In this part of the book, I discuss the relationship between economic development and economic growth.
The first question that the reader will rightly ask is why there is (or there should be) a distinction between economic development and economic growth. This question is particularly apt because I have argued in Chapter 1 that societies that are rich— developed—today are those that have grown steadily over the past 200 years and those that are poor or less-developed are those that have not achieved this type of steady growth.
This perspective suggests that economic development and economic growth are essentially the same thing and should be studied together. Nevertheless, there are two reasons, one good and one bad, for drawing a distinction between development and growth. The good reason is that even though economic development and growth are part of the same process, models of growth emphasize different aspects of this process than models of economic development. In particular, the models we have studied so far focus on either balanced growth or transitional dynamics leading to balanced growth. Even though we have emphasized these transitional dynamics in a number of contexts, our main interest has been to ensure that they take us towards a balanced growth path. Behavior along or near the balanced growth path of a neoclassical or endogenous growth economy provides a good approximation to the behavior of relatively developed societies. But many salient features of economic growth at lower incomes or at earlier stages of development are not easy to map to this “orderly” behavior of balanced growth. In fact, Simon Kuznets and other economists have documented that even in more developed economies, many aspects of the process of economic growth are far from the balanced benchmark implied by the standard neoclassical growth model.Motivated by these patterns, in his classic book Modern Economic Growth, Simon Kuznets defines economic growth as follows:
“We identify the economic growth of nations as a sustained increase in per capita or per worker product, most often accompanied by an increase in population and usually by sweeping structural changes.
In modern times these were changes in the industrial structure within which product was turned out and resources employed—away from agriculture toward nonagricultural activities, the process of industrialization; in the distribution of population between the countryside and the cities, the process of urbanization; in the relative economic position of groups within the nation distinguished by employment status, attachment to various industries, level of per capita income, and the like; in the distribution of product by use—among household consumption, capital formation, and the government consumption, and within each of these major categories by further subdivisions; in the allocation of product by its origin within the nation’s boundaries and elsewhere; and so on.” Simon Kuznets (1966).Although one might debate whether this is the most functional definition of economic growth, it does capture a range of important changes that accompany economic growth in most societies. And yet, the models of economic growth we have studied so far do not do justice to the complex process described by Kuznets. They provide a framework for explaining the sustained increase in income per capita or output per worker. But our models do not feature Kuznets’s sweeping structural changes.
A complementary perspective to Kuznets’s vision is provided by early development economists, such as Hirschman, Nurske and Rosenstein-Rodan, who emphasized the importance of potential market failures and poverty traps in the process of development. If such market failures and poverty traps are an important determinant of economic performance, then we may expect them to be more widespread in less-developed, poorer economies.[43] [44] Thus one might expect Kuznets’s structural change to be accompanied by a process that involves the organization of production becoming more efficient and the economy moving from the interior of the aggregate production possibilities set towards its frontier. A useful theoretical perspective might therefore be to consider the early stages of economic development taking place in the midst of—or even via—this type of structural transformation, which includes both the structural changes emphasized by Kuznets and the process of less- developed economies approaching their efficiency frontier. We may then expect this structural transformation to ultimately bring the economy to the neighborhood of balanced growth, where our focus so far has been. If this perspective is indeed useful, we would like to develop unified models that explain both the structural changes at the early stages of development and the behavior approximated by balanced growth at the later stages. Some of the models we have seen so far take steps in this direction. For example, the model of takeoff in Section 17.6 in Chapter 17 captures a specific type of transformation, from volatile, low-productivity growth into sustained, stable growth. In addition, many of the models in Chapter 18 emphasize the difference between frontier economies and technological followers. Nevertheless, we have not offered a framework that can do justice to Kuznets’s vision and this is largely because the current growth literature is far from a satisfactory framework that can achieve this objective. In this light, the distinction between economic growth and economic development can be justified by arguing that, in the absence of a unified framework or perhaps precisely before we can develop a unified framework, we need to study the two aspects of the long-run growth process separately. Economic growth, according to this division of labor, focuses on balanced growth, the growth behavior of the world economy, and other aspects of the growth process approximating the behavior of relatively developed economies. Economic development, on the other hand, becomes the study of structural transformations, and the efficiency implications of these transformations, at the early stages of development. Models of economic development would then focus on structural changes in the production and consumption, on urbanization, on the size and the composition of the population, on the occupational structure, and on changes in living and social arrangements. The second—the not-so-satisfactory—reason for the distinction between economic growth and economic development is that there are separate literatures on these two topics, with very different emphases and often different questions. The economic growth literature focuses on the theoretical and empirical questions we have so far addressed in this book. The economic development literature, on the other hand, focuses on empirical analyses of education, poverty, discrimination, women’s economic and social status, child outcomes, health, lending relations and agriculture in less-developed economies. Much of this literature is non-theoretical. It documents how economic relationships work in less-developed economies or identifies specific market failures. This literature has provided us with numerous facts that are helpful in understanding the economic relations in less-developed economies and has sometimes acted as a conduit for micro reforms that have improved the lives of the citizens of these less- developed economies. But this literature does not ask questions about the aspects of the process of economic development I have emphasized here—that is, it does not pose the question of why some countries are less productive and poorer, and how and why these less-developed economies can undergo the process of structural transformation associated with, and necessary for, modern economic growth. These two reasons motivate my acceptance of the standard distinction between economic development and economic growth. Although I go along with this standard distinction, throughout I emphasize how it is exactly the same tools that are useful for understanding the process of economic development—the structural transformations emphasized by Kuznets, Hirschman, Nurske and Rosenstein-Rodan—as well as the more orderly process of economic growth. My hope is that this approach will engender both greater efforts to develop a unified theoretical framework useful for understanding the process of development and also theoretical approaches that can make contact with and benefit from the wealth of evidence collected by the empirical development literature. I organize this part of the book into two chapters. The first, Chapter 20, will focus on models that take only a minimal departure from the balanced growth approaches we have seen so far, while still shedding some light on the structural changes emphasized by Kuznets. The models in this chapter can thus be viewed as extensions of the neoclassical growth models in Chapters 8 and 11 designed to shed light on various important empirical patterns. However, these models neither do full justice to the process of sweeping structural changes emphasized by Kuznets nor do they capture the complex aspects of the process of economic development associated with the move from the interior of the production possibilities set towards the frontier.