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Leading Issues in Economic Development
EIGHTH EDITION

Gerald M. Meier • James E.Rauch

Leading Issues in Economic Development

Leading Issues in Economic Development
EIGHTH EDITION

GERALD M. MEIER
Stanford University

JAMES E. RAUCH
University of California, Son Diego

New York Oxford OXFORD UNIVERSITY PRESS 2005

Oxford University Press
Oxford New York Auckland Bangkok Buenos Aires Cape Town Chennai Dor es Salaam Delhi Hong Kong Istanbul Karachi Kolkoto Kuala Lumpur Madrid Melbourne Mexico City Mumbci Nairobi Soo Paulo Shanghai Taipei Tokyo Toronto

Copyright © 2005 by Oxford University Press, Inc.
Published by Oxford University Press, inc198 Madison Avenue, New York, New York 10016 http://vAvw.oup.com Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press.

ISBN 13:978-0-19-517960-6

Printed in the United States of America on acid-free poper

To the next generation of development economists.

-G.M.M.
To Doris
-J.E.R.

CONTENTS

EXHIBITS PREFACE USING THIS BOOK WORLD M A P OF H U M A N DEVELOPMENT INDEX

xiii XV xvii xviii

I. INTRODUCTION Overview I.A. MEASURING DEVELOPMENT Note I.A. 1. The Evolution of Measures of Development Selection lA. 1. Why Are Services Cheaper in the Poor Countries? Comment I.A. 1. The Productivity and Factor Proportions Explanations Again Selection l.A.2. Income Poverty Comment l.A.2. Capabilities and Entitlements Note l.A.2. Other Important Differences Between Developed and Less Developed Countries LB. ECONOMIC PERFORMANCE OF LESS DEVELOPED COUNTRIES: THE RECENT PAST Selection IB. 1. The Lost Decades: Developing Countries' Stagnation in Spite of Policy Reform 1980-1998 Note IB. 1. No Easy Answers, Yet All Is Not Lost Selection IB.2. How Reform Worked in China Selection I.B.3. India Since Independence Selection l.B.4. The Impact of the Economic Reforms in Latin America and the Caribbean Selection I.B.5. Why Has Africa Grown Slowly? I.e. THE DISCIPLINE OF DEVELOPMENT ECONOMICS Note I.e. 1. Evolution of Development Economics Comment I.C.I. Classical GrovAh Theory Comment l.C.2. Development Economics as a Special Subject Note l.C.2. New Endogenous Grov/th Theory

1 ] 5 12 16

32

34

C(JNTHNTS

II. HISTORICAL PERSPECTIVE Overview. The Division of the World Selection II. 1. The Spread of Economic Grov^h to the Third World: 1850-1980 Comment II. 1. State-owned Enterprises and Privatization Selection 11.2. The Division of the World and the Factorol Terms of Trade Note II. 1. Why Not Export First? Note 11.2. The Lewis Model of the World Economy Selection 11.3. Agriculturol Productivity, Comparative Advantage, and Economic Growth Comment 11.2. Income Elasticity of Demand for Food in the fAatsuyama fAodel Selection 11.4. Income Distribution, Market Size, and Industrialization Comment 113. fvMnimum /Market Size in the Murphy-Shleifer-Vishny /v\odel Selection 115. Factor Endowments, Inequality, and Paths of Development Among New World Economies Selection 11.6. Divergence, Big Time Comment 11.4. Will the Poor Countries Catch Up?

81 81 84 ' 0*^ lOT 106 108 ' '1 115

/1

I1 1 '8 1 27 131

. INTERNATIONAL TRADE AND TECHNOLOGY TRANSFER Overview III.A. TRADE Note lll.A. 1. Natural Resource Abundance, International Trade, and Economic Growth Note lll.A.2. Import-substituting Industrialization and the Infant-Industry Argument Selection lll.A. 1. Typology in Development Theory: Retrospective and Prospects Selection III.A.2. An Exposition and Exploration of Krueger's Trade Model Comment lll.A. 1. Moving Up the Ladder and Changes in Relative Costs of Factors of Production Selection III.A. 3. The Process of Industrial Development and Alternative Development Strategies Selection III.A.4. Getting Interventions Right: How South Korea and Taiwan Grew Rich Note lll.A.3. Tradeobility of Intermediate Goods, Linkages, and Bottlenecks lil.B. FOREIGN CONTACT AND TECHNOLOGY TRANSFER Note lll.B. /. Learning in International Production Networks Selection lll.B. 1. Technology Gaps Between Industrial and Developing Countries: Are There Dividends for Latecomers? Selection lll.B.2. The Potential Benefits of FD! for Less Developed Countries Note III.B.2. Trade as Enemy, Handmaiden, and Engine of Growth

