CHAPTER FOUR

Historic Growth and Contemporary

Development: Lessons and Controversies

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 4.1. The Economics of Growth
 Today, countries of the world are divided into rich (developed)
countries and poor (developing) countries.
 There is a wide gap between the rich and the poor countries.
 The statement that “the rich nations get richer and the poor
countries get poorer” has become popular in the literature in world
poverty.
 But what are the explanations for the poor performance of the
developing countries?
 There are two approaches to explain the determinants of economic
development the traditional approach and the institutional approach.

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 1. Traditional Approach (Economic Factors) to
Development
 The traditional approach to development assumes that economic
development is determined by economic factors (natural resources,
capital, technology, etc).
a) Natural Resources.
 The principals factor affecting the development of an economy is the
natural resources or land.
 “Land” as used in economic includes natural resources such as
fertility of land, its situation and composition, forest wealth,
minerals, climate, water resources, sea resources, geographical
proximity with rich countries etc.
 As pointed out by Lewis, “Other things being equal, men can make
better use of rich resources than they can of poor.”

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 Traditional Cont…
 In LDCs natural resources are either unutilized, underutilized or miss-
utilized.
 The presence of natural resources is not sufficient for economic
growth. What is required is their proper exploitation.
 It is often said that economic growth is possible even when an
economic is deficient in natural resources.
 Japan is one such country which is deficient in natural resources but
it is one of the advanced countries of the world because it has been
able to discover new uses for limited resources.

b) Capital Accumulation
 Capital means the stock of physical reproducible factors of
production.
 Capital formation is investment in capital goods that leads to increase
in capital stock, national output and income.

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 Traditional Cont…
 Capital formation is the key to economic development. On the one
hand it reflects effective demand and on the other hand, it creates
productive efficiency for production.
 Capital formation is essential to meet the requirements of an
increasing population in such economies.
 Investment in capital goods not only raises production but also
employment opportunities.
 It is capital formation that leads to technological progress.
 Technological in turn leads to specialization and the economies of
large scale production.
 The provision of social and economic over heads, like transport,
power, education etc in a country is possible through capital
formation.

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 Traditional Cont…
c) Organization
 Organization is an important part of the growth process.
 It relates to the optimum use of factor of production economic
activities.
 Organization is complement to capital and labor and helps in
increasing their product activities.
 In modern economic growth, the entrepreneur has been performing
the task of an organizer and undertaking risks and uncertainties.
 The underdeveloped countries lack entrepreneurial activity. Such
factors as the small size of the market, capital deficiency, absence of
private property and contract, lack of skilled and trained labor, non-
availability of adequate raw materials and infrastructural facilities like
transport, power, etc increase risk and uncertainties.
 That is why such countries lack entrepreneurs.

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 Traditional Cont…
d) Technological Progress
 Technological charges are regarded as the most important factor in
the process of economic growth.
 They are related to changes in the methods of production which are
the result of some new techniques of research or innovation.
 Changes in Technology lead to increase in productivity of labor, capital
and other factors of production.
e) Division of labor and scale of production
 Specialization and division of labor lead to increase in productivity.
 Adam Smith gave much importance to the division of labor in
economic development.
 Division of labor leads to improvement in the productive capacities of
labor.

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 Traditional Cont…
 Ultimately production increases manifold. But division of labor
depends upon the size of the market.
 The size of the market, in turn, depends upon economic progress, i.e.
the extent to which the size of demand, the general level of
production, the means of transport etc are developed.
 When the scale of production is large there is greater specialization
and division of labor. As a result production increases and the rate of
economic progress is accelerated.
 Underdeveloped countries are unable to take advantage of the
economics of division of labor and large scale production due to the
presence of market imperfections, which in turn keep the size of the
market small.

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 2. Institutional Approach to Development
 The institutional approach to development is a recent phenomenon.
It argues that explanations of the poor economic development are
found not only in economic factors but also non-economic factors.
 In fact most of these factors are explained by non-economic factors
or institutional factors.
 The institutional approach to development emphasizes importance of
the institutional factors more than the economic factors using the
case of a metropolitan city.
 The central city in a metropolitan area, while gaining some high-rise
buildings, has a stagnant population and an increasing proportion of
poor people.
 To a certain degree, modern economics is like such a metropolitan
area. The traditional economics is at the center of the city.

