross domestic product) r GNP (or GNI) r GNP (or GNI) per capita r GNP (or GNI) price deflator r high-income countries r Human Development Index (HDI) r indicative planning r International Comparison Project (ICP) r international economic order r Laspeyres price index r least developed countries (LLDCs) r low-income economies r middle-income economies r newly industrializing countries (NICs) r Organization of Petroleum Exporting Countries (OPEC) r price level of GDP ( P ) r Paasche price index r Physical Quality of Life Index (PQLI) r Purchasing Power Parity (PPP) r poverty-weighted index r real economic growth r second world r social democracy r socialism r third world r United Nations Conference on Trade and Development (UNCTAD) r World Trade Organization (WTO) r world’s middle class QUESTIONS TO DISCUSS 1. Is economic growth possible without economic development? Economic devel- opment without economic growth? 2. What do you consider the most urgent goals for LDCs by 2015? Why are these goals important? What policy changes should LDCs undertake to increase the probability of attaining these goals? 3. Give an example of a LDC that you think has had an especially good (poor) development record in the past two to three decades. Why did you choose this LDC? 4. List three or four countries that have moved significantly upward or downward in the GNP per capita rankings in the last several decades. What factors have contributed to their movements? 5. How useful are generalizations about the third or developing world? Indicate ways of subclassifying the third world. 6. Discuss the price-index problem that LDCs face in measuring economic growth. 7. According to World Bank’s World Development Indicators, 2003 , Canada’s 2001 GNI per capita ($21,930) was about 63 times higher than Kenya (with $350). Can we surmise that the average economic well-being in Canada was about 63 times the average economic well-being in Kenya? 8. Nigeria’s 2001 GNP per capita was $290, more than one and one-half times that of neighboring Niger’s $180. What other assessments of socioeconomic welfare (other than GNP per capita in U.S. dollars at the prevailing exchange rates) could be used in comparing Nigeria and Niger? What are the advantages and disadvantages of these alternative assessments? P1: ICD 0521829666c02 CB970/Nafziger 0 521 82966 6 October 13, 2005 13:48 2. The Meaning and Measurement of Economic Development 51 9. Compare basic needs attainment, HDI, PQLI, and the International Comparison Project’s Purchasing Power Parity to GNP per capita in U.S. dollars at existing exchange rates as measures of economic well-being. 10. In what ways are conventional basic-needs measures inadequate in assessing the material welfare of the poorest 20 percent of a developing country’s population? 11. Are economic welfare and political freedom complementary or competing goals? 12. Choose a country, for example, your own or one you know well. What have been the major costs and benefits of economic growth in this country? GUIDE TO READINGS The World Bank, U.N. Development Program, IMF, and International Labour Orga- nization publish annual statistical sources on LDCs and DCs. Many of the same sources are available online, sometimes in preliminary form before publication, or as a CD-ROM. I have listed some URLs that were available when I searched the Internet. URLs can change or may no longer be available. However, these listings or use of a search engine may help you locate these sources for downloading, depending on your software and hardware. The annual World Development Indicators (World Bank 2003h) and its corre- sponding compact disk has the most detailed up-to-date economic statistics on LDCs and DCs. World Development Report by the World Bank (e.g., World Bank. 2003i and http://econ.worldbank.org/wdr/wdr2004/text-18786/) is not only a source for basic economic data on LDCs but also contains a discussion of current development issues. See Bhalla 2002 for criticisms of income data. The World Bank’s annual World Bank Atlas (e.g., World Bank (2002d) and http://nebula.worldbank.org/ Web site } has similar data in compact form. The U.N.’s annual Human Development Report (e.g., U.N. Development Program 2002 and http://hdr.undp.org/reports/view reports.cfm?type = 1) has basic economic and social data. In 1994, the U.N. Development Program (1994:30–31) ranked DCs by various indices of human distress; one example indicates that the homicide rate in the United States is 6 times the rate of most DCs and 12 times that of Japan. The IMF’s biannual bird’s eye view of the world economy, World Economic Outlook (e.g., IMF 2003d and http://www.imf.org/external/pubs/ft/weo/2003/01/ index.htm) includes data and prospects for both LDCs and DCs. Other yearly period- icals include the World Bank’s Global Economic Prospects and the Developing Coun- tries (e.g., World Bank. 2003f and http://www.worldbank.org/prospects/gep2003/ full.htm) and Global Development Finance: Financing the Poorest Countries (e.g., World Bank 2003a and http://www.worldbank.org/prospects/gdf2003/); the U.N. Conference on Trade and Development’s Trade and Development Report (e.g., UNCTAD 2001c and http://www.unctad.org/en/docs/c3l19a3.en.pdf) and Least Developed Countries Report (e.g., UNCTAD 2002b and http://www.un.org/ partners/civil society/m-ldc.htm); and the U.N.’s World Economic Survey by the P1: ICD 0521829666c02 CB970/Nafziger 0 521 82966 6 October 13, 2005 13:48 52 Part One. Principles and Concepts of Development Department of International Economic and