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GROWTH

AND

DEVELOPMENT

GROWTH AND DEVELOPMENT with special reference to developing economies A. P. THIRLWALL Reader in Economics,
GROWTH AND
DEVELOPMENT
with special reference to
developing economies
A. P. THIRLWALL
Reader in Economics, University of Kent at Canterbury
Macmillan Education

ISBN 978-0-333-12207-5

ISBN 978-1-349-15472-2 (eBook)

DOI 10.1007/978-1-349-15472-2

© A. P. Thirlwall 1972 Reprint of the original edition 1972 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission.

First published 1972 by

THE

MACMILLAN

PRESS

LTD

London and Basingstoke Associated companies in New York Toronto Dublin Melbourne Johannesburg and Madras

SBN 333 12206 2 (hard cover) 333 12207 0 (paper cover)

The paperback edition of this book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out, or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser.

TO GIANNA FOR LORENZO

Contents

 

PREFACE

 

XI

1

DEVELOPMENT

AND

UNDERDEVELOPMENT

 

Current Interest in Development Economics

 

The

World Distribution

of

Income

6

The Development Gap

9

Per Capita Income

as an Index

of

Development

 

19

The Measurement and Comparability

of

Per Capita Incomes

24

The Stages of Development

 

27

Rostow' s Stages

of

Growth

31

2

THE

PRODUCTION

FuNCTION

APPROACH

TO

THE

STUDY

OF

THE

CAUSES

OF

GROWTH

38

The Anafysis

of

Growth

 

38

The Production Function

40

The

Cobb-Douglas Production Function

 

43

Embodied Technical Progress

 

51

Improvements in

the

Quality

of

Labour

55

Resource Shifts

56

Empirical Evidence

57

Appendix

2.1:

Denison on' Why

Growth Rates Differ'

 

61

3

LAND,

LABOUR

AND

AGRICULTURE

 

72

The Role

of

Agriculture in Development

73

The

Growth

of

the Money Economy

 

76

Economic Development with Unlimited Supplies of Labour

80

Disguised Unemployment

 

87

Incentives and the

Costs

of

Labour

Tranifers

 

94

4

CAPITAL

AND

TECHNICAL

PROGRESS

97

The Role

of

Capital in Development

 

97

viii

CONTENTS

Technical Progress

105

Capital-

and Labour-saving

Technical Progress

105

How Societies Progress

Technologically

 

109

Learning

111

Education

113

5 THE

PERSISTENCE

OF

UNDERDEVELOPMENT

117

Dualism

118

The Process

of

Cumulative Causation

 

120

The Population

'Problem'

128

Facts about

World Population

133

The

' Optimum' Population

136

A

Model

of

the Low-level Equilibrium

Trap

139

The

Critical Minimum Effort

Thesis

145

6 THE

ALLOCATION

OF

RESOURCES

 

148

The Broad Policy Choices

148

Industry versus Agriculture

150

The

Comparative Cost Doctrine

 

150

Labour-intensive versus Capital-intensive

Technology

151

Balanced versus

Unbalanced Growth

153

Unbalanced Growth

158

Investment Criteria

166

The Minimum Capital-Output Ratio Criterion

168

The Social Product Criterion

170

The Marginal Per Capita Reinvestment Quotient Criterion

172

The Labour Absorption Criterion

175

Balance

of

Payments Considerations

 

176

The Social

Welfare Function

178

7 PLANNING

ECONOMIC

DEVELOPMENT

180

Arguments for and against Planning

 

180

Development Plans

183

Policy Models

185

Projection Models

188

Appendix 7. r:

Input-Output Analysis

 

189

Appendix 7.2:

The Programming Approach to Development

201

Linear Programming

203

Appendix 7.3:

The Planning

Wage

212

CONTENTS

ix

8 FINANCING

DEVELOPMENT

224

A. DOMESTIC

RESOURCES

FOR INVESTMENT

226

Voluntary Saving

226

Involuntary Saving

228

Taxation

229

Deficit Finance

233

Inflation

236

The Causes if Inflation in Less Developed Countries

240

B. FOREIGN

RESOURCES

FOR

INVESTMENT

244

Dual-gap Anarysis and Foreign

Borrowing

244

The Savings-Investment Gap

247

The

Export-Import, or Foreign Exchange, Gap

248

Two Gaps in Practice

250

Foreign Borrowing and the Debt-servicing Problem

252

International Assistance

259

Official Bilateral and Multilateral Assistance

262

Private Foreign Investment

263

Criteria for the Allocation if Assistance

265

Technical Assistance

269

Tied Assistance

269

British Assistance to Less Developed Countries

272

Recent Trends in Savings and Investment in Less Developed Countries

275

9 TRADE

AND

DEVELOPMENT

277

The Gains from Trade

280

New Trade Theories for Developing Countries: The Prebisch Doctrine

287

Technical Progress and the Terms if Trade

288

The Income Elasticity if Demandfor Products and the Balance if Payments

289

Recent Trends in the Terms if Trade

292

Trade Theory and Dual-gap Anarysis

293

Trade Policies

295

Trade

Priferences and Effective Protection

297

International Commodity Agreements

300

X

CONTENTS

Restriction Schemes

 

