Nafziger Economic Development (4th ed)

6Part One. Principles and Concepts of Development

CONGESTION, POVERTY, AND AFFLUENCE IN INDIA’S CITIES

In the large Indian cities, there are few proper footpaths for pedestrians or separation of fast-moving vehicles from slower ones; the flow of traffic consists of the juxtaposition of buses, automobiles, taxis, trucks, jeeps, motorcycles, motor scooters, powered cycles, bicycles, human-drawn and motorized rickshaws, oxcarts, handcarts, cattle, dogs, and pedestrians walking or carrying head loads. Congestion, squalor, destitution, and insecurity characterize the lives of the unemployed, underemployed, and marginally employed in cities such as Kolkata (Calcutta), Mumbai (Bombay), and Delhi – more so than for the rural, landless worker. In the central city, people literally live in the street, where they eat, wash, defecate, and sleep on or near the pavement (see Jagannathan and Halder 1988:1175–78). During the monsoon season, they huddle under the overhanging roofs of nearby commercial establishments. Others with menial jobs live in crowded, blighted huts and tenement houses that make up urban shantytowns. In contrast, the family whose major income earner is steadily employed as an assembly line worker in a large company or as a government clerk may live in a small house or apartment. Upper-income professionals, civil servants, and businesspeople usually live in large houses of five to six rooms. Although they have fewer electrical appliances than the Smiths do, they achieve some of the same material comfort by hiring servants.

Social institutions and lifestyles vary greatly among third-world countries. Nevertheless, most low-income countries have income inequality and poverty rates at least as high as India’s. Even the poorest Americans and Canadians are better off than most of the people in India and other low-income countries.

Globalization, Outsourcing, and Information Technology

Yet both Indians and North Americans are living in worlds affected by domestic economic change and greater integration into the global economy. In the United States, household income distribution is shaped more like an hourglass, with a slender middle, so that families such as the Smiths are falling from the middle class from job loss or rising to higher incomes. In India, the gains from economic growth and reform – although these gains bypass some – mean rising commercial farm income for the families of Sridhar and Balayya and increased business and employment opportunities in the cities. Furthermore, as Anthony P. D’Costa (2003:212) notes, India’s incomes are uneven so that “You have fiber optic lines running parallel with bullock carts.”

With globalization, the worlds of India and the United States increasingly are intersecting, much beyond the expanding Indian-American representation in electronics, academics, business, medicine, and journalism in the United States. Some U.S. corporations (or state or local governmental units) outsource service jobs to India, where an entry salary for a university graduate is $US300–500 monthly, a good salary and career opportunity by local standards. The corporation may have an Indian subsidiary or may subcontract work to an Indian firm. In India, two million

1. Introduction

7

English-speaking college students graduate yearly, and most work for one-tenth to one-fifteenth the salary that a U.S. worker of comparable skill receives.

Low-cost high-quality telecommunications means that U.S. companies can open a call center almost as easily in Kolkata, Delhi, Dakha, Johannesburg, and Manila (Hookway 2003:A1) as in Omaha, Austin, or Tallahassee. Indian employees spend several weeks of training to Americanize their accents and take a crash course in Americana – “holidays, regional speech patterns, weather patterns, and the meaning of terms such as ‘frat party’” – to disguise the callers’ location (Bengali 2003:A1).

As night settles in Mumbai, Megha Joshi enters an office with a group of young graduates, sitting in a row of sound-muffling cubicles, talking into their designer headsets. She phones someone in the United States, 12 time zones away. “Good morning, this is Meg,” she says, Anglicizing her name. Working from a script, she offers the respondent a major credit card. Other Indian call center workers handle routine work, such as helping a customer make a standard order, check a bank or food stamp balance, pay a bill, or activate a credit card; processing insurance claims; recovering bad debts; or providing other customer services; routing more complicated questions back to the call center in the United States. Other outsourcing spans the technology spectrum, including software code writing, chip design, product development, accounting, Web site designing, animation art, stock market research, radiology, airline reservations, tax preparation and advice, transcribing, consulting, prayers for the deceased, and other support services, especially in south India’s Silicon Valley, Bangalore, and other high-technology cities (ibid.; Kansas City Star 2004; World Bank, Development News, December 26, 2002; Guardian 2001; Landler 2001).5 Yet with India’s sustained economic growth and increasingly attractive job options for college graduates, call centers will find it more difficult to hire university graduates cheaply.

