Economic development

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iv CONTENTS

Common Characteristics of Developing Nations 38

Low Levels of Living 38

Low Levels oi Productivỉty 46

High Rates oi Population Grovvth and Dependcncy Burdens 48

High and Rising Levels of Unempỉoyment and Underemployment 49

Substantỉal Dependence ôn Agricultural Production and Primary Product

Exports 50

Dọminance Dependence, and Vulnerabilily in [nternational Relations 53

Conclusion 54

Case study: The Economy of Nigeria 55

Concepts for RevieivlQuestions for Discussion/NotesìPurther Reading 56

Appendix 2.1: Social lndicators as Alternative Measures of Development: The

Physical Qimlìty of Uịe and Human Development ỉndexes 60

Appendix 2.2: statistical Ranking oị Third Worh1 Countries 66

3. Theories of Development: A Comparative Analysis 67

Leading Theories oi Economic Development: Four Approaches 68

The Linear-Stages Theory 69

Rostow's stages oi Grovvth 69

The Harrod-Domar Grovvth Model 70

Obstades and Contraints 72

Necessary versus Sufficient Conditions: Some Criticisms of the Stages

Model 73

Structural-Change Models 74

The Levvis Theorv of Development 74

Structural Change dnd Patterns oi Development 79

Conclusions and Implications 80

The Internatíonal-Dependence Revolution 81

The Neocolonial Dependence Mndel SI

The False-Paradigm Model 83

The Dualistíc-Development Thesis 83

Conclusions and Implications 84

The Neoclassical Counterrevolution 85

Challenging the Statist Approach: Privatization and Free Markets 85

Traditíonal ("OM") Neoclassical Grmvth Theory 86

Conclusions and Implications 86

The Nevv Growth Theory: An Emerging Fifth Approach 88

Motivation for the New Grovvth Theory 88 Theorie Cas Concepts eCriticism Endogenou Study s of for Development s. Thosf GrovvtthRevieĩvlQuestions ee Econom Nchw 8 Gnnvt 9 : Reconcilin y of Indi h Theor a 9gyfor th3 9e0 DiscussionlNoteslĩurther Differences 90 Reading 94

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CONTENTS

4. Historic Grovvth and Contemporary Development: Lessons

and Controversies 99

The Grovvth Game 99

The Economics oi Grovvth: Capital, Labor, and Technology 100

Capital Accumulation 100

Population anđ Labor Force Grovvth loi

Technological Progress 103

Conclusion 105

The Historical Record: Kuznets's Six Characteristics oi Modern Economic

Crovvth 106

High Rates of Per Capita Output and Population Grovvth 106

High Rates oi Productivity Increase 107

High Rates of Economic Structural Transíormation 107

High Rates oi Social, Political, and Ideological Transíormation 108

International Economic Ouíreach 108

Limited [nternatỉonal Spread oi Economic Grovvth 109

Conclusions: The Interdependence oi Grovvth Characteristics 109

The Limited Value oi the Historical Grovrth Experience: Ditícring Initial

Conditions Hũ

Physical and Human Resource Endovvments 11 ]

Relative Levels of Per Capita Income and GNP ni

Climatic Dỉfferences 112

Population Size, Distribution, and Grovvth 112

The Historical Role oi Internatỉonal Migration 113

The Grovvth Stimulus of [nternationaí Trade 114

Basic Scientiíic and Technological Research and Development Capabilities Ì

Stability and Flexỉbility oi Political and Socia] Institutions 116

Conclusions 117

Case Study: The Economy of Kenya 118

Concepts for RevieĩvlQuestionsfor DiscussionlNoteslPurther Reading 121

ì. Comparative Case Study Korca and Argentina: Contributions

ótthe Four Approaches to Dcvclopmcnt 123

I Problems and Policies: Domestic 127

5. Grovvth, Poverty, and Income Distribution 131

The Grovvth Controversy 131

Some Basic Concepts: Size and Functional Distributions oi Income 133

Size Distrìbutions 133

Gin Dualisti Loren Functỉona Typologie i Coefficient zcCurve lDeveìopmen Distribution s 13s7s13an5dtsAggregat an 14d1 Shiítine Measure g Lorenzs oCurves f Inequalit : Somy e140Stylizeđ