302

Price Compensation Agreements

 

303

Income Compensation Schemes

305

REFERENCES

AND

FuRTHER

READING

307

INDEX

317

Preface

This book is offered as an introduction to certain topics in develop- ment economics, with particular emphasis on the economic obstacles to development and the economic means by which less developed countries may raise their rate of growth of output and living standards. This does not mean that it provides a recipe or blueprint for development in the present less developed countries -far from it. There can be no general recipes of this nature, and even if there were there would have to be more than economic ingredients. It is possible, however, to highlight certain fundamental principles and economic truths common to all countries which have set themselves the objective of development, and this is the purpose here. The text is primarily theoretical, and the discussion ranges from the mundane to the technical. This may be offputting, but is virtually inevitable with a subject like development which draws on all branches of economics, and which applies a large chunk of economic analysis to one particular country or set of countries. Certain obvious things need saying about the development process, while the analysis of particular development difficulties and their solution can become quite complex. The most technical aspects of the book on planning techniques are relegated to appendices in Chapter 7. Despite its theoretical emphasis, no more than an elementary knowledge of economics is required, such as a student may receive in a first-year economics principles course. Indeed, the course on which this book is built was originally designed to provide a balanced diet for students studying the sociology and politics of development with no more than one year's elementary exposure to macro- and micro-economic theory. Mathematics is kept to a minimum and there is no recourse to sophisticated growth models. Some readers may be worried by the neglect of non-economic factors in the growth process. The emphasis on the economics of development is not to deny or demote the importance of non- economic factors; rather it is a reflection of my interest and com- petence. Having said this, however, I think the importance of

xii

PREFACE

institutional barriers to development is often exaggerated. As Maddison 1 and others have remarked, the desire for material improvement in less developed countries is very strong - certainly strong enough to counter any institutional barriers that may exist- and the evidence is not very convincing that basic institutional reform is a necessary precondition of accelerated growth. But, in any case, it is my firm belief that the economist has something positive to offer by way of analysis unadulterated by sociological, political and other non-economic variables. It is a favourite pastime of other social scientists to criticise economists for ignoring institu- tional considerations. We now seem to me to be in the opposite danger of a great deal of woolly thinking about what raising living standards is all about. In the final analysis, growth must be con- sidered as an economic process in the important practical sense that it is unlikely to proceed very far in the absence of an increase in the quantity and quality of the resources available for production. Even if we concede that the availability of resources may depend on non-economic factors such as attitudes towards effort, saving, risk-taking, and 'maximising' in general, this does not make non- economic factors prime determinants of development. Their impact is indirect. This is how economists tend to view the relation between development and the institutional environment, and this will be the implicit assumption throughout the present volume. In preparing this book I have been haunted by that celebrated review which began: 'There is much in this book which is new and true; unfortunately that which is new is not true and that which is true is not new!' There is nothing in this present volume which is new either of a theoretical or an empirical nature. I hope, however, that what is not new does not deviate too radically from 'truth' or relevance, and that what is 'true' provides a useful synthesis for an introduction to a course in development economics. Finally, I should make the point that in studying development and the economic difficulties ofless developed countries one would have to be extremely insensitive not to form fairly strong views on the way development problems ought to be tackled. Economists, except perhaps those who return from less developed countries and become anecdotal, have tended in the past to be a trifle detached and rather

1 A. Maddison,

Economic Progress and Policy in Developing Countries (London:

Allen & Unwin, 1970).

PREFACE

xiii

reticent in expressing their views in this controversial area. While on the whole this book follows the positive tradition, there are occasions where there is resort to value judgements. Since this book has arisen out of a series oflectures given to third- year undergraduates at the University of Kent, I should like to express a debt of gratitude to at least three cohorts of students who endured the role of guinea pig so patiently. I am also very grateful to my colleague Roger Hill who read the entire manuscript in draft and pointed out many slippages and obscurities·. But I cannot implicate him in my views or analysis, because I know that he disagrees with a good deal of the approach I have taken - especially the presentation of theoretical skeletons without much empirical flesh, and my neglect of non-economic factors. None the less, I have valued his discussion enormously. Finally, I must thank the editors

of the National Westminster Bank Review, Moneta e Credito and the Scottish Journal cif Political Economy for allowing me to reproduce

material previously published in their journals, and Miss Margaret Hawkins for typing the entire manuscript with her usual cheerful efficiency.

Keynes College, University cif Kent at Canterbury,

1971

A.P. T.

The First Law of Development

'For·unto everyone that hath shall be given and he shall have abundance, but from him that hath not shall be taken away even that which he hath.'

