SMITH ECONOMIC DEVELOPMENT THIRTEENTH EDITION ECONOMIC DEVELOPMENT THIRTEENTH EDITION MICHAEL P. SMITH New York University The George Washington University Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan PEARSON EDUCATION LIMITED KAO Two KAO Park Harlow CM17 9SR United Kingdom Tel: +44 (0)1279 623623 Web: www.com/uk _________________________________ Twelfth edition published 2015 (print and electronic) Thirteenth edition published 2020 (print and electronic) © Michael P. Todaro and Stephen C. Smith 2015, 2020 (print and electronic) The rights of Michael P.
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Pearson Education is not responsible for the content of third-party internet sites. ISBN: 978-1-292-29115-4 (print) 978-1-292-29120-8 (PDF) 978-1-292-29119-2 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Todaro, Michael P, author. Title: Economic development / Michael P. Todaro, New York University, Stephen C.
Smith, The George Washington University. Description: Thirteenth Edition. | Revised edition of the authors' Economic development, [2015] | Includes bibliographical references and index. Identifiers: LCCN 2019035607 | ISBN 9781292291154 (paperback) | ISBN 9781292291208 | ISBN 9781292291192 (epub) Subjects: LCSH: Economic development.
| Developing countries—Economic policy. Classification: LCC HD82 .9009172/4—dc23 LC record available at https://lccn.gov/2019035607 10 9 8 7 6 5 4 3 2 1 24 23 22 21 20 Cover: oxygen/Moment/Getty Images Print edition typeset in 10/12 Palatino LT Std by SPi Gobal Printed and bound by Vivar in Malaysia NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION Brief Contents 1 Introducing Economic Development: A Global Perspective 1 2 Comparative Economic Development 35 3 Classic Theories of Economic Growth and Development 116 4 Contemporary Models of Development and Underdevelopment 164 5 Poverty, Inequality, and Development 220 6 Population Growth and Economic Development: Causes, Consequences, and Controversies 293 7 Urbanisation and Rural–Urban Migration: Theory and Policy 340 8 Human Capital: Education and Health in Economic Development 390 9 Agricultural Transformation and Rural Development 447 10 The Environment and Development 503 11 Development Policymaking and the Roles of Market, State, and Civil Society 557 12 International Trade Theory and Development Strategy 615 13 Balance of Payments, Debt, Financial Crises, and Sustainable Recovery: Principles, Cases and Policies 697 14 Foreign Finance, Investment, Aid, and Conflict: Controversies and Opportunities 749 15 Finance and Fiscal Policy for Development 800 iii Contents Case Studies and Boxes xv Figures and Tables xvii Preface xxi 1 Introducing Economic Development: A Global Perspective 1 1.1 Introduction to Some of the World’s Biggest Questions 1 1.2 How Living Levels Differ Around the World 2 1.3 How Countries Are Classified by Their Average Levels of Development: A First Look 7 1.4 Economics and Development Studies 8 1.1 Wider Scope of Study 8 1.2 The Central Role of Women 10 1.5 The Meaning of Development: Amartya Sen’s “Capability” Approach 10 1.6 Happiness and Development 13 1.7 The Sustainable Development Goals: A Shared Development Mission 15 1.2 The Millennium Development Goals, 2000–2015 16 1.3 Implementing the Sustainable Development Goals 19 1.8 Some Critical Questions for the Study of Development Economics 21 ■ Case Study 1: Comparative Economic Development: Pakistan and Bangladesh 24 2 Comparative Economic Development 35 2.2 What is the Developing World? Classifying Levels of National Economic Development 37 2.1 Conventional Comparisons of Average National Income 37 2.2 Adjusting for Purchasing Power Parity 43 2.3 Other Common Country Classifications 45 2.3 Comparing Countries by Health and Education, and the Human Development Index 46 2.1 Comparing Health and Education Levels 46 2.2 Introducing the Human Development Index 46 2.3 Human Development Index Ranking: How Does it Differ from Income Rankings? 