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vi CONTENTS

A Revievv oi Evidence: [nequality and Absolute Poverty in Third World

Countries 142

Inequality: Variations among Countries 142

Absolute Poverty: Extent anđ Magnitude 145

Economic Characteristics of Poverty Groups 149

VVomen and Povertv 151

Income Levels, Grovvth, and the Extent of Poverty: The Kuznets Hypothesi

and Other Tests 154

Redeíining Development Goals: Grovvth with lmproved Income

Distríbution 157

The Role of Economic Analysis: Redistribution tròm Grovvth 158

Grovvth versus Income Distribution 158

GNPas a Biased Index oi National Development and VVelíare 160

Constucting a Poverty-vveighted lndex o( Social VVelíare 162

Combining the Economics oi Grovvth and Distribution 164

The Range of Policy Options: Some Basic Considerations 165

Areas of Intervention 165

Policy Options 166

Summary and Conclusions: The Need íor a Package of Policies 169

Case study: The Economy of Bangladesh 171

Conceptsfor RevieivlQuestionsfor DiscussionlNoteslĩurther Reading 172

6. Population Grovvth and Economic Developmentí Causes, Consequences,

and Controversies 178

The Basic Issue: Population Grovvth and the Quality oi Life 179

A Revievv oi Numbers: Population Grovvth—Past, Present,

and Future 180

VVorld Populatíon Grovvth through History 180

Structure of the World's Population 183

The Hidden Momentum oi Population Grovvth 187

The Demographic Transition 188

The Causes of High Fertility in Developing Countries: The Malthusian

and Household Models 191

The Malthusian Population Tráp 191

Criticisms of the Malthusian Model 194

The Microeconomic Household Theory oi Pertility Ì9b

The Demand for ChUdren in Developing Countries 199

Some Empirical Evidence 200

ThGoal SomeImplicatíon pópulãtio Populatio esConsequence ânPolicd Objectives ynsApproache Grovvtow forsDevelopmen hof:lIHig sTcnvar sNóah20Rea tPertility 8adtlRea aanProble dConsensu l:Proble Fertilit mSom20mye5sConAictin 202020027 g Opinions 201

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CONTENTS vii

VVh.ìt Developing Countries Can Do 209

VVhat the Developed Countries Can Do: Resources, Population, and the Global

Environment 213

How Developed Countries Can Assist Developing Countries vvith ì heir

Population Programs 214

Case Study: The Economy of China 216

Concepts for Revieiv/Questions for DiscussionlNotesiFurther Ren di MỊ 218

7. Unemployment: Issues, Dimensions, and Analyses 222

The Emplovment Problem: Some Basic Issues 222

Dimensions of Third VVorld Unemployment: Evidence and Concepts 224

Emplovment and UniTnplovment: Trends and Projections 225

Labor Force: Present and Proịected 226

Labor Underutilization: Some Deíinitiona! Distinctìons 228

Linkages among Unempỉoyment, Poverty, and Income Distribution 229

The Lag betvveen Industrial Output and Employment Grovvth: The Misplaced

Emphasis oi the L950s and 1960s 230

Economic Models of Employment Determination 232

The Traditional Competitive Frec-Market Model 233

Output ạnd Emplovment Grovvth: ConAict or Congruence? 235

Appropriate Technology and Employmont Generation: The Price-Incentive

Model 237

Conclusion 240

Case Study: The Economy of Egypt 241

Concepts for Revieiv/Questions for DiscussionlNotes!hurther Reading 243

8. Urbanization and Rural-Urban Migration: Theory and Policy 247

The Migration and Urbanization Dilemma 247

Urbanization: Trends and Proịections 248

The Urban [níormal Sector 253

VVdmen in the Iníormal Sector 257

Urban Unemplovment 258

Migration and Development 260

Internal Migration in Developing Nations: Somc General Facts 262

The Migration Process 263

Migrant Characteristics 263

Tovvard an Economic Theory of Rural-Urban Migration 264

A Verbal Description oi the Todaro Model 265

A Diagrammatic Presentatíon 268

Summar Cas Concepts aneFivd Study Employmen e Poiic y an for :y Th d Impiication Conclusions RevieĩvlQuestions e Econom t Strategs 27y: oTh270 fMexic 2 eShapofor e 27 o5 fDiscussioniNotesiĩurther a Comprehensive Migration Reading 277