(Matthew 25: 29)

I

Development and Underdevelopment

Current Interest in Development Economics

Current academic interest in development economics is a relatively recent phenomenon. For the student today it must be difficult to realise that twenty years ago a course in development economics was a rare feature of an undergraduate programme in economics, and that textbooks on development were few and far between. Similarly, active public concern with the poorer nations ofthe world is of equally recent origin. The majority of the national and inter- national agencies to promote development that we are familiar with today have been established since the Second World War. Before the war the poor countries of the world were categorised as un- developed and relatively neglected. Today the situation is very different. The blunt title of' undeveloped' has been dropped from use, to be replaced by a string of euphemistic labels ranging from 'underdeveloped' to 'emerging', expressing faith in the develop- ment potential of these countries. The development of the so-called Third World is now regarded as one of the greatest social and economic challenges facing mankind. What accounts for this ap- parent sudden change in interest and attitude? Three major stimuli can be pin-pointed. Firstly, there has been a renewed interest among professional economists in the process ofgrowth and the theory of planning. Secondly, the poor countries have become increasingly aware of their own backwardness, which has led to a natural desire for rapid development. Thirdly, with the growth of nationalism in the world, and the cold war, the developed countries have shown a growing political interest in poor and ideologically uncommitted nations.

2 GROWTH

AND

DEVELOPMENT

Academic interest in the mechanics of growth and development is a renewed interest rather than a new preoccupation of economists. The progress and material well-being of men and nations has traditionally been at the centre of economic writing. It constituted one of the major areas of interest of the classical economists. Smith, Ricardo, Malthus, Mill and Marx all dealt at some length (with divergent opinions on many issues) with the causes and conse- quences of economic advance. It is entirely natural that thinkers of the day should comment on the contemporary scene, and there is perhaps an analogy here between the preoccupation of the classical economists at the time of Britain's industrial revolution and the concern of many economists today with the economics of develop- ment and world poverty, which has been brought to the world's attention so dramatically in recent decades. It is often said that we owe modern growth theory to the stagnatory state in which Western nations found themselves between the wars. Whether or not this is so, the challenge of development represents an equivalent challenge to economists today to that of depression and mass unemployment in the thirties. Advances in growth theory, coupled with more detailed knowledge of the sources of growth, and the refinement of techniques for planning and resource allocation, have all increased the possibility of more rapid economic progress than hitherto. Certain theoretical models and techniques have been used exten- sively in some countries. For example, models for calculating in- vestment requirements to achieve a target rate of growth invariably form an integral part of a development plan, and in some countries there have been experiments in recent years with such techniques as input-output analysis and linear programming. The question is often posed as to what lessons, if any, the present less developed countries can draw from the first-hand observations of the classical writers, or more directly from the development experience of the present advanced nations. One obvious lesson is that while development can be regarded as a natural phenomenon, it is also a lengthy process, at least left to itself. It is easy to forget that it took Europe the best part of three centuries to progress from a subsistence state to economic maturity. As for classical theory, however, the gloomy prognostications of Ricardo, Malthus and Mill that progress will ultimately end in stagnation would seem to be unfounded. Population growth and diminishing returns have not been uniformly depressive to the extent that Ricardo and Malthus

DEVELOPMENT

AND

UNDERDEVELOPMENT

3

supposed. Rising productivity and per capita incomes appear quite compatible with population growth and the extension ofagriculture. Classical development economics greatly underestimated the role of technical progress and international trade in the development process. It is these two factors, above all, which seem to have con- founded the pessimism of much of classical theory. With access to modern technology there is hope, and some evidence, that progress in today's less developed countries will be much more speedy than in countries in a similar state one hundred years ago. The pool of technology on which to draw, and the scope for its assimilation, is enormous. Used with discretion, it must be considered as the main means of increasing welfare. As for trade, however, the present less developed countries are probably in an inferior position com- pared with the present advanced countries at a comparable stage of their economic history. The dynamic gains are present but the static efficiency gains are less and the terms of trade undoubtedly worse. At the present time the gains from trade are very unequally distributed between rich and poor countries. This, of course, does not destroy the potential link between growth and trade or con- stitute an argument against trade; rather it represents a challenge for altering the terms on which trade takes place. The greater knowledge and acceptance of planning may also mean that the development experience of the present less developed countries will be less protracted and painful than in the past. Plan- ning can call forth the prerequisites of development more ex- peditiously than the market mechanism, which takes time to operate, and provided attention is paid to the income distribution, the sum total of sacrifice of present generations need be no more severe per individual. New techniques in economic theory, such as input- output analysis and mathematical programming, have given a big boost to development planning. The present generation of develop- ment economists are no longer involved simply with identifying strategic factors in the growth process but also with the scope and role of planning to achieve greater static and dynamic efficiency in resource allocation. Classical economists were concerned with the conditions for static efficiency but, by and large, were either anti- thetical to interference with the market mechanism or regarded interference as irrelevant and therefore uninteresting. Today there is much greater acceptance of interference with the market mech- anism, and planning in less developed countries is seen by many as

4 GROWTH

AND

DEVELOPMENT

the main means by which the development process may be speeded

up.

Some

would

go further

and

argue for

the

complete

abandon-

ment of the market mechanism for the allocation of resources.