Social Affairs (e.g., U.N. 2001). The ILO, for example, 1998 and 2000, provides data on labor, employment, and poverty. The U.N.’s Human Development Report explains the human development index (HDI) and Srinivasan 1994b; Streeten 1994:232–237; and Aturupane, Glewwe, and Isenman 1994:244–254 criticize HDI. Srinivasan (1994a:3–27), Heston (1994:29–52), and Ruggles (1994:77–85) dis- cuss the flaws in cross-national data used by international agencies. Usher (1968) and Kuznets (1971) have good discussions of errors in cross-national income com- parisons. Sources on adjusting national product for purchasing power are Summers and Heston (1991:327–368) and Kravis (1984:1–57); Srinivasan (1994b:241) criti- cizes work on purchasing-power parity. Weighted indices for GNP growth are dis- cussed in Chenery, Ahluwalia, Bell, Duloy, and Jolly (1974). Deaton (2003) critiques measurements of PPPs and suggests steps for improving their calculation. Behrman and Srinivasan (1995a) discuss analytical tools and Deaton (1995) data and econometric tools for development analysis. Thorp (1989:303–304) discusses Dudley Seers, and Worswick (1989:301–302) E. F. Schumacher in Eatwell, Milgate, and Newman (1989). Chenery and Srinivasan (1988 and 1989) include essays by Amartya Sen, “The Concept of Development,” vol. 1, pp. 9–26; T. N. Srinivasan, “Economic Development: Concepts and Approaches,” vol. 1, pp. 1–8; and Lance Taylor and Persio Arida, “Long-Run Income Distribution,” vol. 1, pp. 161–194. Goulet (1971:6–10) discusses replacing the concept of development with that of liberation. The classic discussion of the costs and benefits of economic growth appears in the appendix of Lewis 1955:420–435. On basic needs, see Hicks (1979:985–994); Hicks and Streeten (1979:572–575); and Streeten (1980:107–111). Reddy and Heuty (2005) evaluate the Millennium Development Goals. Develop- ment , 2005, 48(1) has an issue assessing development goals. Murray Leibbrandt, James A. Levinsohn, and Justin McCrary, “Incomes in South Africa Since the Fall of Apartheid,” National Bureau of Economic Research Work- ing Paper No. W11384, 2005, show a substantial decline in real incomes in South Africa between 1995 and 2000, especially among the young and non-white. Whites benefit from skill-biased technological change and a legacy of superior investment in educational capital. Black South Africans are hurt by a slack labor market from restructuring of the economy from unskilled- to skilled-intensive production. P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 3 Economic Development in Historical Perspective Scope of the Chapter To analyze the economics of developing countries, we need some basic facts about their growth and development, including an evolutionary biological approach to development, a sketch of economic development in ancient and medieval times (pre- 15th century), world leaders in GDP capita from about 1500 to the present, the ori- gins of modern economic growth and why it was largely confined to the West before the 20th century, non-Western (Japanese, Korean-Taiwanese, Soviet, and Chinese) growth models, the range of growth in the last 100 to 150 years, a concrete illustra- tion of the power of exponential growth in North America in the last 125 years, the modern periods of fastest growth, the economic growth of Europe and Japan after World War II, the growth of LDCs before and after World War II, and the diverse economic performance among LDCs by country and world region. Finally, the U.N. General Assembly perceives today’s major international problem as the widening income gap between rich and poor countries. Has income indeed widened, and is narrowing the gap an important goal? The last section draws on earlier sections to ask whether income levels between DCs and LDCs are converging or diverging. An Evolutionary Biological Approach to Development Chapter 13 argues against a na ¨ ıve association between climate and human achieve- ment but supports a more sophisticated ecological explanation. The physiologist Jared Diamond (1999) stresses ecology and evolutionary biology, especially distinc- tive features of climate, environment, and wild plants and animals in explaining the fates of human societies and their development. Despite sub-Saharan Africa’s early head start as a cradle of human evolution, Eurasia dominated Africa during the latter half of the second millennium c.e. The sub-Sahara was delayed in food production compared to Eurasia by its paucity of domesticable native animal and plant species, its smaller area suitable for indigenous food production, and its north-south axis, which retarded the spread of food production and innovations. “A wild animal, to be domesticated, must be sufficiently docile, submissive to humans, cheap to feed, and immune to diseases and must grow rapidly and breed well in captivity,” char- acteristics of Eurasia’s cows, sheep, goats, horses, and pigs, but not African wild animals, even in the period since the 15th century (ibid., p. 398). In Africa and the 53 P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 54 Part One. Principles and Concepts of Development Americas, as you move along a north-south axis, you traverse zones differing greatly in climate, habitat, rainfall, day length, and crop and livestock disease. Hence crops and animals acquired or domesticated in one part of Africa have difficulty moving to others. In contrast, crops and animals moved easily between Eurasian societies thousands of kilometers apart but at a similar latitude sharing similar climates