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ECONOMIC GROWTHAND DEVELOPMENT

Second Edition

Hendrik Van den BergUniversity of Nebraska, USA

World ScientificNEW JERSEY • LONDON • SINGAPORE • BEIJING • SHANGHAI • HONG KON"G • TAIPEI • CHENNAI

Contents

Preface

PART I Thinking About Economic Development

CHAPTER 1 The Complexity of Economic Development 11

1.1 The Economic, Social, and Natural Environments 131.1.1 Economic activity and the three spheres 131.1.2 Economic change and human society 14

1.2 The Conventional View: The Great Acceleration 161.2.1 Rapid GDP growth only began after 1800 171.2.2 A new acceleration in the twentieth century 181.2.3 There have been many growth collapses 19

1.3 Small Differences in Growth Have Large Consequences 201.3.1 The power of compounding 211.3.2 Examples of compounding 22

1.4 Structural Change and Economic Growth 241.4.1 Patterns of structural change 241.4.2 The cost of structural change 261.4.3 Definitions of terms 28

1.5 Holism and the Scientific Method 291.5.1 Holism and economics 291.5.2 Homeostatic systems , 321.5.3 Holism and science 331.5.4 Holistic science 35,1.5.5 Kuhn's revolutionary view of science 36

xiv Contents

1.6 How Economists Study Complex Systems 381.6.1 Economic models 381.6.2 The dangers lurking behind models 391.6.3 Economic models, holism, and the scientific method 41

1.7 A Very Brief History of Thought on Economic Development 421.7.1 Economic thought before 1900 421.7.2 Fading interest in development in the late 1800s 431.7.3 Renewed interest in growth after World War II 441.7.4 Development economics and growth theory 451.7.5 The biases of growth theory ^ 451.7.6 Heterodoxy " ' " 47

1.8 What Will Future Economic Development Look Like? 481.8.1 Is further economic growth necessary? 491.8.2 The superfluity of economic growth 491.8.3 Environmental limits to growth 501.8.4 Sustainable economic growth 51

Appendix 1.1: The Mechanics of Economic Growth 54References 57

CHAPTER 2 Measuring Economic Development 59

2.1 Real GDP Per Capita 612.1.1 Gross domestic product (GDP) 612.1.2 GDP versus GNP 632.1.3 Adjusting for price differences 632.1.4 Adjusting for purchasing power 642.1.5 The picture that Maddison' s data paint 662.1.6 Are standards of living becoming more equal? 69

2.2 Finding Better Measures of Economic Development 702.2.1 Household production 712.2.2 Accounting for informal production 722.2.3 The value of leisure 1A2.2.4 Counting the "bads" as well as the goods 752.2.5 Adjusting GDP for environmental costs and benefits 762.2.6 Welfare and lifetime consumption 772.2.7 Adjusting for variety 80

2.3 Beyond Adjustment: New Measures of Economic Development 822.3.1 Improvements in human health 822.3.2 The relationship between output growth and health 852.3.3 Life expectancy and life's order 872.3.4 Education, technology, and what else? 872.3.5 The Human Development Index 89

Contents xv

2.4 Summary and Conclusions 91References 94

CHAPTER 3 Holistic Measurement of Economic Development 97

3.1 Thinking About Happiness 993.1.1 Changing perceptions of the ideal life 993.1.2 Psychology and life satisfaction 100

3.2 Happiness Studies , 1023.2.1 Surveys of life satisfaction " " 1033.2.2 What surveys of happiness tell us 1043.2.3 The Human Development Index again 1063.2.4 Statistical studies of happiness 107

3.3 Neuroscientific Evidence on Happiness 1083.3.1 Linking brain activity to human happiness 1093.3.2 The discoveries of neuroscience _ 1103.3.3 Homeostasis, empathy, learning, and other findings 1123.3.4 Behavioral economics and the neuroscientific findings 115

3.4 Economic Development and Human Happiness 1163.4.1 Is economic growth just a hedonic treadmill? 1173.4.2 Mandeville's "Fable of the Bees" 1183.4.3 Growth, inequality, and happiness 1193.4.4 Individual happiness and economic growth 1203.4.5 Checking in with Kabamba and Banks 122

3.5 How Economists Study Economic Development 1243.5.1 How did economics become such a narrow field? 1243.5.2 Models and the human brain's preference for patterns 1263.5.3 The need for reflexivity 1283.5.4 The Happy Planet Index 129

