Historic Growth and

contemporary Development:
Lessons and controversies

Chapter -Four
 Introduction
• The previous models are formulated based on the experience of the
current developed countries and indicates how economic growth and
development can be achieved given their resource base.

• However, directly formulating and implementing

development policies, for the current developing
countries, based on those models may not always be
proper.

• The major reason is that condition in which those developed

countries implemented the models and achieved development may
not be same as the current situation of developing countries.

• Therefore, development policy making, in developing

countries, should consider the current characteristics and
structural features of the economy.
 4.1 The Historical Record of Economic Growth

• Professor Kuznets, who received the Nobel Prize

in economics in 1971 for his pioneering work in the
measurement and analysis of the historical growth of
national incomes in developed nations, has defined a
country’s economic growth as a “long term rise
in capacity to supply increasingly diverse economic
goods to its population based on advancing
technology and the institutional and ideological
adjustments that it demands”.
In his exhaustive analysis, Kuznets has identified six
characteristic features manifested in the growth
process of almost every developed nation:
1. High rates of growth of output, per capita output and
population.
2. High rates of increase in factor productivity.
3. High rates of structural transformation of the economy
(i.e. a shift from agriculture to non –agriculture and
more recently a shift from industry to service. There is
also a shift in location and occupational structure, that
is, from rural agriculture and related non – agriculture
activity to urban – oriented manufacturing activities).
4. High rates of social, political and ideological
transformation.
• For significant economic structural change to take
place in any society, associated transformations in
attitudes, institutions, and ideologies are often
necessary.

• Obvious examples of these social transformations are

the general urbanization process and the adoption of
the ideals, attitudes, and institutions of what has come
to be known as “modernization.”
According to Kuznets, Modernization includes;
• Rationality- the substitution of modern methods of thinking,
acting, producing, distributing and consuming for age-old
traditional practices. The quest for rationality implies that opinions
about economic strategies and policies should be based on
logically valid inferences and rooted as deeply as possible in
knowledge of relevant facts.
• Economic planning– the search for a rationally- coordinated
system of policy measures that can bring about and accelerate
economic growth and development.
• Social and economic equalization: the promotion of more
equality in status, wealth, opportunities and levels of living.
• Improved institution and attitudes: - necessary to increase
labour efficiency and conscientiousness; promote effective
competition, social and economic mobility and individual
enterprise; permit greater equality of opportunities; make possible
higher productivity; raise levels of living and promote
development.
• Attitudes: - honesty, orderliness, diligence, punctuality, etc.
5. The propensity of economically developed countries
to reach out the rest of the world for markets and
raw materials.

6. The limited spread of this economic growth to only

a third of the world’s population.
4.2 Limited Value of Historical Growth Experience:
Differing initial conditions
The position of developing countries today is in many important ways
significantly different from that of the currently developed countries when
they embarked on their era of modern economic growth. We can identify
eight significant differences in initial conditions that require a special
analysis of the growth prospects and requirements of modern economic
development:
1. Physical and human resource endowments
2. Per capita incomes and levels of GNP in relation to the rest of the world
3. Climate
4. Population size, distribution, and growth
5. Historical role of international migration
6. International trade benefits
7. Basic scientific and technological research and development capabilities
8. Stability and flexibility of political and social institutions
We will discuss each of these conditions with a view to formulating requirements
and priorities for generating and sustaining economic growth as we enter the
twenty-first century.
 1. Differences in Physical and human resource
endowments

• Contemporary developing countries are often well

endowed with natural resource than the currently
developed nations were at the time when the latter
nations began their modern growth.

• A few developing nations are blessed with abundant

supplies of petroleum, other minerals, and raw
materials for which world demand is growing; most less
developed countries, however especially in Asia, where
more than half of the world’s population resides – are
poorly endowed with natural resources.
• In a country where resources are more plentiful, heavy
investments of capital are needed to exploit them. Such
financing is not easy to come by without sacrificing substantial
control to powerful developed country multinational
corporations that alone are currently capable of large scale,
efficient resources exploitation.

• The difference in skilled human resourced endowments is

even more pronounced.

• The ability of a country to exploit its natural resources and to

initiate and sustain long-term economic growth is dependent
on, among other things, the ingenuity and the managerial and
technical skills of its people and its access to critical market
and product information at minimal cost.
• The populations of today’s developing nations are
generally less educated, less informed, and less
skilled than their counterparts where in the early
days of economic growth in the west.

• Paul Romer argues that today’s developing nations

are poor because their citizens do not have access to
the ideas that are used in industrial nations to
generate economic value.
• For Romer, the technology gap between rich and poor
nations can be divided in to two components, a physical object
gap, involving factories, roads and modern machinery and an
idea gap, including knowledge about marketing, distribution,
inventory control, transactions processing, and worker
motivation.

• It is this idea gap, or what Thomas Homer-Dixon calls the

ingenuity gap (the ability to apply innovative ideas to solve
practical social and technical problems), between rich and
poor nations that lies at the core of the development divide.

• No such human resource gaps existed for the now developed

countries on the eve of their industrialization.
 2. Differences in Relative levels of per capita
income and GNP
• The 4/5th of the world’s population at present living in
developing countries have on the average a lower level
of real per capita income than their counterparts had in
the nineteenth century.