and day lengths. Eurasia had the fastest migration and diffusion of technological inno- vations. At the other extreme, premodern Native America and Aboriginal Australia suffered from isolation from Eurasia (ibid., pp. 399–407). These distinctive features of ecology and biology facilitated the early civilization of the Fertile Crescent (today’s Syria, Iraq, Jordan, and Turkey), including the develop- ment of cities, writing, and empires, during the fourth millennium b.c.e. The Fertile Crescent enjoyed a wealth of domesticated big mammals, a plethora of large-seeded grass species suitable for domestication, a substantial percentage of annuals, a cli- mate (mild, wet winters and long, hot, dry summers) favorable to cereals and pulses, and a wide range of altitudes and topographies supporting biodiversity and staggered harvest seasons, factors deficient in South Africa, Mesoamerica, Australia, and New Guinea. However, the Fertile Crescent, by the second or first century b.c.e. no longer possessed further compelling geographic advantages, because of the destruction of much of its resource base and the loss of a head start from domesticable wild plants and animals (ibid., pp. 134–146, 409–411). Diamond emphasizes differences in plant and animal species available for domes- tication, continental isolation, continental population sizes, and diffusion and migra- tion rates dependent on continental axes and prospects for sharing innovations across similar climates and latitudes. Modern transport and communication enable the sharing of innovations among a larger community, the Atlantic economic commu- nity, including North America and Europe. For example, Mennonites from Ukraine brought turkey red wheat to Kansas in the 1870s, the basis for varieties of hard winter wheat on the U.S. Great Plains during the 20th century. But transmitting agri- cultural innovation from North America and Europe to Australia and New Zealand, countries of Western origin isolated in the southern hemisphere, is limited. However, researchers can disseminate new crop varieties across semitropical or tropical zones, as the high-yielding varieties of wheat in Mexico that were adapted to Punjab regions of India and Pakistan in the 1960s. Ancient and Medieval Economic Growth Agnus Maddison (2001:17) uses a vast array of historical statistics to quantify real GDP per capita and its growth in the last millennium, that is, from 1000 to 1998. Real GDP per capita increased 13-fold, population 22-fold, and world GDP 300-fold during the last millennium, contrasting with the earlier millennium, 0–1000 c.e. , when world population grew by only a sixth and GDP per capita made no advances. Western Europe declined during the earlier millennium with the collapse of a cohesive large-scale polity, the Roman empire, and its replacement by a fragmented and unstable political system. Urban civilization disappeared, being replaced by P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 3. Economic Development in Historical Perspective 55 “self-sufficient, relatively isolated and ignorant rural communities where feudal lords extracted income in kind from a servile peasantry” (ibid., p. 50). By 1000, trade among Western Europe, North Africa, and Asia had virtually disappeared. Western Europe was at its lowest point for the two millennia in 1000, when average income levels were below those in China, India, and much of the rest of Asia (Maddison 2001:27–50). From the 10th century to the early 14th century when surpassed by Western Europe, China had the highest income per capita in the world, having devel- oped gunpowder (but not modern guns), a well-developed road system, and mer- chants trading throughout East Asia (Maddison 2001:42, 264). China only surren- dered the world’s lead in GDP to the United States in the 1890s, when China had the world’s largest population of 380–400 million (Maddison 1997:114, 182, 190). The economic ascension of Western Europe began in the 11th century. Western per-capita growth was at a slow crawl of 0.14 percent yearly, tripling average real income from 1000 to 1820. Maddison (2001:28, 51) estimates that this growth was more than twice those of Asia, Latin America, Africa, and Eastern Europe for the same period. The West’s superior technology included navigation, shipbuilding, food processing, banking, accountancy, foreign exchange and credit markets, diplomatic service, corporate governance, military technology, insurance, libraries, the printing press, and improvement in intellectual life and the spread of universities. In about 1500, technological progress and capital formation quickened, with Europe encountering the Americas, opening up an enormous area, including new crops (maize, potatoes, manioc, tomatoes, chillies, peanuts, pineapples, cocoa, and tobacco) and the exchange of crops and animals among Europe, the Americas, and Asia (Maddison 2001:17–25). Asian institutions and policies, however, were weak, negatively reinforced by Western colonial and imperial exploitation, especially from the 18th century onward (Madison 2001:44). World Leaders in GDP per capita, 1500 to the Present In Europe, Venice played a major role in opening the Mediterranean to West European trade and developing commercial links with Northern Europe. From the 10th century, with the rise of northern and central Italian cities, through the first two- thirds of the 16th century, Italy, although not united politically until about 1870, was the richest country in the world, with an estimated GDP per capita of $1,100 (in 1990 international dollars) (Maddison 2001:264). In about 1564, the Netherlands over- took Italy, remaining the world leader until about 1836, when the United Kingdom became the leader. Around 1904, the United States replaced the United Kingdom, 1 continuing leadership through today (Sharpe 2002:22) (see Figure 3-1). 