The

Soviet Union is

central

bution

direction can make to rapid economic advance. Planning requires a certain amount of 'model' building and this,

too, has

model, which forms

invest-

frequently pointed to as

of the

an example of the contri-

by

type

of

that

that

the replacement

by

market mechanism

The

most

of the

that

been inspired

the

economists.

basis

of much

is

common

model-building

the

less

developed countries indulge in,

to calculate

ment requirements necessary to

achieve

a target rate

of growth

of

per

capita

income -

commonly referred

to

as

a

Harrod-Damar

model. Neither

for

tries,

given a big fillip to macro-planning in less developed countries. We

shall consider

development planning.

the

models

of Harrodl

or

Domar2

were designed

developed coun-

the purpose

to which they are now put in less

but there can be no dispute that their growth equations have

later

the

uses

of this type

of aggregate

model

in

Enough has been

said perhaps

to indicate

the contribution that

in the

process of growth and development. A second major factor account-

been

the

economist has

the upsurge

made

to the

current

pervasive interest

has

ing for

of interest in development economics

the poorer nations' accelerated awareness of their inferior economic

and political status in

the

world,

and

a desire for greater political

has been precipitated

developed

rising expectations as

developed countries have

themselves

recognition through economic strength.

by

decolonisation

and

by

nations,

development has

shown

and

in

strengthened

proceeded.

The

recent years a

marked

less

This

by

increased contact with

from within

the

determination

to pull

up

by

their

own bootstraps,

assisted,

in

the

words

of Professor

Hicks,

'by such crumbs of aid as the richer countries are willing to

spare,

and as they themselves are willing to accept'.3

Lastly,

the developed countries

in

recent

years, especially

the

two major power blocs, have been compelled out of political neces-

1 R. Harrod, 'An Essay in Dynamic Theory',

Economic Journal

and

Towards a Dynamic Economics

(London: Macmillan, 1948).

(Mar 1939),

2

E.

Domar, 'Expansion

and

Employment',

American

Economic

Review

(Mar

1947).

3

J. Hicks, 'Growth and Anti-Growth',

Oxford Economic Papers

(Nov 1966)

DEVELOPMENT

AND

UNDERDEVELOPMENT

5

sity to rethink their political and economic relations with the poorer

nations of the world.

Western capitalist and the

cially for the favours

political

less

motives.

The East-West divide has virtually forced the

Communist countries

to compete finan-

of large parts of the Third World for obvious

of

the

side-effects

of the

urgent

for improved living standards

is

desire

of

that they

One

developed countries

have allowed themselves to become a political battleground for the

great powers in the cold war.

On the credit side, though,

there has

affirmation

also

obligation towards

been politically inspired.

been

an

by many developed

Not

all

aid

countries

and

of a moral

poorer nations.

The

assistance has

countries, especially over

developed

the last decade, have been showing genuine concern over the plight

of the less developed world, which has resulted in the establishment

and

support

of several

institutions

countries,

the first Develop-

between the

albeit slowly, as an

the propagation of this ideal is not

to assist

developing

and which led the period

ment

Decade.

The

goal

1960-70 to

of greater

be named

income equality

citizens of a nation seems to be gaining support,

ideal among nations.

Moreover,

confined to

the supra-national institutions that have been especially

established

to further

it. Recent years

have witnessed

the spon-

taneous creation

of several

national pressure groups,

in

different

parts of the world, whose platform is the abolition of world poverty;

and the Church, which has remained silent for so long, is now making

its

voice heard.

The Roman

Catholic

Church recently

announced

the

sale

of property

in

Paris valued

at

$1

million

to

establish

a

development fund for

the

Inter-American Development Bank.l It is now difficult to believe, as

Latin

America to

be administered

by

cynics

sometimes argue,

that

indignation

over

world

poverty

is

largely

a cover for

the

selfish realisation among

developed nations

that their survival depends on racial and economic harmony which

cannot

thrive

in

(with

the divide

a

world

perpetually divided

poor

the division between

into rich

and

broadly corresponding to

the

white

and

other races).

But whatever the

motive

for

concern,

the

reality

of world

poverty

and

underdevelopment

cannot

be

escaped. Furthermore,

it is

likely

to persist for

many years

in

the

future.

The

economist has

a

special responsibility

to

contribute to

an understanding of the economic difficulties these nations face and

to point to solutions.

economic divisions in the world as

Let us

start by establishing the magnitude of

precisely as the

data will allow.

1

The

Times,

27

Mar

1969.

6 GROWTH

AND

DEVELOPMENT

The World Distribution of Income

By any standard one cares to take, the evidence is unequivocal that the world's income is distributed extremely unequally between nations and people, and that there exists in the world a broad north- south divide into rich and poor countries. For example, if figures are taken for the distribution of gross domestic product per capita expressed in U.S. dollars, and ignoring measurement problems for the time being, the following picture emerges for the year 1963 from