3.6 Concluding Thoughts 132References 135

PARTH Models of Economic Development 139

CHAPTER 4 The Evolution of Growth Models: From Smith to 141Harrod-Domar

4.1 Adam Smith's Model of Economic Change 1434.1.1 Specialization and exchange 1454.1.2 Specialization and technological progress 146

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4.1.3 The importance of institutions 1474.1.4 Transportation and communications 1484.1.5 National welfare 1494.1.6 The Smithian model 1504.1.7 Adam Smith's legacy 151

4.2 The Classical Economists and Diminishing Returns 1524.2.1 Malthus'theory of population 1524.2.2 The "Classical" model 1544.2.3 An example of diminishing returns 1544.2.4 The Classical equilibrium , 1564.2.5 An evaluation of the Classical model ' ' 1584.2.6 Income distribution according to the Classicals 1604.2.7 John Stuart Mill's recognition of technological progress 1624.2.8 Assessing the contributions of the Classicals 162

4.3 Karl Marx 1634.3.1 Karl Marx and the Classical School 1644.3.2 Marx's model of capitalist development 1664.3.3 An assessment of Marx and Marxism 169

4.4 The Growth of Neoclassical Economics 1724.4.1 Scientific reductionism 1734.4.2 Some observations on Neoclassical economics 174

4.5 The Harrod-Domar Model 1754.5.1 The "Keynesian" Harrod-Domar model 1764.5.2 The supply side of the Harrod-Domar model 1774.5.3 The popularity of the partial Harrod-Domar model 1784.5.4 The incremental capital-output ratio (ICOR) 1794.5.5 The demand side of the Harrod-Domar model 180

4.6 Summary: What the Models Tell Us about Development 183References 187

CHAPTER 5 Solow's Neoclassical Growth Model 189

5.1 Introduction to the Solow Model 1905.1.1 The Neoclassicaliproduction function 1915.1.2 Consumption and saving 1935.1.3 The capital stock 1945.1.4 The Solow growth equilibrium 195

5.2 The Rate of Saving and the Steady State 1965.2.1 The rate of saving and output growth 1965.2.2 Comparative statics 1975.2.3 Dynamic analysis 1985.2.4 What the Solow model reveals 199

Contents xvii

5.3 Population Growth and the Solow Model 1995.3.1 Population growth and the steady state 2005.3.2 Population growth increases total output 201

5.4 Technological Change 2015.4.1 Technical change and the steady state 2025.4.2 Technological change generates permanent growth 2035.4.3 The steady state with technology-driven growth 2045.4.4 Correlation does not imply causation 2045.4.5 Technological change and the growth path 2055.4.6 Summarizing the Solow model , 206

5.5 Applying the Solow Model " """ 2075.5.1 The Asian "economic miracle" 2075.5.2 The reaction to Krugman's analysis 2095.5.3 The Soviet Union and the Solow model 2105.5.4 Recent Russian economic growth 211

5.6 Economic Growth Paths with Technological Change 2135.6.1 Long-run growth vs. transitional growth 2135.6.2 How countries "catch up" 214

5.7 Rebelo's AK Model: A Special Case of the Solow Model 2175.7.1 The production function and the capital share a 2175.7.2 The special case of no fixed factors 2185.7.3 What does the AK model tell us about growth? 219

5.8 Smith to Solow: Some Conclusions 2205.8.1 Comparing the Solow model with earlier models 2205.8.2 Evidence supporting the Solow model 2225.8.3 Weaknesses of the Solow model 2235.8.4 The importance of diminishing returns 224

Appendix 5.1: The Cobb-Douglas Production Function 227References 231

CHAPTER 6 Economic Development and the Natural 233Environment ,

6.1 Limits to Growth 2366.1.1 Optimists, skeptics, and scientists 2366.1.2 This time we should be concerned 2386.1.3 Must we stop economic growth to survive? 2396.1.4 Stopping growth is also problematic 240

6.2 Technological Change and Nature's Resources ' 2406.2.1 Technology and natural resources 2416.2.2 Effective supply of exhaustible resources 2436.2.3 A model of effective exhaustible resource supply 244

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6.2.4 Effective resource supply with technological change 2456.2.5 Further examples: Effective supply with growth 2466.2.6 Which example is most realistic? 2476.2.7 Technological change and exhaustible resources 247

6.3 Resource Prices and Technological Change 2486.3.1 Hotelling's rising prices, history's falling prices 2486.3.2 Do prices provide accurate signals? 250