1 Before 1800, the United States and Canada did not have good economic prospects compared to other former European colonies in the Americas. “In 1700, Mexico and [what became] the United States had very similar per capita incomes, and the sugar-producing islands of Barbados and Cuba were far richer” (World Bank 2003h:54). In 1800, Cuba and Argentina had higher average incomes than the United States. Only the United States and Canada had the laws, institutions, government, and lack of high wealth inequality facilitating the entrepreneurial ventures, physical and human capital accumulation, and rapid technological progress that spurred the industrial revolution of the 19th century (ibid.). P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 56 Part One. Principles and Concepts of Development 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 1564 1836 1904 Years Real GDP Per Capita (Natural log) Italy Netherlands United Kingdom United States Netherlands 1097 1808 4915 22026 36315 UK Real GDP Per Capita (1990 PPP $s) US Italy 1998 1500 13360 8103 2981 403 665 245 FIGURE 3-1. World Leaders in GDP per Capita, 1500–1998 (1990 $PPP) (natural log). Source: Maddison 2002:264, 276–279. See also Sharpe 2002:23. Beginnings of Sustained Economic Growth Historians hesitate to name a threshold period in history when real per-capita growth took off. Although there were periods of growth before the modern period, rapid, sustained growth was rare. Living standards remained at a subsistence level for the majority of the world’s population. The rapid, sustained increase in per capita GNP characteristic of modern economic growth began in the West (Western Europe, the United States, Canada, Australia, and New Zealand) 125 to 250 years ago. Indus- trialization and sustained economic growth had begun in Great Britain by the last half of the 18th century; in the United States and France in the first half of the 19th century; in Germany, the Netherlands, and Belgium by the middle of that century; and in Scandinavia, Canada, Japan (a non-Western country), Italy, and perhaps Russia, by the last half of the century. China’s average economic welfare was more or less stagnant until the second half of the 20th century. In 1870, knowledgeable economists expected that India would be more economically and financially developed than Japan by 1970 (Goldsmith 1983:4–5). India, a British colony, possessed a unified currency, rudiments of a Western-style banking system, access to the British capital market, and British indus- trial and financial technology, whereas Japan, just emerging from feudalism, had a P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 3. Economic Development in Historical Perspective 57 negligible modern sector, a chaotic currency, and no modern financial institutions. To be sure, from 1870 to 1913, just before World War I (1914–18), one of the more successful phases of capitalist growth, India’s economy grew, albeit slowly. However, India experienced negative growth from 1914 to 1945, a period of crisis in the world economy consisting of a depression bracketed by two world wars. Japan, by con- trast, had virtually the fastest growth in the world during the period 1870 to 1950, notwithstanding its massive defeat during World War II. The rest of Asia grew modestly during the one and one-half centuries before the mid-20th century. Africa, estimated to be close to the world’s average income in 0 c.e. , remained the same or declined in living standards to 1820, but after that experienced modest per-capita growth until the middle of the 20th century. Latin America and Eas- tern Europe outpaced Asia and Africa from 1820 to 1950 (Maddison 2001:28, 126). The West and Afro-Asia: The 19th Century and Today Gross national income per capita for developed countries in the West in the first decade of the 21st century is roughly twelve times that of Afro-Asian low-income countries, if compared using international dollars using purchasing-power parity rates, and about 60 times that of these low-income economies in nominal U.S. dollars. The gap was not so great 130 to 140 years ago, 2 since people could not have survived on one-twelfth the per capita income of the West in the late 19th century. Nobel laureate Simon Kuznets estimates a gap of 5:1 then (Kuznets 1971:23–29). Roughly speaking, at that time the West had an average real income higher than that of Africa today. Figure 3-2 shows, using a slightly different comparison, that the international spread in GDP per capita by region, the ratio of the highest region (Western offshoots: the United States, Canada, and Australia) to the lowest region (Africa), was 5:1 in 1870, 9:1 in 1913, and 19:1 in 1998. The Western or DC economic growth has been much more rapid during the past 130–140 years, and of course the DCs are adding to an already more substantial economic base. Capitalism and Modern Western Economic Development Why did sustained economic growth begin in the West? A major reason is the rise of capitalism , the economic system dominant there since the breakup of feudalism from the 15th to the 18th centuries. The relations between private owners and workers are fundamental to capitalism. The means of production – land, mines, factories, and