ECONOMIC DEVELOPMENT
Fourth Edition

In this fourth edition of his textbook, E. Wayne Nafziger analyzes the economic development of Asia, Africa, Latin America, and East-Central Europe. The treatment is suitable for students who have taken a basic college course in the principles of economics. This comprehensive and clearly written text explains the growth in real income per person and income disparities within and among developing countries. The author explains the reasons for the fast growth of Pacific Rim countries, Brazil, Poland, and (recently) India, and the increasing economic misery and degradation of large parts of sub-Saharan Africa. The book also examines China and other postsocialist economies as low- and middle-income countries, without, however, overshadowing the primary emphasis on the third world. The text, written by a scholar active in economic research in developing countries, is replete with real-world examples. The exposition emphasizes the themes of poverty, inequality, unemployment, the environment, and deficiencies of people in less-developed countries, rather than esoteric models of aggregate economic growth. The guide to the readings, through bibliography as well as Web sites with links to development resources, makes this book useful for students writing research papers.

E. Wayne Nafziger is University Distinguished Professor of Economics at Kansas State University. He is the author and editor of sixteen books and numerous journal articles on development economics, income distribution, development theory, the economics of conflict, the Japanese economy, and entrepreneurship. His book, Inequality in Africa: Political Elites, Proletariat, Peasants, and the Poor (Cambridge University Press), was cited by Choice as an Outstanding Academic Book for 1989–1990. Professor Nafziger is also the author of The Debt Crisis in Africa (1993) and the editor (with Frances Stewart and Raimo Vayrynen) of the two-volume War, Hunger, and Displacement: The Origins of Humanitarian Emergencies (2000). He has held research positions at the U.N. University’s World Institute for Development Economics Research, the Carter Center, the East–West Center, and in Nigeria, India, Japan, and Britain.

Economic Development

FOURTH EDITION

E. Wayne Nafziger
Kansas State University

CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press
40 West 20th Street, New York, NY 10011-4211, USA

www.cambridge.org
Information on this title: www.cambridge.org/9780521829663

First edition © Wadsworth Pub. Co, 1984
Second edition © Prentice-Hall, Inc. 1990
Third edition © Prentice-Hall, Inc. 1997
Fourth edition © E. Wayne Nafziger 2006

This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published by Wadsworth Pub. Co. 1984
as The Economics of Developing Countries
Second edition published by Prentice-Hall, Inc. 1990
Third edition published by Prentice-Hall, Inc. 1997
Forth edition published by Cambridge University Press
as Economic Development

Printed in the United States of America

A catalog record for this publication is available from the British Library.

Library of Congress Cataloging in Publication Data

Nafziger, E. Wayne.
Economic development / E. Wayne Nafziger. – 4th ed.
p. cm.
Revised edition of: The economics of developing countries.
Includes bibliographical references and index.
ISBN-13: 978-0-521-82966-3 (hardback)
ISBN-10: 0-521-82966-6 (hardback)
1. Developing countries–Economic conditions. 2. Income
distribution–Developing countries. 3. Economic development.
I. Nafziger, E. Wayne. Economics of developing countries. II. Title.
HC59.7.N23    2005
330.9172′4 – dc22    2005021599

ISBN-13 978-0-521-82966-3 hardback
ISBN-10 0-521-82966-6 hardback

The author and publisher kindly acknowledge permission to reprint: From WORLD DEVELOPMENT REPORT 1979 by World Bank, copyright © 1979 by the International Bank for Reconstruction & Development/The World Bank. Used by permission of Oxford University Press, Inc. From WORLD DEVELOPMENT REPORT 2003: INVESTMENT CLIMATE, GROWTH AND POVERTY by The World Bank, copyright © 2003 by The International Bank for Reconstruction & Development, The World Bank. Used by permission of Oxford University Press, Inc.

From Peter Kilby, “Hunting the Heffalump” (pp. 27–8). In Entrepreneurship and Economic Development. Copyright © 1971 by The Free Press, a Division of Simon & Schuster Adult Publishing Group. Adapted by permission of the publisher. All rights reserved.

Permission to reprint the Genuine Progress Indicator was granted by Redefining Progress. © 2004 Redefining Progress. All rights reserved.

Kluwer Academic Publishers' Journal of Economic Growth and the authors for David Dollar and Aart Kraay, “Growth Is Good for the Poor,” 7(3) (September 2002): 223, Figure 1.

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate.