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 Institutional Cont…
 At the same time, the suburbs of economics are expanding rapidly in
all directions. The institution approach to development is a case in
point.
 For example, consider shifting the focus from capital and other
resources toward the quality of governance. In the suburbs of
economics, governance is a focus, but not in the city center where
capital is the focus.
 The institutional factor further argues that most of the economic
factors can be obtained in the globalize market.
 For example, many MNCs are ready to invest a significant amount of
capital if conditions are favorable. Besides LDCs can also borrow
technologies from DCS.

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 Institutional Cont…
a)Type of Government
 A country with a monarchy system is less likely to develop as
compared with a country with a democratic government.
 The nature of democracy depends on the level of education,
discipline, culture etc. of the people.
 In maintaining rules, governments could be soft or strong. To
maintain rules and there by prepare the ground for development,
governments need be strong.
 Good governance is another important factor which determinants
economic performance of countries.
 According to Olson M. “Governance is a decisive determinant of
economic performance and that with the right economic policy and
institutions, poor countries can grow at a very rapid rate.”
 Good governance is reflected by long tem vision, correct policies
and effective implementation.
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 Institutional Cont…
 For example, in Japan the government decided what type of
industries to develop after World War II.
 Another aspect of good governance is the development of
infrastructure. Countries like Hong Kong, Singapore, Malaysia, etc.
develop infrastructure and attract foreign capital.
b) Institutions
 Availability of technology like the capital good, complementary
factors like infrastructure, highly skilled labor, innovation etc. are
required for an economy to grow.
 To have such technological changes requires a good institution.
 Thus, institutions that encourage technological innovation and
suitability of institution for successful adoption of new ideas is an
important question.
 Political and cultural dynamism help in adoption of new technology
and the negative forces such as labor union orthodoxy should be
managed properly by good governance.
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 Institutional Cont…
• Reservation/Affirmative Action/: Social justice requires that if some
sections of the society are deprived, they must be given special
attention i.e. reservation is needed.
• The supporters of reservation justify its use in terms of social justice,
equity and to rectify historical mistakes. However, from the point of
view of efficiency, it is not justified.
c) Social Structure of Population.
• Homogeneity of the population leads to the development of national
feelings, which is helpful for economic development – for example
China, Japan, Korea, Russia.
• On the other hand, population of a country could also be
heterogeneous - divided on the basis of language, religion, ethnicity,
caste etc. In such societies, some groups play entrepreneurial role.
For example, the Jews in USA.

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 Institutional Cont…
d) Human Capital and Cultural Traits.
 The difference in per capita income among countries could be
explained by human capital and cultural traits.
 In the DCs, human capital and cultural traits in the form of work
culture, discipline, good entrepreneurship etc. have played an
important role. Poor countries are poor because they lack these
traits.
 Cultural advancement according to M. Olson results in two types of
human capital:
1). Marketable human capital- these include more skill, propensity to
work harder, more entrepreneurial personality - these qualities result
in increase in the quality and quantity of productive outputs.
2). Civic culture- A civic culture leads to the election of good
government which adopts good policy. It also results in a disciplined
society. Corruption will be less. People pay tax.
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 4.2. The Historical Record: Kuznets’s Six Characteristics of
Modern Economic Growth
 Based on the analysis of historical growth of
national incomes in developed countries, Prof.
Simon Kuznets has identified three principal
components for a country’s economic growth:
– Sustained rise in national output
– Technological advancement is a necessary but not
sufficient condition for continuous economic growth
– Technological innovation and social innovation are
concomitant

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 Kuznet’s cont…
 Six features present in the growth process of every
developed nation are:
1. High rates of per capita output and population growth
2. High rates of total factor productivity increase
3. High rates of economic structural transformation
4. High rates of social, political, and ideological
transformation
5. International economic outreach for markets and raw
materials
6. Limited international spread of this economic growth
to 1/3 of the world’s population