In software and related services, India moved up the information and communications technology (ICT) value chain from Western corporate outsourcing and small IT enterprises to a major exporter. Chapter 15 discusses J. T. Banerjee (not his real name), Kolkata director of TRP Software, Limited, a data systems and software company that designed information management systems for firms and governmental units. TRP took advantage of India’s low-salaried university graduates to put together competitive bids overseas. However, TRP’s export growth did not take off until after 1991, when India’s liberalization of input purchases and foreign exchange allowed Mr. Banerjee to travel overseas freely and purchase inputs in a timely way.

Domestic firms such as TRP, joined by the emerging technically talented Indian diaspora, provided the skills for India to play a major role in the global information technology industry. In the late 1990s, Chinese and Indian immigrants ran one-third of the high-technology firms in the Silicon Valley, California. Indianand

5 The marketing consultant Rama Bijapurkar labels call center workers, some with changing attitudes toward family, romance, marriage, and material possessions, as “liberalization children.” The post-1991 liberalization, which stimulated the demand for cellphones, motorcycles, cafe´ dining, and Western-style consumer imports demand, helped create a young affluent class that included information technology employees (Slater 2004:A1).

8Part One. Principles and Concepts of Development

Indian-American-owned companies in the United States, frequently spinoffs from large American companies, have become suppliers to former U.S. employers or other contacts, using Indian employees. Moreover, Indian software firms raised capital in the United States to acquire U.S. companies, set up offices to interact with clients, and undertake research and innovation. India undertook innovation and skill deepening in “solid systems integration skills, imaging and scientific programming, such as GIS and CAD/CAM, and real time programming, such as telecom, multimedia, and e-commerce.” India’s software sector represents “the first time India has produced a skill-based, high value export-oriented sector. The sector has also attracted considerable foreign direct investment by multinational corporations and brought in some expatriate professionals” (D’Costa 2002, with quotations from pp. 10, 4).

India’s ICT production grew from $10 million in 1986–87 to $1.7 billion in 1994– 95 to $16.5 billion ($9.5 billion exports) in 2002–03, comprising 3 percent of GDP and 18 percent of exports. In 2002, Forbes ranked India’s software services magnate, Wipro’s Azim Premji, 41st in the world in net worth, with $6.4 billion, and one of the other top 500 billionaires was from India’s software industry (NASSCOM 2003a; NASSCOM 2003b; NASSCOM 2003c; D’Costa 2002:1, 5). “Mumbai, . . . a highly developed financial and commercial center [has] large software firms, such as TCS, Tata-Infotech and Citibank.”6 Still, India’s global ICT share in 2001 was just over 1 percent (D’Costa 2002:8).

India’s and Asia’s Golden Age of Development

India’s recent growth is a part of a golden age of development for Asia (Bhalla 2002:195), during years of globalization (expansion of trade and capital movements), 1980–2000. From 1980 to 2000, the absolute incomes of the industrialized countries’ middle class “slowed down to a crawl – only 1.2 percent a year, a third of that experienced by their parents – [while] that of Asian elites slowed down only marginally – to 2.9 percent” (ibid., p. 195). The impact of this has been most substantial among the world’s middle class (income range of $US10–$US40 a day or annual purchasing-power equivalent income, at 1993 prices, between $US3,650 and $US14,600). The relative income of Asian elites (top 10 percent of income earners) increased from 43 percent in 1980 to 60 percent in 2000 of the middle 50 percent of industrialized countries’ income earners, a group with comparable education and skills.