other forms of capital – are privately held; and legally free but capital-less workers sell their labor to employers. Under capitalism private individuals operating for profit make production decisions. Capitalist institutions had antecedents in the ancient world, and pockets of capital- ism flourished in the late medieval period. For example, a capitalist woolen industry 2 The starting point for examining modern economic growth is often 1870 because of complete national- income data for today’s DCs and a large number of LDCs since then (Pritchett 1997:4; Maddison 2001). P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 58 Part One. Principles and Concepts of Development International S p reads In GDP P er Ca p ita 0 2 4 6 8 10 12 14 16 18 20 1000 1200 1400 1600 1800 1830 1870 1900 1950 1998 International S preads In GDP P er C a p ita FIGURE 3-2. International Spreads in GDP per Capita (1990 $PPP), Ratio of Highest Region to Lowest Region. Note: The regions are Western Europe, Western offshoots, Japan, Asia (excluding Japan), Latin America, Eastern Europe and former Soviet Union, and Africa. Source: Maddison 2001, p. 126, whose data are for 1000, 1500, 1820, 1870, 1913, 1950, 1973, and 1998. All other years are based on linear interpolation between these eight benchmark years. existed in 13th-century Flanders and 14th-century Florence, but it died out because of revolutionary conflict between the workers and capitalists. Thus the continuous development of the capitalist system dates only from the 16th century. Especially after the 11th century, the growing long-distance trade between capital- ist centers contributed to the collapse of the medieval economy. As European trade activity expanded during the next few centuries, certain institutions facilitated the growth of modern capitalism. Among them were private property, deposit bank- ing, formal contracts, craft guilds, merchant associations, joint stock companies (the precursor of the corporation), insurance, international financial markets, naval pro- tection of trade vessels, and government support in opening markets and granting monopoly privileges for inventions. At the same time, burgeoning industrialization and urbanization further weakened the feudal economy, an agricultural system based on serfs bound to their lord’s land. Ultimately these changes in trade, industry, and agriculture transformed the medieval economy into a new society fueled by capitalistic endeavors. Before the 20th century, only capitalist economies were successful in large capital accumulation and in generating and applying a vast scientific and technical knowl- edge to production. Why was capitalism first successful in the West? 1. The breakdown of the authority of the medieval Roman Catholic Church, together with the Protestant Reformation of the 16th and 17th centuries, stim- ulated a new economic order. Although Protestantism, like Catholicism, was P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 3. Economic Development in Historical Perspective 59 ascetic, manifesting itself in the systematic regulation of the whole conduct of the Christian, the economic historian Max Weber, The Protestant Ethic and the Spirit of Capitalism , 3 contended that the new Protestant ethic translated its “inner-worldly” asceticism into a vigorous activity in a secular vocation, or call- ing (in contrast to the “other-worldly” asceticism of the Catholic monastery). The Protestant ethic fostered hard work, frugality, sobriety, and efficiency, virtues coinciding with the spirit essential for capitalist development. Acceptance of the Protestant idea of a calling led to the systematic organization of free labor and gave a religious justification for unstinting work even at low wages in the ser- vice of God (and incidentally the employer). Chapter 12 questions Weber’s the- sis, suggesting that Protestantism’s secularization or accommodation may better explain any association between Protestantism and capitalism. Still most eco- nomic historians would agree that the decline of the church’s all-encompassing power in political, economic, and ideological realms was necessary to free the spirit of capitalist development. 2. Between the 16th and 19th centuries, Western Europe witnessed the rise of strong national states that created the conditions essential for rapid and cumu- lative growth under capitalism. The nation-state established a domestic mar- ket free of trade barriers, a uniform monetary system, contract and property law, police and militia protection against internal violence, defense against external attack, and basic transportation and communication facilities – all of which fostered capitalism. Initially, absolute monarchs wrested power from feudal lords and town authorities and consolidated territory into large polit- ical and economic units – the nation-state. The nation-state was necessary for the larger markets and economies of scale of capitalist expansion. Even- tually monarchy ceded power to the bourgeoisie , the capitalist and middle classes. Where an absolute monarch existed, the capitalist class, who enjoyed only a precarious existence under autocratic authority, ultimately stripped the monarch of power and installed representatives more favorable to their economic interests. 