6.4 Global Warming 2526.4.1 The issue of global warming 2526.4.2 Evidence of global warming ; 2546.4.3 Projections of global warming " " " 2546.4.4 More uncertainty: Feedback 2566.4.5 Stabilizing temperatures 256

6.5 The Loss of Biodiversity 2576.5.1 The issue of biodiversity 2586.5.2 The services of nature 2596.5.3 The value of biodiversity _ 261

6.6 The Solow Model and Renewable Resources 2626.6.1 An enhanced Solow model 2636.6.2 There must be technological change in both spheres 2676.6.3 Summarizing the conclusions of the enhanced Solow model 268

6.7 A Strategy for the Future 2696.7.1 Net domestic product 2696.7.2 The graphic cost of resource depletion 2706.7.3 Refining the definition of sustainable development 272

References * 276

CHAPTER 7 Technological Change: What Is It and How Do 279We Model It?

7.1 Introduction to Technology and Technological Change 2807.1.1 Technological change and the production function 2827.1.2 A more holistic definition of human technology 2837.1.3 The diversity of technological change 2867.1.4 A historical view of technology • 2887.1.5 Ranking technological breakthroughs 289

7.2 Measuring Technological Change 2917.2.1 The sources of growth equation 2917.2.2 Estimates of the Solow residual • 2937.2.3 Inaccuracies in measuring inputs and output 2937.2.4 Sustainable technological progress 295

Contents xix

7.3 Common Characteristics of Technological Change 2967.3.1 The S-curve of technology diffusion 2967.3.2 The slow application of electricity in manufacturing 2997.3.3 Technological change is not always technological progress 3007.3.4 The geographic diffusion of technology is also slow 3017.3.5 Technological change as a combinatoric process 3037.3.6 Technological change can be path dependent 3047.3.7 Technology is a nonrival good 3067.3.8 Paradigm shifts 3077.3.9 Summarizing the characteristics of technology 309

7.4 Technological Change as an Externality: Learning by Doing 3107.4.1 Learning by doing and technological change 3117.4.2 The Liberty Ship program 3127.4.3 How is learning related to doing? 314

7.5 Summary and Observations 315References 318

CHAPTER 8 Dynamic Models of Technological Change 321

8.1 Schumpeter's Ideas on Technological Change 3238.1.1 Endogenous growth models and perfect competition 3248.1.2 Joseph Schumpeter, a radical economist 3258.1.3 Creative destruction and the entrepreneur 3268.1.4 Case study: Entrepreneurs in China 3288.1.5 The routinization of entrepreneurship 3298.1.6 The role of the financial sector 3318.1.7 Progress versus change 3318.1.8 Final thoughts on creative destruction 332

8.2 The Schumpeterian R&D Model 3328.2.1 Imperfect competition and profits 3338.2.2 Costly innovation must be paid for 3348.2.3 The resource cost of innovation 3358.2.4 The present value of innovation 3378.2.5 The equilibrium level of R&D activity 3398.2.6 The changes in fx, r, R, and P and innovation 3408.2.7 Some further observations 3428.2.8 Land-grant universities and extension agents 343

8.3 The Long-Run Trend in the Costs of Innovation 3448.3.1 How to avoid a technology slowdown ' 3448.3.2 Measuring R&D . 3458.3.3 The knowledge burden 3478.3.4 Finding the right combinations 348

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8.3.5 Case study: Finding the right combinations in Peru 3488.3.6 Protectionism and creative destruction 3498.3.7 The Holmes and Schmitz model 3508.3.8 Protectionism and paradigm shifts 3518.3.9 When is technological change progress? 352

8.4 Technology and Developing Economies 3538.4.1 Endogenous technological change and convergence 3548.4.2 Can technology transfers close the gap? 355

8.5 Technology and the Natural Environment 3578.5.1 Making environmentally friendly technology "profitable" 3588.5.2 Making inter-generational decisions ~ ~ 3598.5.3 Environmental costs and true economic development 3598.5.4 The Jevons effect complicates adjustment 361

8.6 Conclusions and a Critique 362Appendix 8.1: Mathematical Proof of the Positive Effect of p 366Appendix 8.2: A Mathematical Version of the Schumpeterian Model 367References _ 371