• First, over half of the population of developing

countries is attempting to subsist at bare minimum
levels. Obviously, the average standard of living in, say
early nineteenth century England was nothing to envy
or boast about but it was not as economically
debilitating or precarious as it is today for a large
fraction of people in the developing world especially
those in the 40 or so least developed countries.
• Second, at the beginning of their modern growth
era, today’s developed nations were economically in
advance of the rest of the world.

– They could, therefore, take advantage of their relatively

strong financial position to widen the income gaps
between themselves and less fortunate countries.

– By contrast, today’s LDCs being their growth process at

the low end of the international per capita income scale.
 3. Climatic Differences
• Almost all developing countries are situated in tropical or sub
tropical climatic zones.

• It has been observed that the economically most successful

countries are located in the temperate zone.

• It is undeniable that the extremes of heat and humidity in most

poor countries contribute to
– deteriorating soil quality and the rapid depreciation of many natural
resources.
– They also contribute to the low productivity of certain crops,
– the weakened regenerative growth of forests, and the poor health of
animals.
– Finally and perhaps most important, extremes of heat and humidity,
not only cause discomfort for workers but can also weaken their health,
reduce their desire to engage in strenuous physical work , and generally
lower their levels of productivity and efficiency.
4. Differences in population size, distribution and Growth

Before and during their early growth years, western

nations experienced a very low rise in population
growth.

As industrialization proceeded, population growth rates

increased primarily as a result of falling death rates but
also because of slowly rising birth rates.

However, at no time during their modern growth epoch

did European and North American countries have
natural population growth rates in excess of 2% per
annum, and generally averaged much less.
• By contrast, the populations of many developing
countries have been increasing at annual rates in
excess of 2.5% over the past few decades, and some
are rising even faster today.

• Moreover, the concentration of this large and

growing population in a few areas means that most
LDCs today start with considerably higher person-
to- land ratios than the European countries did in
their early growth years.
 5. The Historical Role of International Migration

• Of perhaps equal historical importance to the

differing rates of natural population increase is the
fact that in the 19th and early 20th centuries, there
was a major outlet for excess rural populations in
international migration, which was both widespread
and large scale.
6. Differences in the growth stimulus of International Trade

• International free trade has been called the “engine of

growth” that propelled the development of today’s
economically advanced nations during the 19th and early 20th
centuries.

• Together with a relatively stable political structure and

flexible social institutions, increased export earnings enabled
the developing country of the 19th century to borrow funds in
the international capital market at very low interest rates.

• This capital accumulation in turn stimulated further

production, made possible increased imports, and led to a
more diversified industrial structure.
• Today the situation for many LDCs is very different.
With the exception of a few very successful East
Asian countries , the non-oil exporting (and ,indeed
some oil exporting) developing countries face
formidable difficulties in trying to generate rapid
economic growth on the basis of world trade.

– Many developing countries have experienced a

deteriorating trade position.
– Their exports have expanded, but usually not as fast as
the exports of developed countries.
– Their terms of trade (the price they receive for their
exports relative to the price they have to pay for
imports) have declined steadily.
 7. Differences in Basic Scientific and Technological
Research & Development Capabilities

• The high rates of growth experience of contemporary

developed countries have been sustained by the
interplay between mass application of many new
technological innovations based on a rapid advancement
in the stock of scientific knowledge and further
additions to that stock of knowledge made possible by
growing surplus wealth.

• And even today, the process of scientific and

technological advancement in all its stages, from basic
research to product development, is heavily
concentrated in the rich nations.
• Over 90% of all world research and development
(R&D) expenditures originate in these countries.

• Rich countries are interested mainly in the development of

sophisticated products, large markets, and technologically
advanced production methods using large inputs of capital and
high levels of skills and management.

• Poor countries, by contrast, are much more interested in

simple products; simple designs, saving of capital, use of
abundant labour, and production for smaller markets.

• But they have neither the financial resources nor the scientific
and technological know-how at present to undertake the kind
of research and development that would be in their best long
term economic interests.
8. Differences in Stability and Flexibility of Political
and Social Institutions

• One very obvious difference between the now developed and

the underdeveloped nations is that well before their industrial
revolution, the former were independent consolidated nation
states able to pursue national policies on the basis of
consensus toward modernization.

• In contrast to those pre industrial, culturally homogenous,

materially oriented, and politically unified societies, with their
emphasis on rationalism and modern scientific thought, many
developing countries of today have only recently gained
political independence and have yet to become consolidated
nation states with an effective ability to formulate and pursue
national development strategies.
Moreover, the modernization ideas embodied in the
notions of rationalism, scientific thought,
individualism, social and economic mobility, the
work ethics, and dedication to national material and
cultural values are concepts largely alien to many
contemporary developing societies.

Until stable and flexible political institutions can be

consolidated with broad public support, the present
social and cultural fragmentation of many
developing countries is likely to inhibit their ability
to accelerate national economic progress.
• We may conclude that due to very different
initial conditions, the historical experience of
Western economic growth is of limited
relevance for contemporary developing
nations.

• Nevertheless, one of the most significant and relevant

lessons to be learned from this historical experience is
the critical importance of concomitant and
complementary technological, social, and
institutional changes, which must take place if
long term economic growth is to be realized.