the United Nations' Yearbook of National Accounts Statistics, zg66. Of

the 104 countries for which figures are published, from a total of 132 listed, 19 had registered per capita incomes of less than $100; 56 had per capita incomes between $100 and $500; 11 had per capita incomes between $500 and $1,000; and 18 had per capita incomes in excess of $1,000. (Those countries for which figures were not pub- lished for 1963 would have swelled the ranks of the first two distri- bution brackets.) Alternatively, considering the distribution of world income in relation to the distribution of population, and using $500 annual per capita income as an arbitrary dividing line between rich and poor countries, we find that approximately 20 per cent of the world's population is in receipt of approximately 70 per cent of the world's income and hence that 80 per cent of the world's population receives only 30 per cent of the world's income. Moreover, there is little evidence that this distribution has been narrowing over time. According to Kuznets, if Lorenz curves are drawn by ranking classes of countries in ascending or descending order of the ratio of their percentage share of total incomes to their percentage share of total population, and the cumulative distribution of income is plotted against the cumulative distribution of the population for the years 1894--5, 1938 and 1949, one would not find the curves shifting closer to the 45° line (which represents a perfectly equal distri- bution).! In short, while per capita income has been rising in the low-income countries, it must have been growing as fast, if not faster, in the high-income countries during the first half of the twen- tieth century. Since 1949, the evidence is not so clear-cut. According to statistics presented by Mueller to the annual meeting of the American

1 S. Kuznets,

'Regional Economic Trends and Levels of Living', in

DEVELOPMENT

AND

UNDERDEVELOPMENT

7

Statistical Society

(see Table

1.1),1 there is

some evidence that the

distribution

may

have narrowed since

1949,

at

least during

the

first half of the

Table

1.1

is

1950s.

based

countries covering

80

on income

per

cent

and

population

data

for seventy

of the

world's population.

When

Lorenz curves are constructed from the data

(see Fig.

1.1), Mueller

finds

they

give unambiguous

results

for

1957 compared to

1949

and

1962, but that the curves cross for 1949 and

1962.

 

TABLE

1.1

 

The

World Distribution of Income

 
 

%

ofworld

%

of world income

population

1949

1957

1962

Low-income countries

67

15

17

15

Middle-income countries

15

18

18

19

High-income countries

18

67

65

66

When two Lorenz curves

cross, precluding a

definite conclusion

on distribution from a

visual inspection of the curves, a

more pre-

cise measure of distribution is required.

A common procedure is

to

express the

area

enclosed between

the Lorenz curve

and

the 45°

line as

a ratio of the total area below the 45° line. This is

the Gini

coefficient of concentration which varies from 0 (complete equality)

to

ratio yielded the

1

(complete inequality). Calculation

of this

following results:

0·654

(1949),

0·627

(1957)

and

0·640

(1962).2

Mueller therefore concludes

that the relative income

gap

between

rich and poor countries declined somewhat between 1949 and

rose a equality in the early

1957,

in-

little between 1957

and

1962,

but

showed

no

greater

1960s compared with 1949.

Andie

and

Peacock, however,

reach

a different conclusion.3

Taking sixty-two countries, they found that the Lorenz curves cross

for

1949

and

1957,

and that the

concentration ratio

1949

is

approximately

the

same (0·637

But while

the

concentration

ratios

are

and

0·636

roughly

the

1957

respectively).

for

and

same,

Andie

1

2

3

Reproduced in a letter to

Information supplied by Mueller.

The Economist,

11

Oct

1969.

S.

Andie and A.

Peacock,

'The International Distribution of Income,

1949 and

1957',

Journal cifthe Royal Statistical Sociery,

part 2 (1961).

8

GROWTH

AND

DEVELOPMENT

and

Peacock concluded

that

the relative position

of the

less

de-

veloped countries must have worsened considerably because of the

much faster growth of countries in the upper quintile of the income

distribution than in the lower quintile.

This is certainly true

of the

IOOr---------------------------------------------------------------------~

"'E

0

u

c:

0

-

c:

"'

u

"'

a

1957~

,•':;:/

;7

-~

;:.:::----1962

\

Per

cent

of

population

FIG.l.l

100

countries of Western Europe compared to the less

tries, which is illustrated in Table

developed coun-

1.2 (p.

12 below).

Turning

to

the

spread

of per

between countries,

1963 from a recorded $35 per annum

capita

income

this is also colossal, ranging in

in Malawi to

$4,902 per annum in Kuwait.

We may also note the

dispersion of the

continents

which was $590 in

average per capita income figure for the different

the average

per

capita income for

the

world,

1963. The continents are listed in ascending order

around

of 'richness' :

Asia (excluding Japan),

$100; Africa,

$110

(1958) ;

Middle

East,

$230

(1958);

Latin America,

$330;

Europe,

$1,080;

(dates in parentheses refer to the latest

available figures published by the United Nations).

a

relatively recent phenomenon. All countries were once at subsistence

and North America, $2,770

It

is

easily forgotten

that

the

rich-poor

country

divide

is

DEVELOPMENT

AND

UNDERDEVELOPMENT

9

level, and as recently as two hundred years ago, at the advent of the British industrial revolution, absolute differences in living standards between countries on average cannot have been as great as all that. The average per capita income of the less developed countries today is approximately $150 per annum, and as far as we know this was about the average level of real per capita income in Western Europe in the mid-nineteenth century. If we regard $150 as only barely above subsistence, the major part of present income disparities between developed and less developed countries must have arisen over the last century. Some countries, through a combination of fortune and design, have managed to grow much faster than others. The overriding influence has been industrialisation and the tech- nological progress entailed. The concentrated impact of indus- trialisation on living standards in the Western world is dramatically emphasised by Patel's illustration that if six thousand years of man's 'civilised' existence prior to 1850 is viewed as a day, the last century or so represents less than half an hour; yet in this 'half-hour' more real output has been produced in the developed countries than in the preceding period.l It is true that living standards in the less developed countries are currently rising faster than at any time in the past; but so, too, are living standards in the developed countries, and the gap between rich and poor countries continues to widen. Although development consists of more than a rise in per capita incomes, income disparities are the essence of the so-called develop- ment 'gap'. Let us examine the nature and magnitude of the gap more closely.