PART III Key Elements of Economic Development 375

CHAPTER 9 Population Growth 377

9.1 The Many Views of Population Growth 3799.1.1 Population growth's congestive effects 3809.1.2 People as the source of technological progress 3809.1.3 Population growth, economies of scale, and congestion 3819.1.4 The changing effect of growth on population 382

9.2 A Brief Demographic History 3829.3 The Components of Population Growth 386

9.3.1 Historical examples 3879.3.2 Demographic transition 3899.3.3 Patterns of population growth: Summary 391

9.4 Explaining the Patterns of Population Growth 3929.4.1 Kremer' s model of long-run economic growth 3929.4.2 Galor and Weil's model of human capital accumulation 3959.4.3 Jones' model of the production function of ideas 3969.4.4 Leibenstein's model of the marginal child 3979.4.5 Why birth rates have declined 3989.4.6 Concluding thoughts on the population transition 3999.4.7 China's policy of birth planning 400

Contents xxi

9.5 The Short-Run Effects of Shifts in Population Growth 4019.5.1 Population profile 4019.5.2 The dependency ratio 4049.5.3 The importance of the population profile 406

9.6 Population Growth and the Natural Sphere 4069.6.1 Population growth in the natural sphere 4079.6.2 Technological change and population growth in the 408

natural sphere9.7 Summary and Some Conjectures 409

9.7.1 Projected future population growth 4109.7.2 Consequences of future population growth 4119.7.3 Further issues 412

References 414

CHAPTER 10 Human Capital: Humans' Aquired Abilities 417

10.1 Definition of Human Capital 41910.2 Education 420

10.2.1 Trends in education 42010.2.2 Gender and education 42310.2.3 Convergence in educational opportunities 42410.2.4 Summary of the state of education in the world 426

10.3 The Costs and Benefits of Education 42710.3.1 Net returns to education 42710.3.2 Private versus social returns to education 42910.3.3 Estimates of the returns to education 43110.3.4 Developing country expenditures on education 43410.3.5 The statistical evidence on education is not entirely clear 43410.3.6 Diminishing returns and human capital 43610.3.7 Human capital and R&D activity 436

10.4 The Optimal Supply of Education with Externalities 43810.4.1 Human capital and externalities 43910.4.2 A case of multiple equilibria 44010.4.3 Why private education falls short of social needs 44310.4.4 Further difficulties in setting education policy 44410.4.5 The roles of education in the economic and social spheres 445

10.5 Child Labor and Human Capital 44710.5.1 Child labor throughout history 44710.5.2 The economics of child labor 44810.5.3 Policies to deal with child labor - 450

10.6 Summary and Conclusions 450References 453

xxii Contents

CHAPTER 11 The Financial Sector of the Economy 455

11.1 Saving 45711.1.1 The population profile and saving 45911.1.2 Changing profiles and savings rates: The evidence 46011.1.3 Research using the World Bank saving data base 46111.1.4 Saving for the environment: What the evidence implies 462

11.2 The Fundamental Role of the Financial Sector 46311.2.1 Financial failure is a constant 46311.2.2 A simple model of the financial sector 46511.2.3 Extending the analysis to the whole economy 466

11.3 Market Failures in the Financial Sector 46711.3.1 The possibility of default 46811.3.2 Contract enforcement in Taiwan 46811.3.3 Enforceable contracts do not eliminate all risk 46911.3.4 The adverse selection problem 47114.3.5 The moral hazard problem - 47211.3.6 Government regulation and the information problem 47211.3.7 Property rights and collateral: A role for government 47411.3.8 Financial intermediaries also face perverse incentives 47511.3.9 Financial intermediaries versus financial markets 476

11.4 Microfinance 47711.4.1 The Grameen Bank of Bangladesh 47711.4.2 The Grameen model is not new 47911.4.3 Nacional Monte de Piedad 48011.4.4 The future of microfinance 481

11.5 Systemic Failures in the Financial Sector 48211.5.1 Interest rate ceilings 48311.5.2 Human psychology and self-imposed repression 48411.5.3 Culture and the financial sector: Islamic finance 48611.5.4 Crony capitalism: Private financial repression 488

11.6 Crony Capitalism and the Natural Environment 49011.6.1 The financial system's bias towards the economic sphere 49111.6.2 The conflicting consequences of financial deregulation 492

11.7 Summary and Conclusions 493References , 496

CHAPTER 12 Institutions and Sustainable Development 499

12.1 The Role of Institutions in Human Society . 50112.1.1 Dependence on strangers is problematic 50312.1.2 Getting the institutions right 504