49 2.4 Human Development Index: Alternative Formulations 51 v vi Contents 2.4 Key Similarities and Differences Among Developing Countries 54 2.1 Levels of Income and Productivity 54 2.2 Human Capital Attainments 55 2.3 Inequality and Absolute Poverty 57 2.4 Population Growth and Age Structure 58 2.5 Rural Economy and Rural-to-Urban Migration 59 2.7 Level of Industrialisation and Manufactured Exports 61 2.8 Geography and Natural Resource Endowments 61 2.9 Extent of Financial and Other Market Development 62 2.10 Quality of Institutions and External Dependence 63 2.5 Are Living Standards of Developing and Developed Nations Converging? 67 2.1 The Great Divergence 67 2.2 Two Major Reasons to Expect Convergence 69 2.3 Perspectives on Income Convergence 70 2.6 Long-Run Causes of Comparative Development 74 2.7 Concluding Observations 82 ■ Case Study 2: Institutions, Colonial Legacies, and Economic Development: Ghana and Côte d’Ivoire 84 Appendix 2.1 The Traditional Human Development Index (HDI) 102 Appendix 2.2 How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages 108 3 Classic Theories of Economic Growth and Development 116 3.1 Classic Theories of Economic Development: Four Approaches 116 3.2 Development as Growth and the Linear-Stages Theories 117 3.1 Rostow’s Stages of Growth 118 3.2 The Harrod-Domar Growth Model 118 3.3 Obstacles and Constraints 121 3.4 Necessary Versus Sufficient Conditions: Some Criticisms of the Stages Model 122 3.3 Structural-Change Models 122 3.1 The Lewis Theory of Economic Development 122 3.2 Structural Change and Patterns of Development 127 3.3 Conclusions and Implications 128 3.4 The International-Dependence Revolution 129 3.1 The Neocolonial Dependence Model 130 3.2 The False-Paradigm Model 131 3.3 The Dualistic-Development Thesis 131 3.4 Conclusions and Implications 132 3.5 The Neoclassical Counter-Revolution: Market Fundamentalism 133 3.1 Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches 133 3.2 Traditional Neoclassical Growth Theory 135 3.3 Conclusions and Implications 137 3.6 Classic Theories of Development: Reconciling the Differences 138 ■ Case Study 3: Classic Schools of Thought in Context: South Korea and Argentina 140 Appendix 3.1 Components of Economic Growth 147 Contents vii Appendix 3.2 The Solow Neoclassical Growth Model 153 Appendix 3.3 Endogenous Growth Theory 158 4 Contemporary Models of Development and Underdevelopment 164 4.1 Underdevelopment as a Coordination Failure 165 4.2 Multiple Equilibria: A Diagrammatic Approach 168 4.3 Starting Economic Development: The Big Push 174 4.1 The Big Push: A Graphical Model 175 4.2 Other Cases in Which a Big Push May Be Necessary 180 4.3 Why the Problem Cannot Be Solved by a Super-Entrepreneur 181 4.4 Further Problems of Multiple Equilibria 183 4.1 Inefficient Advantages of Incumbency 183 4.2 Behaviour and Norms 183 4.4 Inequality, Multiple Equilibria, and Growth 185 4.5 Michael Kremer’s O-Ring Theory of Economic Development 186 4.1 The O-Ring Model 186 4.2 Implications of the O-Ring Theory 189 4.6 Economic Development as Self-Discovery 191 4.7 The Hausmann-Rodrik-Velasco Growth Diagnostics Framework 192 4.8 Conclusions 199 ■ Case Study 4: China: Understanding a Development “Miracle” 202 5 Poverty, Inequality, and Development 220 5.3 Gini Coefficients and Aggregate Measures of Inequality 226 5.4 The Ahluwalia-Chenery Welfare Index (ACWI) 228 5.2 Measuring Absolute Poverty 228 5.2 Multidimensional Poverty Measurement 233 5.3 Poverty, Inequality, and Social Welfare 233 5.1 What is it About Extreme Inequality That’s So Harmful to Economic Development? 