The Development Gap2

The statement that 'the rich countries get richer and the poor countries get poorer' has become a popular cliche in the literature on world poverty, but without much discussion of the facts or the precise magnitude of the development task facing the less developed countries if the per capita income gap between rich and poor nations is to be narrowed. Indeed, the statement itself is not unambiguous.

1 S. J. Patel, 'The Economic Distance between Nations: Its Origins, Measurement and Outlook', Economic Journal (Mar 1964). 2 The substance of this section was first published in the National West-

minster Bank Review (Feb 1970), and reprinted in Rivista Internazionale di Scienze Economiche e Commerciale (Mar 1970).

10 GROWTH

AND

DEVELOPMENT

Since living standards in all countries tend to rise absolutely over time, it obviously refers to the comparative position of poor countries, but is the comparative position being measured taking absolute or relative differences in per capita income? How should the develop- ment 'gap' be assessed? Unfortunately there is no easy answer to this question, yet the answer given has a profound bearing on the growth of per capita income that poor countries must achieve either to prevent a deterioration of their present comparative posi- tion or for an improvement to be registered. Relative differences will narrow as long as the per capita income growth rate of the less developed countries exceeds that of the developed countries; and this excess of growth is a precondition for absolute differences to narrow and disappear in the long run. In the short run, however, a narrowing ofrelative differences may go hand in hand with a widen- ing absolute difference, given a wide absolute gap to start with, and thus the rate of growth necessary to keep the absolute per capita income gap from widening is likely to be substantially greater than that required to keep the relative gap the same. But suppose the relative gap does narrow, and the absolute gap widens, are the poor countries comparatively better or worse off? There is a tendency in economics to measure phenomena, especially dispersions of income, in relative rather than absolute terms - to compare differences in the rates of change of variables, rather than absolute differences, as with Lorenz curves. In com- paring rich and poor countries, however, it is not difficult to argue that even if a relative per capita income gap is narrowed, the comparative position of the poor may have worsened because the absolute gap has widened. Take for illustration the case of the average Indian living on the equivalent of $100 per annum com- pared with the average American living on approximately $4,000. Suppose the Indian's income rises by 20 per cent and the American's income by 10 per cent. The Indian is now relatively better off, but is he not comparatively worse off? The American's increased com- mand over goods and services (i.e. 10 per cent of$4,000) far exceeds that of the Indian (i.e. 20 per cent of $1 00), and unless marginal utilities differ radically, divergences in total utility and welfare will widen in favour of the American. On welfare grounds there would seem to be a case for paying as much attention to absolute differences in per capita income between rich and poor countries as to rates of growth of per capita income.

DEVELOPMENT

AND

UNDERDEVELOPMENT

11

In the Development Decade 1960-70, however, both the relative and absolute per capita income gap between the rich and poor 'continents' seems to have widened, as indicated in Table 1.2, which shows the rate of growth of gross domestic product (G.D.P.), population and per capita incomes (P.C.Y.) for the years 1950-60 and 1960-6 for selected areas of the world. There is no way to inter- pret these figures other than pessimistically. Figures for continents disguise differences between countries within continents, but for Mrica, East and South Asia, and Latin America as a whole the growth of living standards clearly fell short of growth in Europe and North America in the first half of the 1960s. Only southern Europe and the Middle East exceeded the performance of the more ad- vanced countries. And, in general, the experience of the early 1960s was worse than the decade of the 1950s. Now let us turn to the future comparative position of the less developed countries, and the magnitude of the development task as far as more equitable world living standards are concerned. To avoid the issue of whether strategy and assessment should be con- cerned with absolute or relative per capita income differences, and to facilitate quantification, matters will be made simple by assuming that the desirable goal is to narrow and eliminate both the absolute and the relative gap. We shall take as a target the per capita income ofAmerica and the existing countries of the European Economic Community (E.E.C.), and attempt to answer three specific questions as reliably as the data will allow:

1. Supposing that the E.E.C. countries and America, i.e. the United States (as representative of the developed world), experience per capita income growth of 3 per cent per annum from now until the year 2000, how fast would certain less developed countries have to grow for per capita incomes to be equalised by that date?

2. Given the above assumptions, how fast would the less developed countries have to grow merely to prevent the present absolute per capita income gap between rich and poor countries from being any wider in the year 2000?

3. Given the recent growth experience of certain less developed countries, and again assuming 3 per cent per capita income growth in the E.E.C. and America, how many years would it take for the per capita income gap to be eliminated?