ASIA’S COMPETITION AND AMERICAN PROTESTS

Globalized firms, in their search for lower costs, are hiring Indians (and Chinese, Bangladeshis, and Malaysians) to do their work in place of middle-class Americans, Britons, Swedes, or Dutch; and in some instances, as noted earlier, Asians are subsequently establishing enterprises that compete globally. Figure 1-1 shows U.S.

6 Tata, named for Jamshedjee Tata, who established India’s first steel mill in 1911, is India’s largest industrial house.

U.S. Income Relative to That of Developing Regions, 1960–2000. Sources: Bhalla 2002:192; WIDER 2002; World

FIGURE 1.-1

Bank 2002h. CD-ROM.

9

10Part One. Principles and Concepts of Development

income, 1960–2000, falling relative to East and South Asia, virtually unchanged relative to Latin America, and increasing substantially relative to Africa.

In the 1960s and 1970s, those representing large U.S. corporate interests, such as Nelson Rockefeller, a liberal Republican, supported populist programs of health, education, and welfare. In subsequent decades, as multinational corporations have become more footloose with greater global opportunities for outsourcing, these interests are more likely to oppose large government spending on educational and welfare programs for the middle and working classes.

Indian and Asian elites anticipate doubling real incomes in a generation. By contrast, the middle classes of the United States and other industrialized countries are facing a collapse in growth (doubling real incomes not in one but in three generations), more competition from foreign skills, and lowered expectations for a better life. Is it surprising that many U.S. and Western middle classes are protesting against globalization?

Latin America’s 2000 income relative to the United States is only 70 percent of its preglobalization value in 1960 (Bhalla 2002:192–96). Porto Alegre, Brazil, in Latin America (Mumbai, India in 2004) hosts an annual anti-globalization meeting, the

World Social Forum, a rival to the annual World Economic Forum for the world’s economic elites, usually held in Davos, Switzerland.

Although Asians protest the policy cartel of the IMF, World Bank, and U.S. government, they rarely protest against globalization, from which they benefit. Africa, by contrast, has few protests against expansion of global trade, capital movements, and outsourcing, from which it receives little benefit. Africans are more likely to complain about their lack of integration into the international economy.

Critical Questions in Development Economics

An introduction to development economics should help you gain a better understanding of a number of critical questions relating to the economics of the developing world. The following list is a sample of 19 such questions. Each is numbered to correspond to the chapter in which it is primarily discussed.

1.How do the poorest two-thirds of the world live?

2.What is the meaning of economic development and economic growth?

3.What is the history of economic development? How have developing countries performed economically in the last half century?

4.What are the major characteristics and institutions of developing countries?

5.What are the major theories of economic development?

6.Has economic growth in the third world improved the living conditions of its poor?

7.How can poverty be reduced in the rural areas of low-income countries?

8.What effect does population growth have on economic development?

9.Why is there so much unemployment in developing countries?

1. Introduction

11

10.What factors affect labor skills in the third world?

11.What criteria should be used to allocate capital between alternative projects? How important are information and other technology in economic development?

12.What factors contribute to successful entrepreneurial activity in developing countries?

13.Are humankind’s economic policies sustainable over the next few centuries?

14.What monetary and fiscal policies should a country use to achieve economic development with price stability?

15.How can LDCs export more and import less?

16.What policies can ease the international debt and financial crises in developing countries?

17.What trade strategies should developing countries use?

18.Should developing countries rely on market decisions or state planning in allocating resources?

19.Do price and exchange-rate decontrol, financial liberalization, deregulation, and privatization improve LDC performance?