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VÍU CONTENTS

9. Agricultural Transíormation and Rural Development 281

The Imperative oi" Agricultural Progress and Rural Development 281

Agricultural Stagnation and Grovvth, 1950-1990 283

The Structure oi Third VVorlđ Agrarian Systems 288

Two Kinds of VVorld Agriculture 288

Peasant Agriculture in Latin America, Asia, and Africa 290

The Important Role of VVomen 301

The Economics of Agricultural Development: Transition from Peasant

Subsistence to Specialized Commercial Parming 304

Subsistence Farming: Risk Aversion, Uncertainty, and Survival 304

The Transition to Mixed anđ Diversiíied Farming 309

From Divergence to 5pecìalization: Modern Commercial Farming 310

Conclusions 311

Tovvard a Strategy oi" Agricultural and Rura) Development: Some Main

Requirements 311

ĩmproving Small-Scale Agriculture 311

Conditions for Rural Development 313

Case Study: The Economy of Ghana 317

Conceptsfor RevieivlQucstionsfor Discussion/Notes/Purther Reaảing 319

10. The Environment and Development 325

Economics and the Environment 325

Environment and Development: The Basic Issues 326

Sustainable Development 327

PopuKìtion, Resources, and the Environment 327

Poverty and the Environment 328

Growth versus the Envữonment 328

Ru rai Development and the Environment 328

Lỉrban Development and the Environment 329

The Global Environment 329

The Scope of Envịrọnmental Degradation: A Bríeí Statistical Revievv 330

Rural Development and the Environment: A Tale oi Tvvo Villages 333

Traditional Economic Models of the Environment 335

Privately Owned Resources 335

Common Property Resources 338

Criticisms oi the Neoclassical Common Propertv Framewơrk 339

Public Goods and Bads: Regional Environmentaỉ Degradation and the

Free-Rider Problem 340

ThUrbaeCrítỉcism ThProblem Industrializatio Nee ne Developmen Ecolog d fss ooryi Polic f th oCongestio nie anUrba Publi ty and Reíor Urba ndnc Slumth Goo anmned 34Environmen dAĩ sth 34Framewor r9 ePollutio Avalabilit 3 nkt 343434y52 o3 f Clean VVater and Sanitatỉon J4fi