12 GROWTH

AND

DEVELOPMENT

TABLE

1.2

Rates of Growth

Gross Domestic Product,

qf

Population and Per Capita Income,

1950-60 and 1960-6

1950-60

(%

p.a.)

1960-6

(%

p.a.)

 

('poor'

countries)

Africa

G.D.P.

4·4

3·3

Population

2·2

2·3

P.C.Y.

2·2

1·0

South Asia

G.D.P.

3·6

3-4

Population

1·9

2·5

P.C.Y.

1·7

0·5

East Asia

G.D.P.

5·1

4·9

Population

2·5

2·7

P.C.Y.

2·5

2·1

Southern Europe

G. D.P.

5·6

7·7

Population

1·4

1·4

P.C.Y.

4·1

6·2

Latin America

G.D.P.

4·9

4·7

Population

2·9

2·9

P.C.Y.

1·9

1·7

Middle East

G.D.P.

5·6

7·2

Population

3·1

2·9

P.C.Y.

2-4

4·2

 

('rich' countries)

North America

G.D.P.

3·3

5·0

Population

1-8

1·5

P.C.Y.

1·5

3·4

Western Europe

G.D.P.

4·7

4-4

Population

0·7

1·0

P.C.Y.

4·0

3·4

Source:

International Development Agency,

Annual Report,

1968.

DEVELOPMENT

AND

UNDERDEVELOPMENT

13

two questions we get some idea of the growth

task facing the less developed countries in their struggle not only for

By asking the first

parity

of living standards with

the

developed world

but

also

in

preventing

the

absolute

gap

in

living standards

from widening.l

The third question is designed to highlight how lengthy the catching-

up process is likely to be for the poorer countries if they do not achieve

per

capita income

growth substantially in

excess

of the

growth

of

developed nations.

tion if the growth of the poor countries is less than that of the devel-

3 per cent on our assumptions), except

There is,

of course, no answer to the third ques-

oped countries (i.e. less than

that the relative

and

absolute

per capita income gap between rich

and poor countries will widen for ever.

Given the basic data,

the solutions to the questions posed involve

no

interest:

value from the to the questions

tries from

more

than

X=

simple

r0(1

+

United

manipulation

r)n.2

Nations'

of the

formula for

compound

The basic data have been taken at face

Accounts Statistics,

answers

1.3 for a wide selection of coun-

and the

are given in Table

different continents.

A few

words

of caution

are

in

order before commenting on the

results.

the choice of the target year in the future but also on the figures for

The

answers to

the first

two questions

depend

not only on

1

The answers given,

of course, will be somewhat sensitive to

the target

year chosen.

Some year has to be taken and the year 2000,

No significance should be attached to the year 2000, however.

apart from marking the end

also provides a date far enough

away for action to be taken and results achieved to raise living standards in

of one millennium and the start of another,

the less developed nations.

2 The solution to question

1 is given by

r

=

-

(~Xt{To)

1

X

100;

the solution to question 2 is given by

r

=

-

(~[Xt

(Xo

-

To)/To]) -

1

X

100;

and the solution to question 3 is given by

t=

loge

r 11

Xo{To

- r.,

X 100

where

Xt

is per capita income in the E.E.C. and America in the year 2000

Xo

is base-period per capita income in the E.E.C.

and America

To

is base-period per capita income of the less developed country

n

is the number of years between the base period and the year 2000

r

11

r.,

is the

country

is

America.

rate

rate

the

of growth of per capita income

in the less developed

of growth

of per

capita

income

in

the

E.E.C.

and

14 GROWTH

AND

DEVELOPMENT

TABLE

1.3

The Development 'Gap'

(I)

(2)

(3)

(4)

(5)

Per

Recent

Per capita

Per capita

No. of years

capita

annual

income growth

income growth

required to

gross

growth

required in

required to

close gap

domestic

of

less developed

prevent from

between less

product

G.D.P.

country to

·widening the

developed

atfactor

per

reach P.C.Y.

absolute gap

country and

cost in

capita

of

between less

E.E.C./U.S.A.

$U.S.

(%)

E.E.C./U.S.A.

developed

(1965)

(by year 2000)

country and

Latin America

Argentina

783

Barbados

377

Bolivia

!53

Brazil

232

Chile

579

Colombia

267

Costa Rica

382

Dominican Republic

231

Ecuador

200

El Salvador

252

Guatemala

298

Guyana

296

Haiti

86

Honduras

207

Jamaica

453

Mexico

443

Nicaragua

325

Panama

474

Paraguay

200

Peru

238

Puerto Rico

1089

Trinidad and Tobago

661

Uruguay

562

Venezuela

916

Latin America

380

Africa

Algeria

206

Ethiopia

47

Gabon

369

Gambia

85

Ghana

265

Kenya

86

Liberia

251

Libya

707

Malawi

41

Mauritius

228

Morocco

180

Nigeria

68

Sierra Leone

136

Somalia

5\b

Sudan

96

Tanzania

69

Tunisia

188

Uganda

83

Zambia

206

Africa

110b

E.E.C./U.S.A. (by year 2000)

2·9

4·7

7·3

4·3

6·8

n.s.

n.s.