Contents xxiii

12.1.3 Not all institutions are equally flexible 50512.1.4 The relationship between formal and informal institutions 50612.1.5 The complexity and inconsistencies of change 508

12.2 Human Behavior and Institutions 50812.2.1 Individual rationality does not guarantee social success 50912.2.2 The tragedy of the commons 51012.2.3 Game theory and the tit for tat strategy 51212.2.4 Results of the 2004 tournament 51512.2.5 Sometimes people are irrational 516

12.3 Institutions and Exchange •. 51712.3.1 Transactions costs and economic efficiency 51812.3.2 The evolution of markets 51912.3.3 Most human exchanges and negotiations do not involve 521

markets12.3.4 Social capital 522

12.4 Culture * 52412.4.1 Case study: A culture clash and exploitation 52512.4.2 Cultures and subcultures 52612.4.3 Symbolic violence — The iron hand of culture 52712.4.4 The blinding influence of culture 530

12.5 The Importance of Institutions for Economic Development 53112.5.1 Institutions and innovation 53112.5.2 Institutions and sustainability 532

12.6 Nation Building: Defying the Strength of Institutions 53312.6.1 The Paris Conference and the failure of nation building 53412.6.2 The failure of Paris did not deter further nation building 53512.6.3 Is gradual change more successful? 538

12.7 Summary and Conclusions 539Appendix 12.1: Empirical Studies of Institutions and Economic Growth 542References 545

CHAPTER 13 Formal Government Institutions 547

13.1 The Economic Roles of Government 54913.1.1 Adam Smith's basic functions of government 55013.1.2 Externalities and government policy 55213.1.3 Externalities and the holistic nature of human welfare 55313.1.4 Imperfect competition and government policy . 55513.1.5 Intertemporal decisions 55613.1.6 Macroeconomic stability 55713.1.7 Achieving a just distribution of society's production 557

xxiv Contents

13.1.8 Government leadership in changing the institutional 558structure

13.1.9 There are no human rights without economic rights 55913.1.10 Summarizing the motivations for collective government 561

action13.2 Government Failures 562

13.2.1 Why government may fail to accomplish its goals 56213.2.2 Rent seeking 56313.2.3 An example of rent seeking 56413.2.4 A final comment on rent seeking 56713.2.5 The comparative advantage of government 567

13.3 Corruption 56813.3.1 Casual evidence of corruption 56813.3.2 Measures of worldwide corruption 57113.3.3 The conditions for corruption 57213.3.4 How can corruption be reduced? 57513.3.5 Measuring the effect of corruption on growth 576

13.4 Informal Activity: Making the Best of Bad Institutions 57713.4.1 Informality is a widespread phenomenon 57713.4.2 Informal economic activity is a form of rent evasion 57813.4.3 Estimates of informal activity 57913.4.4 Informality is more prevalent in developing countries 58013.4.5 Informality and development 58013.4.6 Summarizing the consequences of informality 582

13.5 The Institution of Intellectual Property Rights 58213.5.1 The history of patents and copyrights 58313.5.2 The patent as a property right to an idea 58313.5.3 The cost of protecting intellectual property rights 58413.5.4 International protection of intellectual property rights 58513.5.5 Patents as an example of the clash of formal and 586

informal incentives13.6 Summary and Conclusions 588References 590

PART IV International Economic Integration 593

CHAPTER 14 International Trade and Development 599

14.1 The Growth of International Trade 60014.1.1 New transport technologies 60014.1.2 Is trade an engine or handmaiden of growth? 602

Contents xxv

14.2 Orthodox Economic Analysis of International Trade 60414.2.1 The production possibilities frontier 60414.2.2 Consumer demand and indifference curves 60514.2.3 Combining the supply and demand sides of the economy 60714.2.4 The gain from international exchange 60914.2.5 The gain from international specialization 61114.2.6 Welfare gains from trade according to the HO model 61214.2.7 An evaluation of the HO model and the gains from trade 612

14.3 International Trade and Economic Growth 61414.3.1 International trade and Schumpeter's model of innovation 61614.3.2 Trade and technology transfers 61714.3.3 Statistical evidence on trade and development 61814.3.4 What does the statistical evidence suggest? 61914.3.5 Conclusions suggested by the statistical evidence 620