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CONTENTS ix

The Global Environment: Rain Forest Destruction and Greenhouse

Gases 351

Policy Options in Developing and Developed Countries 353

VVhat Less Developed Countrìes Can Do 353

How Developed Countries Can Help LDCs 355

VVhat Developeđ Countries Can Do for the Gỉobal Environment 356

Case study: The Economy oi Pakistan 358

Concepts for RevieutlQuestions for DiscussionlNoteslFurther Reaảing 359

li. Education and Development 363

Education and Human Resources 363

Education in Developing Regions 366

Public Educatìonal Expenditure 366

Enrollments 367

Literacy 368

Costs and Earnings 368

The Gender Cáp: VVomen and Education 370

The Economics oi Education anđ Emplovment 372

Educational Supply and Demand: The Relationship between Employment

Opportunities and Educatìona] Demands 372

Social versus Private Beneíìts and Costs 376

Education, Societv, and Development: Some Issues 379

Education and Economic Growth 379

Educatỉon, [nequalỉty, and Poverty 380

Education, [ntema] Mỉgration, and the Brain Drain 382

Education ót VVomen, Pertility, and Chilđ Health 385

Education and Rura] De\ eIopment 386

Summary and Conclusions: Maịor Educational Policy Options 387

Polides Largely Externa] to Educatíona] Systems 389

Polides Internal to Ẽducatỉona] Systems 390

Case studỵ: The Economv of Malaysia 392

Concepts for ReviemlQuestioits for DiscussionlNoteslĩurther Reading 394

l i. Comparative Case Study:Bangladesh and Nigeria: Poverty

Policy 400

Q Problems and Policies: International 405

12. Trade Theor>' and Development Experience 407

The Importance of International Trade and Finance 407

Five Basic Questíons about Trade and Development 409

The Importance oi Trade for De\ elopment: A Statistical Revievv 411

Exportsand [mports: Trends and Pattems 411

Importance oi ExportstoDitíerent Developing Nations 416

The Terms oi Trade 417

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X CONTENTS

The Traditional Theory of International Trade 419

Relative Factor Enđốvvments and Internatìonal Specializatíon: The Neocl.1"

Model 420

Trade Theory and Development: The Traditional Arguments 425

Some Criticisms oi Traditional Free-Trade Theory in the Context oi Third

VVorld Experience 426

Fixed Resources, Full Employment, and the Intemational [mmobility of Capila

and Skilled Labor 427

Fixed, Freelv Available Technology and Consumer Sovereignty

43 1

ĩnternal Factor Mobility and Períect Competition: The Structuralist Critìque

and the Phenomenon of lncreasing Returns, Impertect Competition,

and Controlleđ Markets 432

The Absence oi National Govcrnments in TrađinK Relations 434

Balanced Trade and International Pricc Adịustments 435

Trade Gains Accruing to Nationals 436

Some Conclusions ôn Trade and Economic Development: The Limits

oi Theory 437

Case study: The Economy of South Korea 441

Concepts for RevieĩvlQuestionsforDiscussionlNoteslPurther Reading 443 13. International Finance, Third VVorld Debt, and the Macroeconomic

Stabilization Controversy 447

The Balance of Payments Account 448

General Considerations 448

A Hypothetical Illustration: Deíicits and Debts 450

Pinancing and Reducing Payments Deíicits: Some Initial Policy

Issues 452

Recent Trends in LDC Balance of Payments 454

The Third VVorld Debt Crisis 457

Background and Analysis 457

Dimensions oi the Crisis 459

Attempts át Alleviation: Macroeconomic Instability, IMF Stabilization

Policies, and Their Critics 465

The 1MF Stabilization Program 465

Global Dimensions of the LDC Debt Problem 467

Hasthe Dcbt Prohlem Disappeared? VVinners and Losers 469

Conclusions 469

Case study: The Economy of Venezuela 471

Conceptsfor RevieivlQụestions for DiscussionlNoteslFurther Reading 472

Appendix mà the Worỉd 13.1 A Brief Bank 47 History 6 oỊ the Ịnternational Monetary ỉund

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CONTENTS xi

14. The Trade Policy Debate: Export Promotion, Import Substitution

and Economic [ntẹgration 483

Trade Strategies for Development: Export Promotion versus Import

Substitution 484

Export Promotion: Looking Outward and Seeing Trade Barricrs 485

Import Substitution: Looking Invvard bút Still Paying Outward 491

The IS Industrialization Strategy and Results 494

Foreign-Exchange Rates, Exchange Controls, and the Devaluation Decision 500

Summary and Conclusions: Trade Optimists and Trade Pessimists 505

Trade Pessimỉst Arguments 505

Trade Optimisl Arguments 506

Reconciling the Arguments: The Data and the Consensus 507

South-South Trade and Economic Integration: Looking Outvvard

and Invvard 509

The Grovvth oi Trade among Developing Countries 509

Economic Integration: Theorv and Practice 510

Regional Trading Blocs and the Globalization oi Trade 512

Trade Policies of Developed Countries: The Need for Reform 513

Rich-Nation Tariff and Nontariíí Trade Barriers 514

Export Incentives oi Developed Countries 514

The Problem oi Adjustment Assistance 514

Domestic Economỉc Polỉcies 515

Case Study: The Economy oi Jamaica 517

Concepts for RevieưlQuestions for DiscussionlNoteslỉurther Reading 519

Appendừ 14.1 A Diagmmmatic Portrayai of Export-promoting (ÉP)