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 Kuznet’s cont…
 High rates of per capita output and population growth
 For the capitalist developed countries, Annual growth rates over the
past 200 years averaged
– real GNP growth 3% per year
– population growth 1% per year
– per capita output 2% per year
– a doubling time of roughly 35 years for per capita output, 70
years for population and 24 years for real GNP, were far greater
than what was experienced in the pre – industrial revolution
period.
 High rates of total factor productivity increase
– It is the output per unit of all inputs and measures the efficiency with which
all inputs are used
– It represents technology and accounts for about 50 t0 75% of historical
growth per capita in industrialized economies 17
 Kuznet’s cont…
 Economic structural transformation
 There was a high rate of structural and sectoral change inherent in
the growth process.
 It refers to the gradual shift away from the agricultural to non-
agricultural activities and away from small family and personal
enterprises to impersonal organizations of huge national and
multinational corporations.
 Social, political, and ideological transformation
 Transformations in attitudes, institutions, and ideologies are often
necessary to bring an ideal structural change
“Modernization Ideals” include
 Rationality; the substitution of modern methods of thinking,
acting, producing, distributing and consuming for age old
traditional practices.
 Economic planning; the search for a rationally coordinated system
of policy measures that can bring about an accelerated economic
growth and development. 18
 Kuznet’s cont…
 Social and economic equalization; the promotion of more equality
in status, opportunities, wealth, income and levels of living
 Improved institutions and attitudes; Improved institutions will be
necessary to increase labor efficiency, promote effective
competition, social and economic mobility etc
 International economic outreach for markets and raw
materials
 Rich countries reached out to the rest of the world in search of
primary products, raw materials and cheap labor and further to find
markets for their products.
 This had the effect of unifying the globe and bringing out the socioeconomic and political
domination of the poor nations by the rich nations.
 Limited international spread of this economic growth
 The spread of modern economic growth is limited to the less than ¼ of
the world’s population found in the developed regions.
 There are even widely seen tendencies where the rich grow at the
expense of the poor. 19
 Interdependence of growth characteristics

Rising TFP High per capita output

High per capita income & consumption

Structural changes in production and labor

Economic growth + technological changes

Self-generating economic growth International outreach

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 Chenery’s Patterns of Development
 Chenery and colleagues examined patterns of development for developing
countries at different percapita income levels during the post-war period.
 Major hypothesis is that development is an identifiable process of growth
and change whose main features are similar in all countries.
 The empirical studies identified several characteristic features of economic
development:
– Shift from agriculture to industrial production
– Steady accumulation of physical and human capital
– Change in consumer demands
– Increased urbanization
– Decline in family size
– Demographic transition

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 Chenery’s Patterns of Development
 The model recognizes that differences in development occur
among countries due to :
– Resource endowment and size
– Government policies and objectives
– Availability of external capital and technology
– International trade environment
 A correct mix of policies based on observed patterns occurring
in all countries during the development process can generate
growth
 Emphasis on patterns rather than theory may lead the
countries to draw wrong conclusions (reverse causality??).

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4.3. The Limited Value of the Historical Growth Experience: Differing Initial Conditions

1. Physical and human resource endowments

 Developing countries have poor endowments of both
 Developing countries are faced with technology and ingenuity gaps.
2. Relative levels of per capita income and GNP
 LDCs have lower living standards than historical living standards in
present developed nations
3. Climatic differences
 Tropical vs temperate
4. Population size, distribution, and growth
 Exceed the historical growth rates of developed countries
(2% per annum)
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 Differing Initial Conditions… Continued
5. Historical role of international migration
 In the 19th and early 20th century, there was a major outlet for excess
rural population in international migration.
 Developing country there is little chance of reducing population
pressure through massive international emigration because of factors
such as great geographical distance and very restrictive immigration
laws in developed countries.
6. International trade benefits
 Free trade was the engine of growth for the currently
developed countries
 The today’s developing countries face many difficulties in
their trial to exploit international trade to their advantage
and growth.
 Deteriorating terms of trade for developing countries
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 Existence of barriers to trade
7. R and D capabilities
 Developed nations utilized the outcomes of scientific research and
technology in their growth experience.
 These countries also spend large sums of money to run and finance
different researches and they actively utilize their outcomes.
 The current poor countries, however, are not engaged in a
production process that invited technological advancement.
 They produce simple materials by saving capital (making less use of
capital) and using more labor.
8. Stability and flexibility of political and social institutions
 The current developed countries were independent consolidate
states able to undertake national policies on the quest to
modernization.
 Most of the current poor nations have only recently got their
independence and have not yet become fully consolidated nations
states with effective ability to formulate and follow national
policies.
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