Limitations of Standard Economic Approaches

These questions are only some of those to be explored. The answers may be more complex than you think. When analyzing the developing countries, rigid adherence to standard economic approaches, concepts, or paradigms creates problems. Unlike developed countries, developing economies frequently do not have a mobile and highly educated labor force, commercial farmers, large numbers of responsive entrepreneurs, a favorable climate for enterprise, a high level of technical knowledge, local ownership of industry, heavy reliance on direct taxes for revenue, a large number of export commodities, an average income substantially above subsistence, a well-developed capital market, or a high savings rate. The problems of developing economies are often unique. You may have to unlearn much when studying their economies. As a leading development economist, Dudley Seers (1963:77), suggests: “The abler the student has been in absorbing the current doctrine, the more difficult the process of adaptation” to a study of the developing world. Although this is probably overstated, you must set aside your preconceptions and keep your mind open to other approaches and concepts in analyzing a world different, in many ways, from the United States, Canada, and Western Europe.7

A related warning is to be skeptical of development statistics. Examining and making inferences from development statistics is serious business. Surjit Bhalla (2002)

7 Seers (1963:77–98) contends that calling a book that deals primarily with the U.S. economy Principles of Economics is like calling a book dealing with horses Animals. Indeed, for Seers, development economics, which analyzes the 75–80 percent of the world in developing countries plus comparisons with the growth record of industrialized economies, is much closer to general principles of economics.

12Part One. Principles and Concepts of Development

shows that, contrary to received wisdom in development economics, global inequality and poverty rates are not increasing but declining. He says (ibid., p. 163) that “The disillusionment with the processes of [recent] growth was in large part an unintended outcome of a revolution, a changed paradigm, in the measurement of poverty, a paradigm that carried no less a signature than that of the World Bank. A large part of this disillusionment is an illusion. . . . [An] unwarranted mix [of survey data on poverty with national accounts data on income] is the source of popular disillusionment. The mixed-up observation [is] due to the mix-up of using Peter’s poverty (from survey data) and Paul’s income (from national accounts data).” This issue, discussed in Chapter 6, is only one example of economists’ flaws in interpreting developing countries’ data.

TERMS TO REVIEW
	Davos		Porto Alegre
	International Monetary Fund		World Bank
	less developed countries (LDCs)		World Economic Forum
	policy cartel		World Social Forum

QUESTIONS TO DISCUSS

1.What do you hope to gain from a course in economic development (other than a good grade)?

2.Why is studying economics so central to understanding the problems of developing countries?

3.What impact might rapid economic development have on the lifestyle of Balayya’s family? Kolkata’s marginally employed? Software workers and capitalists?

4.What effect has globalization and outsourcing had on income and employment in North America? In India and China?

5.Would you expect the development goal for the Indian poor to be a lifestyle like that of the Smiths?

6.Why are economic theories about developing countries different from those based on Western experience? What assumptions are involved in each case?

7.Give an example of how rigid adherence to Western economic theory or uncritical examination of development statistics may hinder understanding the developing world.

GUIDE TO READINGS

The Guide to Chapter 2 lists major statistical sources on LDCs and industrialized countries, including, in some instances, Internet Web sites. Bhalla (2002) critiques these statistical sources.

1. Introduction

13

Arndt (1987) traces the history of thought about economic development as a policy objective. Meier and Seers, Pioneers in Development (1984), use biography to examine the history of the field. Meier (2005) examines the evolution of development economics during the past 50 years.

Rodrik, “Growth strategies” (2004), http://ksghome.harvard.edu/ .drodrik. academic.ksg/papers.html, is a paper in Aghion and Durlauf’s Handbook of Economic Growth. In addition to Rodrik’s essay, preliminary contents of this handbook include the neoclassical and Schumpeterian growth models; the transition from stagnation to growth; poverty traps; econometrics of economic growth; crosscountry growth patterns; the world income distribution; scale effects; measuring quality change and externalities; growth accounting; historical perspectives on growth, technology, and institutions; general purpose technologies; trade specialization and growth; the effects of inequality on growth; inequality and development; political regimes, institutions, property rights, and growth; financial markets and growth, urban development, and human capital; demography and growth; policy and growth; the effects of technical change on wage inequality; growth and the size of nations; growth and the environment; social consequences of growth; social capital; and two essays on reflections on growth theory (see http://www.elsevier.com/inca/ publications/store/6/2/2/1/3/1/622131.pub.htt).