and Import-substituting (IS) ĩraác stmtegies 524

15. Direct Foreign Investment and Foreign Aid: Controversies

and Opportunities 526

The International Flow oi Financial Resources 526

Private Direct Foreign Investment and the Multinational

Corporation 527

Multinational Corporations: Size, Patterns, and Trends 529

Private Poreign Investment: Some Pros and Com for Development 531

Foreign Aid: The Development Assistance Debate 537

Conceptual ùnd Measurement Problems 537

Amounts and Allocations 539

VVhy Donors Give Aid 541

Why LDC Redpients Accept Aid 546

Conclusions The Effect: Towar s oi Ảidd a 54 Nev 7 v Vievv of Foreign Aid 548

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xii CONTENTS

Case Study: The Economy of Uganda 550

Concepts for Reviem/Questíons for DiscussìonlNoteslFurther Reading 551

IU. Comparativc Case Study: Thailand and the Philippines: Trađe

Strategy 556

ỊSM Possibilities and Prospects 563

16. Planning, Markets, and the Role oi the State 565

The Planning Mystique 565

The Nature of Development Planning 566

Basic Concepts 566

Planning in Mixed Developing Economies 567

The Rationale for Planning in Developing Economies 568

Market Failure 568

Resource Mobilization and Allocation 569

Attitudinal or Psychological Impact 570

Foreign Aid 570

The Planning Process: Some Basic Models 570

Characteristics oi the Planning Process 570

Planning in Stages: Three Basic Models 571

The Crisis in Planning: Problems of Implementation and Han Failures 579

Thcory versus Practicc 579

Reasons for Plan Pailures 581

Government Failure and the Resurgent Preíerence for Markets over

Planning 584

Problems oi State Intervention and the Rise of Market Preíerences 584

Sociocultural Preconditions and Economic Requirements for a Market

Economy 586

Role and Limitations of the Market in LDCs 588

Development Planning and the State: Concluding Observations 591

Case Study: The Economy of the Philippines 594

Concepts for RevieivlQuestions for DiscussionlNoteslFurther Reading 595

17. Financial Systems and Fiscal Policy 599

The Painíul Road to Macroeconomic Stabilitv 599

Financial Systems and Monetarv Policv 600

Differences betvveen MDC and LDC Rnancial Systems 600

The Role of Central Banks 603

ThThe Emergence oi Dc\'elopment Bankừig 605 e Role oi Iníormal Finance for Small-Scale Enterprise 607

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xxiv PREFACE TO THE FIFTH ED1TI0X

14. The "Concepts for Revievv" íind "Questions for Discussion" sections át the

end of each chapter have been revised, as has the Glossary át the back of [he

book. Used in coiýunction with the excellenl ỉnstructors Manual prepared

by Proíessor Siephen c. Smith. these end materials are intended to provide

all thát is necessary for student revievvs and teacher lecture and exam prepa￾ration.

15. Pinally, ã new Casebook designed to accompany this text and consisting of

studies organized to reílect the contents of each chapter has also been pre￾pared hy Protessor Smith.

The íbregoing highlights of the new edition should indicate how extensively

the text has been revised and updated to meet the needs of undergraduate eco￾nomic development courses in the 199ŨS. Ì am extremely gratitìed hy the vvide￾spread success of previous editions, which have now been translated into eight

languages (the latest heing Estonian) and by the enthusiastic response and en￾couragemenl thát Ì have received from proíessors and students in both the devel￾oped and developing worlds.

I trust thát thisfifthedition vvill once again provide an accurate reflection of

the multidimensional nature of contemporary development problems. My indebt￾edness and gratitude to the many individuals who have helped shape this new

edition cannot adequately be conveyed in a few sentences. ì will therelbre leave

ít to the acknovvledgments to mention specific names. Hovvever. ì must record

here my immense indebtedness to the hundreds of former students and contem￾porary colleagues who look the time and trouble during the pastfour years to

vvrite orspeak to me about the vvays in which this text could further be improved.