3. The declining influence of the church coincided with the Enlightenment, a period of great intellectual activity in 17th- and 18th-century Europe that led to the scientific discoveries of electricity, oxygen, calculus, and so on. These discov- eries found practical application in agriculture, industry, trade, and transport and resulted in extended markets, increased efficiency of large-scale production, and enhanced profits associated with capital concentration. Furthermore, the rationalism permeating the new science and technology meshed with the spirit of capitalist enterprise. 4. The philosophical rationalism and humanism of the Enlightenment, coupled with Protestantism’s spiritual individualism (the “priesthood of all believers”), empha- sized freedom from arbitrary authority. In the economic sphere, this liberalism advocated a self-regulating market unrestricted by political intervention or state 3 1958; German original 1904–05. P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 60 Part One. Principles and Concepts of Development monopoly. These views were tailor made for the bourgeoisie in its struggle to overthrow the old order. 5. Intellectual and economic changes led to political revolutions in England, Hol- land, and France in the 17th and 18th centuries that reduced the power of the church and landed aristocracy. The bourgeoisie took over much of this power. Economic modernization in Europe would probably not have been possible with- out these revolutions. 4 6. Modern capitalism is distinguished from earlier economic systems by a prodi- gious rate of capital accumulation. During the early capitalism of the 16th and 17th centuries, the great flow of gold and silver from the Americas to Europe inflated prices and profits and speeded up this accumulation. Inflation redis- tributed income from landlords and wage laborers, whose real earnings declined, to merchants, manufacturers, and commercial farmers, who were more likely to invest in new and productive enterprises. 5 Capitalism, as an engine for rapid economic growth, spread beyond Europe to the outposts of Western civilization – the United States, Canada, Australia, and New Zealand. Indeed, during most of the 20th century, capitalism has been more successful in the United States than in other Western economies. However, modern industrial capitalism was established in the West at great human costs. Physical violence, brutality, and exploitation shaped its early course. In England and Belgium, wages dropped and poverty increased markedly during the accelerated industrial growth of the latter 18th and early 19th centuries. In both countries, it took a half-century before the absolute incomes of the poor reached pre–Industrial Rev- olution levels (Adelman and Morris 1978:245–273). Perhaps Charles Dickens best portrays the starvation, destitution, overcrowding, and death among the mid-19th century unemployed and working class. The lives fictionalized in Nicholas Nickleby , A Christmas Carol , and Oliver Twist were grim indeed. Dickens’s novels are an accu- rate portrayal of not only the English working class but of other Western workers during this time. 6 Although these human costs may not be inevitable, similar prob- lems have not been avoided by newly industrializing countries in subsequent periods. But despite these costs, even the late Marxist Maurice Dobb (1926) conceded that 4 Although capitalism originated in the modern West, much of what contributed to its rise originated in other civilizations. For example, much of its scientific and technical content came from the Middle East and India, the philosophical from ancient Greece, and the legal and political from ancient Greece and Rome. 5 Much of this section is from Dillard (1967:72–149); Dillard (1979:69–76); and North and Thomas (1970:1–17). Neo-Marxists and dependency theorists (discussed in Chapter 5) argue that Western capitalism, through informal imperialism and late 19th- and early-20th-century colonialism, developed at the expense of Latin America, Asia, and Africa, capturing their surplus (output above wages, depreciation, and purchases from other firms) through policies controlling their raw materials, markets, international trade, and planning. Most Western mainstream economists would not add imperialism as a contributor to Western capitalist success. 6 However, as Polak and Williamson (1993:229–230) indicate, rural poverty rates were higher than urban poverty rates in both England and France during the Industrial Revolution. P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 3. Economic Development in Historical Perspective 61 capitalism has improved the levels of living for a large proportion of the Western population since the early 19th century. Economic Modernization in the Non-Western World Capitalism led to modern economic growth in only a few non-Western countries. Chapter 5 discusses the relative importance of barriers to capitalism extant in tradi- tional societies, as well as the effects of colonialism and other forms of Western polit- ical domination on the slow development of non-Western economies. Irrespective of the cause, it is clear that most non-Western countries lacked the strong indigenous capitalists and the effective bureaucratic and political leadership essential for rapid economic modernization. THE JAPANESE DEVELOPMENT MODEL 7 Early capitalism’s fast growth. One notable exception was Japan, one of the five non-Western countries that escaped Western colonialism. Despite unequal treaties with the West from 1858 to 1899, Japan had substantial autonomy in economic affairs compared to other Afro-Asian countries. Japan’s level of economic development was much lower than that of Western coun- tries in the middle to latter 19th century. However, since 1867, when Japan abolished feudal property