To H. M. A. Onitiri, Aaron Gana, B. Sarveswara Rao,
M. Jagadeswara Rao, R. Sudarsana Rao, and Hiroshi Kitamura

Contents

Figures and Tables

Abbreviations and Measures

Measures

   1 hectare = 2.47 acres
   1.61 kilometer = 1 mile
   2.59 square kilometers = 1 square mile
   1 meter = 1.09 yards = 3.3 feet
   1 kilogram = 2.2 pounds
   2.54 centimeters = 1 inch
   28.3 grams = 1 ounce
   0.028 cubic meters = 1 cubic foot

Preface to the Fourth Edition

I wrote this text to increase readers’ understanding of the economics of the developing world of Asia, Africa, Latin American, and East-Central Europe, where three-fourths of the world’s population lives. The book is suitable for students who have taken a course in principles of economics.

   The growth in real income per person in the third-world nations of Latin America, Asia, and Africa, about threefold since 1950, is a mixed record. For some economies, the growth warrants optimism, particularly in Taiwan, South Korea, Singapore, Malaysia, Thailand, Indonesia, China, other fast-growing Pacific Rim countries, Brazil, and more recently India. The tragedy, however, is that sub-Saharan Africa, encountering growing misery and degradation from 1965 to 2005, has not shared in these gains. The sub-Sahara is not only vulnerable to external price shocks and debt crises that destabilized the global economy in the late 20th century but also is plagued by increasing food deficits, growing rural poverty, urban congestion, and falling real wages, difficulties that represent an inadequate response to adjustment, reform, and liberalization, often imposed by the International Monetary Fund (IMF) or World Bank as a last resort. The problems of Bangladesh, Nepal, Afghanistan, Myanmar (Burma), Cambodia, and Haiti are as severe as those of Africa.

   This edition expands on previous material analyzing China and other countries that were socialist during most of the post–World War Ⅱ period. The major upheaval in the field since early 1989 has been the collapse of state socialism in East-Central Europe and the former Soviet Union and economists’ downward revision of estimates of their average economic welfare. Since the late 1980s and early 1990s, postsocialist European countries, like other low- and middle-income countries, have undertaken structural adjustment and market reforms, generally under IMF or World Bank auspices. Yet a substantial proportion of these liberalizing postsocialist economies have still not attained their pre-1989 peak in economic welfare. This edition reflects this reality by increasing examples from such countries as Russia, Poland, Ukraine, Hungary, Czech Republic, and other transitional economies, and by drawing lessons from their adjustment, stabilization, and liberalization for other middle-income and low-income countries.

   Yet I have not allowed the problems of East-Central Europe and the former Soviet Union, important as they are, to overshadow the primary emphasis of the book on Asia, Africa, and Latin America. The major focus is on their real-world problems – from those of newly industrializing countries, such as Taiwan, South Korea, Singapore, and Malaysia, to those of the slow-growing sub-Sahara – rather than abstract growth models.

   I am gratified by the response from reviewers, instructors, students, and practitioners in the United States, Canada, Europe, Japan, Australia, New Zealand, Korea, and the developing world to the emphases in the book’s third edition. This revision continues previous themes, such as the origins of modern growth, problems measuring growth, and the origin and resolution of the debt crisis, and integrates social, political, and economic issues and emphasizes poverty, inequality, and unemployment in the discussion of economic policies throughout the book.

   This edition takes advantage of the recent explosion of Internet resources in development economics. For each chapter, I provide an Internet assignment that instructors can use for students to analyze data or write reaction papers by accessing Nafziger, Internet Assignments, 2006, at http://www.ksu.edu/economics/nafwayne/. Clicking Nafziger, Links to Economic Development, 2006, at the same Web site lists links to numerous useful sites. Many of my bibliographical references also list the URL. Moreover, a university’s library may provide access to online journals, expanding the options for assignments accessible at the students’ desktops.

   The text incorporates substantial new material to reflect the rapidly changing field of development economics. I have updated tables, figures, and chapters with the most recent data, and I have revised chapter-end questions to discuss and guides to readings. The reader can access Nafziger, Supplement, 2006, at my Web site to find material complementary to the book. Finally, the text, more user-friendly, includes a bibliography and glossary at the end.

   The edition’s other major changes reflect recent literature or readers’ suggestions. In the introduction to Chapter 1, I have added sections on globalization, outsourcing, and information technology and Asia’s recent golden age of development, with its expansion of the middle class, to the comparison of living standards between rich and poor countries. Chapter 2, on the meaning and measurement of development, has new material on confidence intervals for gross product PPPs and Amartya Sen’s analysis of development as freedom.

   Chapter 3’s historical perspective includes Jared Diamond’s evolutionary biological approach to development and the effect of geography on the diffusion of innovation; sections explaining China’s market socialism and the end of Japan’s economic miracle; the inadequacy of the United States as a development model; and an analysis of the rapid growth of the Celtic tiger, Ireland. The same chapter assesses Ha-Joon Chang’s argument that rich countries used protection and state intervention in their early industrialization but “kicked away the ladder” for poor countries. New material also includes widening gaps or spreads between the West and developing countries and a broadening of the convergence concept to include Stanley Fischer and Surjit Bhalla’s argument that rich and poor individuals are converging. The chapter is enriched by much material from Angus Maddison: a summary of economic growth since the ancient period, the transfer in GDP per capita world leadership from one nation to another from 1500 to the present, the cross-national comparisons of economic growth during periods between 1870 and the present, and the identification of the golden age of capitalist development.