233 5.2 Dualistic Development and Shifting Lorenz Curves: Some Stylised Typologies 235 5.3 Kuznets’s Inverted-U Hypothesis 239 5.4 Growth and Inequality 243 5.4 Absolute Poverty: Extent and Magnitude 244 5.1 The Multidimensional Poverty Index (MPI) 246 5.5 Economic Characteristics of High-Poverty Groups 251 5.1 Children and Poverty 252 5.2 Women and Poverty 252 5.3 Ethnic Minorities, Indigenous Populations, and Poverty 255 5.6 Growth and Poverty 257 viii Contents 5.7 Labour, the Functional Distribution of Income, and Inclusive Development 258 5.1 The Functional Distribution 258 5.2 Labour and Inclusive Development 260 5.8 Policy Options on Income Inequality and Poverty: Some Basic Considerations 262 5.1 Areas of Intervention 262 5.2 Altering the Functional Distribution of Income Through Relative Factor Prices: Minimum Wage and Capital Subsidy Debates 263 5.3 Modifying the Size Distribution Through Increasing Assets of the Poor 264 5.4 Progressive Income and Wealth Taxes 265 5.5 Direct Transfer Payments and the Public Provision of Goods and Services 266 5.6 Applying Insights from Behavioural Economics to Address Poverty 268 5.9 Summary and Conclusions: The Need for a Package of Policies 270 ■ Case Study 5: India: Complex Challenges and Compelling Opportunities 272 Appendix 5.1 Appropriate Technology and Employment Generation: The Price Incentive Model 281 Appendix 5.2 The Ahluwalia-Chenery Welfare Index 284 6 Population Growth and Economic Development: Causes, Consequences, and Controversies 293 6.1 The Basic Issue: Population Growth and the Quality of Life 293 6.2 Population Growth: Past, Present, and Future 294 6.1 World Population Growth Throughout History 294 6.2 Structure of the World’s Population 296 6.3 Demographic Structure and the Hidden Momentum of Population Growth 299 6.3 Demographic Structure and the Demographic Transition 303 6.4 The Causes of High Fertility in Developing Countries: The Malthusian and Household Models 305 6.1 The Malthusian Population Trap 305 6.2 Criticisms of the Malthusian Model 309 6.3 The Microeconomic Household Theory of Fertility 311 6.4 The Demand for Children in Developing Countries 314 6.5 Implications for Development and Fertility 315 6.5 The Consequences of High Fertility: Some Conflicting Perspectives 316 6.1 It’s Not a Real Problem 317 6.2 It’s a Deliberately Contrived False Issue 318 6.3 It’s a Desirable Phenomenon 318 6.4 It Is a Real Problem 320 6.5 Goals and Objectives: Toward a Consensus 324 6.6 Some Policy Approaches 326 6.1 What Developing Countries Can Do 326 6.2 What the Developed Countries Can Do 329 6.3 How Developed Countries Can Help Developing Countries with Their Population Programmes 330 6.4 Policy for Still-Developing Countries Facing Population Declines 330 ■ Case Study 6: “Twins” Growing Apart: Burundi and Rwanda 332 Contents ix 7 Urbanisation and Rural–Urban Migration: Theory and Policy 340 7.1 Urbanisation: Trends and Living Conditions 341 7.2 The Role of Cities 349 7.2 Efficient Urban Scale 353 7.3 Understanding Urban Giants: Causes and Consequences 354 7.1 First-City Bias 355 7.2 The Political Economy of Urban Giants 356 7.4 The Urban Informal Sector 358 7.1 Policies for the Urban Informal Sector 359 7.2 Women in the Informal Sector 362 7.5 Migration and Development 363 7.6 Toward an Economic Theory of Rural–Urban Migration 366 7.1 A Verbal Description of the Todaro Model 366 7.7 Conclusion: A Comprehensive Urbanisation, Migration, and Employment Strategy 373 ■ Case Study 7: Rural–Urban Migration and Urbanisation in Developing Countries: India and Botswana 377 Appendix 7.1 A Mathematical Formulation of the Todaro Migration Model 382 8 Human Capital: Education and Health in Economic Development 390 8.1 The Central Roles of Education and Health 390 8.1 Education and Health as Joint Investments for Development 392 8.2 Improving Health and Education: Why Increasing Income Is Not Sufficient 393 8.2 Investing in Education and Health: The Human Capital Approach 396 8.