Michael p. Todaro

February 1993

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Preíac e t o the First Editio n

The íield oi development economics has undergone proíound changes during

the 197ŨS. Old clichés and shibboleths about necessary conditions and historical

determinants have been replaced by a healthy agnosticism ãná a reỄreshing

vvillingness to focus ôn speciíic probíems and real ìssues. The very mèanirig òf

the term developmenl has been altered from an almost exclusive associatión vvith

aggregate economic grovvth to a much broader interpretation thát encompasses

questions of poverty, inequality. and unempolyment also. If nothing eise the

1970S WỊỊỊ be remembered as a decade during which the problenis of domèstic

and international poverty and income distribution rose to the tóp of the agenda of

the development debate. Moreover. the 1970s ushered in ã new era of interna￾tional instabilitỵ and global economic disorder vvhich shattered the complacency

and security of the developed vvorld and forced Ít to take seriõusĩy its pious

rhetoric aboul globalinterdependence. VVhatever else happens. the system of

economic relationships betvveen the developed and the underdeveloped wórld

will never be quite the same again; nor vvill the tìeld of developmẽnt economics

In a constantly changing world, outmoded and outdaled textboõks have a

special proclivity for survival. Long after academic researchers have discarded

irrelevant or incorrect Iheories and have thoroughly reoriented their điscipline

tovvard new issues and problems. many leading textbooks continue to íocus ôn

discarded concepts anđ inappropriate models. Nowhere is this more evident than

in the rapidly changing Held oi' development economics.1

Ít is prẽciseiỹ in the

hope of rectifying this situation thát the present book has been conceived and

structured. (See the Introduction ton a detailed description of the organiìation

and orientation of the text.)

Michael p, Todaro

January 1977

Note

In hịs major survey oi the recent evolution oi development theory and policv for

example, Derek Healey conduded thát "there can be little doubt thai a thoróugh

survey of opinion ôn the problem of economic developmenl vvould show thai ai the

enđ ót the I96ŨS and the beginning oi the 1970» a new consensus began to emerge

Like an nevv attitudes, Ít arose nót in a vacuum bút in response to the demonstrabìe

failure oi pasl belieís and practices. For Ít is điíHcult to alter accepted notions-we

have invested tao much intellectual capital in thèm. ít is difflcuit to admit (hát Khai

once appeared axiomaHc is in fact subịect to the limitations oi túm and space and

must novv be doubted " DerekT. Healey, "Development policy: New Ihinking ãboui

an mterpretation," Journal oỊEconomk Literature (September 1972): 792-794

XXV

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Kconomic Development, Kinh Kdition

Copyrighl ị 1994. I9S9. [985. 1981. 1977 hy Michael p. Todaro.

AU rights reserved.

No pan of Ihis publication may be reproduced,

slored in a retrieval system, or transmilted

in any form or hy any means, electronic, mechanical,

pholocopying. recorđing, or othervvise.

wiihoul [he prior permission ofthe publisher.

Longman, 10 Bank Street, VVhite Plains, N.Y. 10606

Associated companies:

Longman Group Ltd.. I.ondon

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Copp Clark Pitman, Toronto For Donna Renée

ìenior acquisilions editor: David M. Shapiro

Developmenl editor: Susan Alkana

'roduction editor: Cracom Corporation/Ann p. Kearns

Texl design: Silvers Design

Coverdesign: Silvers Design

Cover photos: AP/Wide VVorld

Texl art: Cracom Corporation

Produclion supervisor: Richard c. Bretan

Libraọ oi Congress Cataloging-in-Publication [)ala

Todaro. Michael p.

Economic developmenl Michael Todaro.

p. em.

Kc\ ed. of: Economic developmenl in the Third World. 4th ed.

1989.

Includes index.

ISBN 0-8013-1081-4

I. Economic development. 2. Developingcountries—Economic

policy. I. rodaro. Michael p. Economic de\elopmeni in the Third

World. li. Tille.

HD82T552 1994

338.9'009172'4—dc20 9241256

áp

I 2 .1 4 5 6 7 8 4 I0-MA-979695949.1

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