6·1*

7·0

9·5

6·1

8·3

43

69

4·8

9·7

12-4

8·6

IJ.l

124

169

-1·6

8·5

11·0

7-4

9·8

n.s.

n.s.

6·0

5·7

8·1

5·0

7-1

30

57

2·8

8·0

10·6

7·0

9·3

n.s.

n.s.

Q.7

6·9

9·4

6·0

8·3

n.s.

n.s.

0·8

8·5

11·0

7·4

9·8

n.s.

n.s.

1·6

8·9

11·5

7·8

10·2

n.s.

n.s.

1·9

8·2

10·8

7-1

9·5

n.s.

n.s.

2·5

7·7

10·3

6·6

9·1

n.s.

n.s.

4·9

7-7

10·3

6·7

9·1

83

125

0·1

1J.6

14·2

10·3

12·9

n.s.

n.s.

1·9

8·8

11-4

7·7

10·1

n.s.

n.s.

3·5

6·4

8·9

5·6

7·8

230

392

6·2

6·5

9·0

5·7

7·9

37

62

3·4

7-4

10·0

6·4

8·8

370

573

4·3*

6·3

8·7

5·5

7·7

85

147

5·8*

8·9

11·5

7·8

10·2

70

99

3·5

8·4

10·9

7-4

9·7

359

520

9·4

3·8

6·2

3·5

5·5

4

17

3·0

5·3

7·9

4·7

6·8

n.s.

n.s.

2·9

5·8

8·2

5·0

7-1

n.s.

n.s.

10·9*'

4·3

6·8

3·9

7·8

6

16

1·8 1

7·0

9·5

6·1

8·3

n.s.

n.s.

5·0'

8·6

11·0

7-6

9·9

71

122

2·3

13·5

16·2

12·2

15·0

n.s.

n.s.

6·4

6·9

9·5

6·1

8·4

40

64

3·0

IJ.6

14-2

lo-7

12·9

n.s.

n.s.

7·8

8·0

10·6

7-1

9·4

35

52

1·8

11·6

14·2

10·3

12·8

n.s.

n.s.

7·6'

8·0

IO.S

7·0

9·3

36

54

29·2

5·1

7·8

4·5

6·5

3

7

3·6

14·0

16·6

12·6

15·2

592

727

0·6

8·5

IJ.l

7-4

9·7

n.s.

n.s.

1·8

9·2

11·8

8·1

10·5

n.s.

n.s.

5·1

12-4

15·0

11·0

13·6

145

184

1·5*'

10·1

12·7

8·9

11·3

n.s.

n.s.

11·0

13-1

10·4

12·3

n.s.

n.s.

2·3

11·2

13·9

10·0

12·5

n.s.

n.s.

3·0*

12·3

14·9

10·8

13·5

n.s.

n.s.

3·9

9·1

11·7

7·9

10·4

225

315

3·8

11·8

14·4

10·4

12·9

356

457

6·8

8·8

11-4

7-7

10·1

51

73

1·0'

8·9

IJ.l

8·4

10·3

n.s.

n.s.

DEVELOPMENT

AND

UNDERDEVELOPMENT

15

 

TABLE

I .3-continued

(I)

(2)

(3)

(4)

(5)

Per

Recent

Per capita

Per capita

No. ofyears

capita

annual

income growth

income growth

required to

gross

growth

required in

required to

close gap

domestic

of

less developed

prevent from

between less

product

G.D.P.

country to

widening the

developed

at factor

per

reach P.C.Y.

absolute

gap

country and

cost in

capita

of

between Jess

E.E.C./U.S.A.

$U.S.

(%)

E.E.C./U.S.A.

developed

(1965)

(by year 2000)

country and E.E.C.fU.S.A. (by year 2000)

East and South-east Asia

Mghanistan

Burma

Cambodia

Ceylon

Hong Kong

India

Indonesia

Iran

Korea (Republic)

Laos

Malaysia

Nepal

Pakistan

Philippines

Singapore

Taiwan

Thailand East and South-east Asia (excluding Japan)

Middle East

Aden

Iraq

Jordan

Lebanon

Syria

Yemen

Middle East

49b

GOa

120

137

305•

92

82

240

93

62b

272

69

95

237

527

200

113

IOOa

53b

242d

198o

218b

162

SOb

230b

(including Kuwait)

n.a.

11·1

13·2

10·9

12-4

n.a.

n.a.

1·9'

12·4

15·0

lJol

13-7

n.s.

n.s.

6·9

10·6

13-1

9·3

11·8

64

84

J.4

10·1

12-7

8·9

11-4

n.s.

n.s.

3·5

7·2

9-6

6·4

8·6

309

471

4·4

11·4

14·0

10·1

12·6

196

254

-0·2'

11·8

14·4

10·5

13·0

n.s.

n.s.

3·5 8

8·4

10·9

7·3

9·6

357

636

4·0'

11·4

14·0

10·1

12·6

273

354

n.a.

10·4

12·6

9·9

11·8

n.a.

n.a.

3·5

8·0

10·5

6·9

9·3

332