   Chapter 4’s profile analyzes the high proportion of output and the labor force in services in rich countries, the role of institutions in economic development, and the controversy about social capital and growth. In Chapter 5, on development theories, I add the Murphy–Shleifer–Vishny model to the balanced and unbalanced growth discussion and Michael Kremer’s O-ring theory of coordination failure. I also have transferred capital requirements and incremental capital-output ratios to the appendix to Chapter 5.

   Chapter 6 expands discussion of weaknesses of poverty and hunger data, points out the multidimensional nature of poverty, provides data for global and regional poverty rates, looks at how poverty and inequality affect war and political violence, and defines the concept of $1/day and $2/day poverty, pointing out that these refer to purchasing power adjusted income in 1985. The chapter also critiques the contrasting views of the World Bank, Institute for International Economics, and Sala-i-Martin on how to measure poverty.

   Chapter 7, on rural poverty and agricultural transformation, expands the discussion of how agriculture affects overall economic growth, puts more emphasis on off-farm sources of rural income, examines multinational corporations and contract farming in developing countries, adds to the time-series data on the growth of average food production in rich and poor countries, and provides new data on food deficits and food insecurity in developing countries and the relative importance of fish, meat, and grains in developing countries. The same chapter reworks the section on how poor agricultural policies and institutional failures hamper sub-Saharan African agriculture and compares India and China’s growth in average food output. Other new sections include the Hayami–Ruttan induced-innovation model of agricultural development, the benefits and costs of agricultural biotechnology, multinational corporations and contract farming in developing countries, and power sources by developing-country region.

   Chapters 8–13 discuss factors of growth. Chapter 8, on population, includes several new tables and figures and adds population growth deceleration since 1960 to the emphasis on rapid population growth from 1950 to the present. Chapter 10, on human capital, expands comparisons of how health affects economic development; updates and expands the section on the economic impact of HIV/AIDs, tuberculosis, and malaria on developing countries; and includes a new section on mortality and disability, including comparative data on disability-adjusted life years. Chapter 11 on capital formation, investment choice, information technology, and technical progress includes material previously included in a separate chapter on sources of capital formation. Furthermore, we have added a substantial section on computers, electronics, and information technology, with a critical analysis of the productivity paradox stating that computers do not show up in measures of total factor productivity. The section’s micro- and macroeconomic data give examples of the impact of information technology and growth and compares the lag between computer innovation and growth with those of previous major innovations. Chapter 12 on entrepreneurship and organization examines the relationship between long-term property rights and entrepreneurial activity. Chapter 13, on natural resources, analyzes the literature on resource curse and includes discussion of an updated Nordhaus–Boyer model and its implications for global climate change.

   Chapters 14–17 integrate macroeconomics and the international economics of development. Chapter 14, on monetary, fiscal, and incomes policy has new sections on how international and domestic capital markets affect the financial system and how adverse selection, moral hazard, and external shocks contributed to financial crises such as those in Mexico (1994), Asia (1997–99), Russia (1998), and Argentina (2001–03). Chapter 15, on balance of payments, aid, and foreign investment, has a new section on the perverse capital flow from poor to rich countries, including an explanation of massive capital inflows to the United States.

   Chapter 16, on external debt and financial crises, has a new section on spreads and risk premiums and a detailed analysis of financial and currency crises. These crises relate to sections on World Bank–IMF lending and adjustment programs, the fundamentalists and their critics, reasons for the IMF’s failure to reduce financial crises, the IMF’s sovereign debt restructuring proposal, and new approaches to resolving the debt crises.

   Chapter 17, on international trade, has new sections on path dependence and comparative advantage and arguments for rich-country tariffs based on income distribution, third-world child labor, and the environment. The discussion of global production networks examines how low-income countries with reduced protection moved up the value-added ladder to expand their low-technology exports. Other new topics include the importance of trade in services, the debate concerning offshore outsourcing, criticism of current intellectual property rights’ rules, the analysis of currency crises, proposals for managed floating exchange rates in countries open to international capital flows, arguments against the proliferation of free trade areas, and the euro versus the U.S. dollar as reserve currencies for developing economies.

   Chapter 19, on stabilization, adjustment, reform, and privatization, has expanded the literature on privatization and revised and increased the discussion of adjustment and liberalization in Russia, China, and Poland and their lessons for developing countries.