relationships, its economic growth has been the most rapid in the world. Japan’s “guided capitalism” under the Meiji emperor, 1868 to 1912, relied on state initiative for large investments in infrastructure – telegraphs, postal service, water supply, coastal shipping, ports, harbors, bridges, lighthouses, river improvements, railways, electricity, gas, and technical research; for helping domestic business find export opportunities, exhibit products and borrow abroad, establish trading compa- nies, and set marketing standards; for importing machines sold on lenient credit terms to private entrepreneurs; for laws encouraging freedom of enterprise and corporate organization; for organizing a banking system (with the central Bank of Japan); for sending students and government officials for training and education abroad; and (in the absence of foreign aid) for hiring thousands of foreigners to adapt and improve technology under local government or business direction. In the late 19th century, government initiated about half the investment outside agriculture but sold most industrial properties, often at bargain prices, to private business people. Additionally government aided private industry through a low-wage labor policy, low taxes on business enterprise and high incomes, a favorable legal cli- mate, destruction of economic barriers between fiefs, lucrative purchase contracts, tax rebates, loans, and subsidies. Japan acquired funds for industrial investment and assistance by squeezing agriculture, relying primarily on a land tax for govern- ment revenue. From the state-assisted entrepreneurs came the financial cliques or combines (zaibatsu) that dominated industry and banking through World War II. Keiretsu , formed after World War II, refers to groups of affiliated companies loosely 7 This section is based on Nafziger (1995) and Nafziger (1986:1–26). P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 62 Part One. Principles and Concepts of Development organized around a large bank, or vertical production groups consisting of a core manufacturing company and its subcontractors, subsidiaries, and affiliates (Hsu 1994:198–99). Nevertheless, unlike the contemporary Indian government, the Meiji government retained small industry, compelling the zaibatsu to provide technical advice, scarce inputs, and credit and encouraging small firms to take cooperative action. Creating small industry from scratch is not as effective as the Japanese approach of maintaining and upgrading workshop, handicraft, and cottage industry from an earlier stage of development. Meiji Japan did not stress large leaps to the most advanced state of industrial tech- nology available, but step-by-step improvements in technology and capital as gov- ernment departments, regions, firms, and work units learned by doing. In the 1870s, this meant technical and management assistance and credit facilities to improve and increase the scale of crafts and small industry from the feudal period, causing less social disruption, as small industry’s environment was not alien. Regarding Japan’s technology acquisition, Lawrence G. Franko (1983:23) con- tends that The Japanese are without doubt the world’s champion importers of “other people’s” technology. Unlike other industrial nations which may have forgotten how much of their technological development was in fact based on seeking out, stumbling upon, or helping themselves to foreign discoveries and innovations, Japan has continuously sent its sons to be educated abroad and then to live or travel abroad to search out ways of catching up with or surpassing the West. The fact that today Japan probably has one of the highest mass standards for primary and secondary schools in the world, and shares underlying national values, is no accident. Japan’s rulers laid the foundation in the late feudal period, when Japan’s primary enrollment rate was higher than the British, and in 1872, when a national system of universal education stressing scientific and technological education was established. Moreover from 1868 to World War II, the Japanese had a policy (first forced and later chosen) of multilateral, nondiscriminatory foreign trade outside their empire (1904–45). Unlike today’s LDCs, Japan did not discriminate against exports. The increased tariff protection in the first quarter of the 20th century, which reduced the price of foreign exchange, was offset by government export promotion, which brought the exchange rate close to a market-clearing rate (see Chapter 17 on foreign exchange rates). From 1868 to 1897, the Japanese yen, on a silver standard that declined relative to gold, chronically depreciated vis- ` a-vis the U.S. dollar, maintaining Japan’s competitiveness. Today’s international economic conditions are not so favorable to LDC export expansion. The most rapidly expanding LDC manufactured exports during the 1970s through the early 1990s were textiles, clothing, footwear, and simple consumer goods requiring widely available labor-intensive technology. But competition from other aspiring newly industrial exporting countries is more severe than it was for Meiji P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 3. Economic Development in Historical Perspective 63 Japan. Still, LDCs could benefit from the Japanese approach of using international competition and market-clearing exchange rates to spur exports. The end of Japan’s economic miracle. In 1982, University of Washington Professor Kozo Yamamura (1982:99–117) was one of the earliest economists to point out the end