Other development surveys include Eatwell, Milgate, and Newman (1989), Stern (1989), and, with bibliographies, Chenery and Srinivasan (1988, 1989).

Seers (1963) is the focus of discussion by Martin and Knapp (1967), the proceedings of a conference on teaching and learning development economics. Seers (1969: 1–16) examines “The Meaning of Development,” reprinted in Lehmann (1979), with critical essays on development theory by Seers, Nafziger, Cruise O’Brien, and Bernstein. Lal’s The Poverty of “Development Economics” (1985) criticizes Seers’s emphasis on government involvement in LDCs (see Chapter 18).

The February 1986 issue of World Development 14 is devoted to a review of the methodology of development economics. Streeten (1985) examines development theories. Nobel laureate Gunnar Myrdal (1970:3–29) discusses values and biases in development economics.

Jagannathan and Halder (1988:1175–78) is excellent on Kolkata pavement dwellers.

On my Web site, http://www.ksu.edu/economics/nafwayne/, clicking Links to Economic Development will take you to a list of development journals, as well as to links to journals on economic development and developing countries; online journals and databases; general resources in economic development; economics departments, institutes, and research centers in the world in economic development; collections, publications, and institutions in economic development; international agencies; development economics abstracts; Japan, Eastern Europe, and the former Soviet Union, searching on Lexis-Nexis; resources on natural resources and the environment; news on developing countries; and other economic sites.

Students have access to a wealth of material on the Internet. An Internet assignment for each chapter to accompany this text can be found at http://www.

14Part One. Principles and Concepts of Development

ksu.edu/economics/nafwayne, by clicking Internet Assignments for Nafziger,

Economic Development.

Texts no longer need maps and country information on developing countries, as U.S. government URLs provide this information. My Web site provides links to background notes at http://www.state.gov/r/pa/ei/bgn/; and country listings, with maps and information about the economy and government, at http://www.odci.gov/ (click on “the World Factbook”).

2The Meaning and Measurement of Economic Development

Scope of the Chapter

This chapter discusses the meaning, calculation, and basic indicators of economic growth and development; the classification of rich and poor countries; the priceindex problem; the distortion in comparing income per head between rich and poor countries; adjustments to income figures for purchasing power; alternative measures and concepts of the level of economic development besides income per head; the problems of alternative measures; and the costs and benefits of economic development.

Growth and Development

A major goal of poor countries is economic development or economic growth. The two terms are not identical. Growth may be necessary but not sufficient for development. Economic growth refers to increases in a country’s production or income per capita (Box 2-1). Production is usually measured by gross national product (GNP) or gross national income (GNI), used interchangeably, an economy’s total output of goods and services. Economic development refers to economic growth accompanied by changes in output distribution and economic structure. These changes may include an improvement in the material well-being of the poorer half of the population; a decline in agriculture’s share of GNP and a corresponding increase in the GNP share of industry and services; an increase in the education and skills of the labor force; and substantial technical advances originating within the country. As with children, growth involves a stress on quantitative measures (height or GNP), whereas development draws attention to changes in capacities (such as physical coordination and learning ability, or the economy’s ability to adapt to shifts in tastes and technology).

The pendulum has swung between growth and development.1 A major shift came near the end of the UN’s first development decade (1960–70), which had stressed economic growth in poor countries. Because the benefits of growth did not often spread to the poorer half of the population, disillusionment with the decade’s progress

1 Immediately after World War II, scholars and third-world governments were concerned with wider objectives than simply growth. However. the Nobel laureate W. Arthur Lewis (1955:9) set the tone for the late 1950s and 1960s when he noted that “our subject matter is growth, and not distribution.”

15