   I am indebted to numerous colleagues and students in the developed and developing world for helping shape my ideas about development economics. I especially benefited from the comments and criticisms of John Adams, Edgar S. Bagley, Maurice Ballabon, Thomas W. Bonsor, Antonio Bos, Martin Bronfenbrenner, Christopher Cramer, Robert L. Curry Jr., Wayne Davis, Lloyd (Jeff) Dumas, David Edmonds, Patrick J. Gormely, Roy Grohs, Margaret Grosh, Ichirou Inukai, Philip G. King, Paul Koch, Bertram Levin, John Loxley, L. Naiken, Elliott Parker, Harvey Paul, James Ragan, David Norman, Alan Richards, Anwar Shaikh, Gordon Smith, Howard Stein, Shanti Tangri, Lloyd B. Thomas, Roger Trenary, Rodney Wilson, and Mahmood Yousefi. Scott Parris, Simina Calin, and others at Cambridge University Press contributed substantially to the book. Fjorentina Angjellari, Gregory Dressman, Jared Dressman, Akram Esanov, Ramesh Mohan, Anton Kashshay, and Boaz Nandwa assisted in graphing, computer work, and critical analysis. Elfrieda Nafziger not only assisted in the project but also tolerated inconveniences and assumed responsibilities to leave me more time for writing. Although I am grateful to all who helped, I am solely responsible for any errors.

   I also am grateful to the following for permission to reproduce copyrighted materials: the American Economic Association for figures from Journal of Economic Perspectives 16 (Winter 2002), Journal of Economic Perspectives 13 (Summer 1999), Journal of Economic Perspectives 8 (Winter 1994), American Economic Review 93 (May 2003), American Economic Review 92 (September 2002), 741; and, for a figure and quotation, from Journal of Economic Perspectives 11 (Summer 1997); British Petroleum P.L.C. for a table from the Statistical Review of World Energy 2004; Cambridge University Press for a table from Celso Furtado, Economic Development of Latin America; the East–West Center for a table from Nafziger, Class, Caste, and Entrepreneurship: A Study of Indian Industrialists, 1978; the Economic Record for a table from M. L. Parker, “An Interindustry Approach to Planning in Papua New Guinea,” September 1974; the Institute for International Economics for figures and a table from Surjit Bhalla, Imagine There’s No Country, and a figure from Jeffrey Frankel, Regional Trading Blocs in the World System; the International Fund for Agricultural Development for a figure from Idriss Jazairy et al., The State of World Rural Poverty, 1992; the International Monetary Fund for a figure from World Economic Outlook April 2003, and tables from Vito Tanzi and Howell H. Zee, Tax Policy for Emerging Markets – Developing Countries; IMF Working Paper 00/35, 2000; Kluwer Academic Publishers and the authors for a figure from David Dollar and Aart Kraay, “Growth Is Good for the Poor,” Journal of Economic Growth; Harry Anthony Patrinos for a table from “Returns to Education: A Further Update,” 2002; Population Reference Bureau, Inc., for graphs from Thomas W. Merrick, “World Population in Transition,” Population Bulletin, Vol. 41, No. 2 (April 1986), and Madga McHale and John McHale, “World of Children,” Population Bulletin, Vol. 33, No. 6 (January 1979); Dani Rodrik for a figure on GDP per capita by country grouping; Xavier Sala-i-Martin for a figure from his “The World Distribution of Income,” National Bureau of Economic Research Working Paper 8933, Cambridge, MA, 2002; Thomson for material from Maurice Dobb, Capitalist Enterprise and Social Progress; the International Bank for Reconstruction and Development/ The World Bank for tables from Chenery and Syrqin, Patterns of Development, 1950–1970, 1975, World Development Report 1980, World Development Report 2003, Global Economic Prospects 2004, and figures from World Development Indicators 2003, World Development Report 2004, World Development Report 1990, World Development Report 2003, Global Development Finance 2003, and Global Economic Prospects and the Developing Countries 2003; the Organization for Economic Cooperation and Development for tables and figures from OECD in Washington: Recent Trends in Foreign Aid, 2002; the United Nations for quotes from “ECA and Africa’s Development, 1983–2008,” Addis Ababa, 1983, and African Alternative Framework to Structural Adjustment Programs for Socio-Economic Recovery and Transformation (AAF-SAP), Addis Ababa, April 10, 1989, the Millenium Development Goals from the U.N. Millenium Summit, 2002, figures and tables from the United Nations Conference for Trade and Development, World Investment Report 2003 – FDI Policies for Development: National and International Perspectives, 2003, and World Investment Report 2002: Transnational Corporations and Export Competitiveness, 2002; and the United States Bureau of the Census for figures from International Data Base Population Pyramids, 1950–2050, 2004.

   I have made every effort to trace copyright owners, but in a few cases this was impossible. I apologize to any author or publisher on whose rights I may have unwittingly infringed.