of Japan’s “miracle,” warning that Japan had exhausted its three decades of fast growth from catch-up, benefiting from internal and external economies of scale and learning by doing from rapid growth in investment and adapting advanced technol- ogy from more advanced DCs (see DC convergence later). Japan’s industrial policy, spearheaded by the Ministry of International Trade and Industry, still relied on cartels and restrictions to limit imports even after joining the General Agreement on Tariffs and Trade (GATT), the global organization administering rules of conduct in interna- tional trade before 1995, when GATT was replaced by the World Trade Organization (WTO). The informal protection from cartels, administrative guidance, and subsi- dies increased domestic costs to the detriment of Japan’s otherwise efficient export sectors. These high costs, together with a keiretu -laden banking system impaired by a 10-percent ratio of bad debts to GDP in 1990, burst the financial euphoria of the 1980s, and were followed by stagnation from 1992 to 2003 (Katz 1998; Katz 2003). Many doubt that LDCs, once having provided protection for the catch-up phase, would have the strength to counter the special interests comparable to Japan’s Iron Triangle – politicians, the bureaucracy, and big business – that became more venal and incestuous beginning in the early 1970s. Japan’s growth collapse in the 1990s is another reason not to blindly follow its or any other country’s model of economic growth without asking how that model needs adjustment when transferred to another country and culture. Moreover, although a contemporary LDC can learn useful lessons from the early Japanese model, these lessons are limited because of Japan’s historically specific con- ditions and because aspects of the 1868–1937 Japanese approach also contributed to pathologies in growth, such as zaibatsu concentration, income inequality, labor union repression, militarism, and imperialism. These pathologies were not reduced until military defeat in 1945 was followed by land, educational, demilitarization, labor union, antimonopoly, monetary stabilization, constitutional, and other reforms undertaken by the U.S. occupational government, supported by the revolutionary momentum of the Japanese populace. This series of events associated with military devastation is not to be recommended or likely to accelerate economic development and democratize the political economy in LDCs as it did in Japan. THE KOREAN–TAIWANESE MODEL Despite Asia’s financial crisis, 1997–99, the fastest growing developing countries are the Asian tigers or newly industrializing countries (NICs) of East and Southeast Asia – South Korea, Taiwan, and Singapore, and Hong Kong, a part of China since 1997. Both Singapore and Hong Kong have been prosperous entrepot city-states, providing trade and financial links for their hinterlands, for other parts of Asia, and between Asia and the external world. As city-states, however, they are not likely to P1: Oyk 0521829666c03 CB970/Nafziger 0 521 82966 6 September 29, 2005 7:56 64 Part One. Principles and Concepts of Development serve as models for more populous nation-states. Thus, we concentrate here on the two remaining Asian tigers, Taiwan and Korea, which have both enjoyed a real per capita growth rate of more than 6 percent since 1960 and graduated to high-income economies in the years since 1990. The model of Korea and Taiwan is similar to that of Japan, perhaps unsurprisingly for two countries that were also a part of greater Chinese civilization for centuries and that were Japanese colonies from about the turn of the 20th century through World War II. Similar to Japan, the governments of Korea and Taiwan systematically inter- vened to further economic development, building infrastructure, providing tax incen- tives and subsidized credit for export manufacturing and other selected industries, 8 investing heavily in primary education and other human capital, and maintaining macroeconomic stability during external shocks (for example, from oil price increases in 1973–74 and 1979–80 and American dollar depreciation in the late 1980s), thus restraining inflation and avoiding external debt crises (World Bank 1993a; Amsden 1994:627–633; Kwon 1994:635–644; Lall 1994:645–654; Yanagihara 1994:663–670). A major difference between the two was that Korean government policies were partial to private conglomerates such as Hyundai, Lucky-Goldstar, and Daewoo, whereas Taiwan emphasized aid and the dissemination of research and technology to small-to medium-sized private and state-owned enterprises (Rodrik 2000:195–201; Noble and Ravenhill 2000:80–107). Korea and Taiwan, also like Japan, have had a high quality of economic manage- ment provided by the civil service, with merit-based recruitment and promotion, com- pensation competitive with the private sector, and economic policy making largely insulated from political pressures. According to Harvard’s Dani Rodrik (2000:195– 201), Korea and Taiwan had been hampered by a coordination failure before the 1970s. Labor skills, technologies, and intermediate inputs or capital goods require a large-scale movement of resources to benefit from internal and external economies of scale and well-educated workers at low cost to be competitive internationally. In the 1970s, the Taiwanese and Korean states provided “big push” polices (see Chapter 5) to coordinate the mobilization of resources essential for economic transformation and a takeoff into sustained growth. Both Asian tigers have combined