133 133

140 1 44 146 151 154 1 56 1 63 170

1 72

1 75 178 180

CONTENTS

ix

IV. HUMAN RESOURCES Overview IV.A. EDUCATION Note IV.A. 1. Three Views of the Contribution of Education to Economic Growth

183 184 187 187

Selection IV.A. 1. Economic Impact of Education 189 Comment IV.A. I. Updated Estimates of Returns to Investment in Education Comment IV.A.2. Ability Differences, Spillovers, and the Returns to Investment in Education Selection IV.A.2. Creating Human Capital Selection IVA.3. Schooling and Labor Market Consequences of School Construction in Indonesia Selection IV.A.4. Interpreting Recent Research on Schooling in Developing Countries Selection IVA.5. School Inputs and Educational Outcomes in South Africa IVB. HEALTH Selection IV.B. 1. Pharmaceuticals and the Developing World Selection IV.B.2. Identifying Impacts of Intestinal Worms on Health in the Presence of Treatment Externalities Selection IV.B.3. Confronting AIDS IVC. POPULATION Note IVC. 1. The Size of the World's Population and the Size of the Average Family Selection IVC. 1. Economic Approaches to Population Growth Selection IVC.2. Demographic Trends in Sub-Saharan Africa Comment IVC. 1. The "Demographic Dividend" IVD. GENDER AND DEVELOPMENT Selection IVD. /. Gender Inequality at the Start of the 21 st Century Selection IV.D.2. Missing Women Selection IV.D.3. Women as Policy Makers 198 201 206 212 218 225 231 240 247 248 194

255 26 261 261 275 284

V. INVESTMENT AND FINANCE Overview: Investment and Finance: The Engines of Growth? Note VI. The AK Model Fixed Investment the Key to Economic Growth?

Selection Vl.\s

Selection V.2. Financial Development and Economic Grov^h Selection V.3. Taming International Capital Flows Selection V.4. Can Foreign Aid Buy Growth? Selection V.5. The Microfinance Promise

X

CONTENTS

VI. URBANIZATION AND THE INFORMAL SECTOR Overview VI.A. URBAN GROWTH AND INFRASTRUCTURE Selection VI.A. 1. Urban Growth in Developing Countries: A Demographic Reappraisal Selection VI.A.2. Urban Primacy, External Costs, and Quality of Life Selection Vl.A.3. The Impact of the Privatization of Water Services on Child Mortality in Argentina VLB. RURAL-URBAN MIGRATION AND THE INFORMAL SECTOR Selection VLB. 1. Economic Development with Unlimited Supplies of Labor Selection VLB.2. A Model of Labor Migration and Urban Unemployment in Less Developed Countries Note VLB. 1. The Lewis Versus the Horris-Todaro View of Underemployment in Less Developed Countries Selection VIB.3. Wage Spillover and Unemployment in a Wage-Gap Economy: The Jamaican Case Note Vl.B.2. Econometric Studies of Migration Selection VI.B.4. Labour Market Modelling and the Urban Informal Sector: Theory and Evidence Selection VLB.5. The Role of the Informal Sector in the Migration Process: A Test of Probabilistic Migration Models and Labour Market Segmentation for India

331 331 336

336 338 343 353 355 358 360 365 370 371

376

VII. AGRICULTURE Overview VILA. DESIGNING A N AGRICULTURAL STRATEGY Selection VILA. 1. Agriculture, Climate, and Technology: Why Are the Tropics Falling Behind? Note VILA. /. Food, Hunger, Famine Selection VII.A.2. Agricultural Development Strategies Note VILA.2. Induced Technical and Institutional Change Comment VILA. I. The Green Revolution Selection VII.A.3. Some Theoretical Aspects of Agricultural Policies Selection VII.A.4. Rural Infrastructure Selection Vll.A.5. Prospects and Strategies for Land Reform VII.B. MICROECONOMICS OF THE RURAL SECTOR Selection VII.B. 1. The New Development Economics

381 381 384

388 393 394 397 398 400 404 407 416 416

CONTENTS

xi

Selection VII.B.2. Contractual Arrangements, Employment, and Wages in Rural Labor Markets: A Critical Review Selection VllB.3. The New Institutional Economics and Development Theory Selection Vll.B.4. Rural Credit Markets and Institutions in Developing Countries: Lessons for Policy Analysis from Practice and Modern Theory Selection VIIB.5. A Survey of Agricultural Household Models: Recent Findings and Policy Implications Comment VII.B. I. Supply Functions and Price Responsiveness 420 423 425 428

43

VIII. INCOME DISTRIBUTION Overview Note VIII. 1. Measurement of Income Inequality VIII.A. THE IMPACT OF DEVELOPMENT O N INCOME DISTRIBUTION Selection Vlll.A. 1. Economic Growth and Income Inequality Selection Vlll.A.2. A Note on the U Hypothesis Relating Income Inequality and Economic Development Selection Vlll.A.3. Economic Development, Urban Underemployment, and Income Inequality Comment Vlll.A. I. The Informal Sector, Intraurban Inequality, and the Inverted U

433 433 437 444 444 449 450

Selection VIII.A.4. Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness 456 Comment Vlll.A.2. Evidence for the Inverted U Across Countries Versus Within Countries over Time 463 VIII.B. THE IMPACT OF INCOME DISTRIBUTION O N DEVELOPMENT Selection VIII.B. 1. The Middle Class Consensus and Economic Development Selection VIII.B.2. Income Distribution, Political Instability, and Investment VIII.C CASE STUDIES Selection VIII.C. L Rising Inequality in China, 1981-1995 Selection Vlll.C.2. Falling Inequality in Rural Indonesia, 1978-1993 465 465 468 473 473 481

IX. POLITICAL ECONOMY Overview IX.A. THE (PROPER) ROLE OF THE STATE IN LESS DEVELOPED COUNTRIES Selection IX.A. 1. Public Policy and the Economics of Development Comment IX.A. 1. Development Planning Comment IX.A.2. Governing the Market

489 489 494

494 499 500

xii

CONTENTS IX.B. RENT SEEKING A N D GOVERNMENT FAILURE Note IX.B. 1. W h a t A r e Rents? Selection IX.B. 1. The Political Economy of the Rent-Seeking Society Comment IX.B. I. Complete Rent Dissipation Through Competitive Rent Seeking In the Harris-Todaro Model Comment IX.B.2. The Relationship Between Rent Seeking and Corruption Selection IX.B.2. The Regulation of Entry Selection IX.B.3. Africa's Grov4h Tragedy: Policies a n d Ethnic Divisions IX.C STATE CAPACITY Selection IX.C. 1. Institutions a n d Economic Performance: Cross-Country Tests Using Alternative Institutional Measures Selection IX.C.2. The State as Problem and Solution: Predotion, Embedded Autonomy, and Structural Change Selection IX.C.3. Taking Trade Policy Seriously: Export Subsidization as a Case Study in Policy Effectiveness Selection IX.C.4. Bureaucratic Structure and Bureaucratic Performance in Less Developed Countries 573 560 541 536 502 502 505 508 508 510 521 536

X. DEVELOPMENT A N D THE ENVIRONMENT Overview: Environmental Problems in Less Versus More Developed Countries

581 581 588 597 599 601 603 61 2 622

Selection X. 1. Development and the Environment Comment X. 1. The "Environmental Kuznets Curve" Selection X.2. North-South Trade and the Global Environment Comment X.2. Empirical Studies of the Impact of International Trade on the Environment in Less Developed Countries Selection X.3. Deforestation and the Rule of Law in a Cross Section of Countries Selection X.4. Determinants of Pollution Abatement in Developing Countries: Evidence from South and Southeast Asia Selection X.5. Genuine Savings Rates in Developing Countries

APPENDIX: H O W T O READ A REGRESSION TABLE INDEX OF SELECTION AUTHORS INDEX

633 639 641

EXHIBITS

Exhibit I.A. 1. The Human Development Index Exhibit l.A.2. Human Development Index Rankings Compared to U.S. Dollar Per Capita GDP Rankings Exhibit l.A.3. Exchange-Rate-Deviation Index in Relation to Real GDP Per Capita Exhibit l.A.4. Basic Data Exhibit IB. 1. Life Expectancy and Educational Attainment Versus Per Capita GDP: Recent Performance of Less Developed Countries Exhibit IB.2. Country Average Versus Population-Weighted Per Capita GDP Growth Rotes: Recent Performance of Less Developed Countries Exhibit IB.3. Catching Up to the Core Exhibit lll.A. 1. Share of Primary Products in Merchandise Exports and Index of Export Concentration Exhibit IV.B. I Health Indicators Exhibit IVC 1. Demographic Data and Population Forecasts, by Human Development Index and Geographic Region Exhibit V 1. Investment and Financial Indicators in Fast and Slow Growth Economies Exhibit VLB. 1. Self-Employment and Unpaid Family Labor Exhibit VILA. 1. Agricultural Labor Force and Productivity Exhibit Vlll. 1. Income Distribution and Inequality Measures Exhibit IX.A. 1. Market Failure and State Intervention Exhibit X. 1. Environmental Indicators

5 6 15 21

42

43 44

1 37 21 2

240 296 353 385 440 499 584

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