14.4 Why Free Trade May Not Benefit a Country 62214.4.1 Adjustments to trade are costly 62314.4.2 The example of NAFTA ' - 62514.4.3 Shifts in the terms of trade 62614.4.4 Infant industries 62814.4.5 Increasing returns to scale 63014.4.6 Manufacturing, agriculture, and technological change 63314.4.7 Enclaves, maquiladores, and spillovers 634

14.5 The Environmental Impact of International Trade 63614.5.1 Shifting GHG emissions to less developed countries 63614.5.2 Institutional failures in the global food distribution system 63714.5.3 The GHGs embedded in trade 63814.5.4 Another example of GHGs embedded in trade 639

14.6 Summary and Concluding Remarks 640References 643

CHAPTER 15 International Investment, International Finance 647and Economic Development

15.1 The Economics of International Investment and Finance 64915.1.1 A traditional model of international investment 65015.1.2 Risk and diversification 65315.1.3 The long-run dynamic gains from international investment 65315.1.4 Schumpeterian innovation and international investment 654

15.2 International Financial Flows and Economic Crises 65615.2.1 International finance in the nineteenth century 65615.2.2 The case of Mexico 65715.2.3 Global finance up to 1980 658

xxvi Contents

15.2.4 The resumption of private international lending 659(and borrowing)

15.2.5 The macroeconomics of international investment 66015.3 The Aftermath of the 1982 Debt Crisis 661

15.3.1 The high levels of debt in 1982 66115.3.2 Reaching an agreement 66315.3.3 Another crisis in Mexico 66615.3.4 The Asian crisis of 1997 66715.3.5 Some common threads 66915.3.6 Foreign debt and currency mismatches 67015.3.7 Can financial crises be avoided? " 67115.3.8 A note on exchange rate uncertainty 672

15.4 Foreign Direct Investment 67415.4.1 The growth of FDI and TNCs 67515.4.2 The history of TNCs 67515.4.3 TNCs and international trade 67815.4.4 TNCs and the spread of technology 67815.4.5 Is FDI less volatile than other financial flows? 679

15.5 Why Have Transnational Corporations Grown? 68015.5.1 Why TNCs dominate the economic sphere 68115.5.2 TNCs are altering the economic and social spheres 683

15.6 A Final Note 684References 687

CHAPTER 16 International Economic Policy: Heterodox 691Approaches

16.1 Mercantilism and the Colonial System 69316.1.1 The example of Brazil 69416.1.2 Mercantilism after Brazil's political independence 69616.1.3 Brazil in the 1930s 69816.1.4 From accidental to planned industrialization .699

16.2 Interpreting Brazil's Colonial and Post-Colonial Experiences 70016.2.1 Dependency theory 70016.2.2 The Structuralist school 701

16.3 The Agglomeration of Economic Activity 70216.3.1 The causes of agglomeration 70316.3.2 The agglomeration of innovative activity 70416.3.3 The changing patterns of economic activity 70516.3.4 Immigration and agglomeration . 70716.3.5 Immigrants and the brain drain 71016.3.6 Immigrants and agglomeration again 712

Contents xxvii

16.4 Import Substitution Industrialization (ISI) 71216.4.1 Import substitution policies 71316.4.2 An assessment of import substitution policies 71516.4.3 An extreme example of ISI 71816.4.4 Lessons from ISI 719

16.5 Trade, FDI, and Agglomeration: Modern Mercantilism? 72116.5.1 The recent evolution of mercantilism 72116.5.2 TNCs and international economic policy 72316.5.3 Further concerns about TNCs 72416.5.4 Neocolonialism? ^ 724

16.6 Foreign Aid " " 72716.6.1 Foreign aid and GDP growth 72716.6.2 Domestic capabilities and foreign aid 72916.6.3 Developed countries' commitment to aid 729

16.7 Concluding Remarks 730References 735

PARTV Development Issues 739

CHAPTER 17 The Distribution of Income and Wealth 743

17.1 Economic Development and Structural Change 74417.1.1 An orthodox explanation of structural change 74417.1.2 Unbalanced growth 74517.1.3 Unequal income elasticities of demand 74617.1.4 The costs of structural change 750

17.2 Measuring the Distribution of Income 75017.2.1 First look at inequality 75117.2.2 The Lorenz curve _ 75117.2.3 Longitudinal data 755

17.3 Long-Term Trends in the Distribution of Income ' 75617.3.1 The distribution of income in the distant past 75717.3.2 Estimating historical Gini coefficients 75817.3.3 The distribution of wealth 760

17.4 The Relationship between Growth and Income Distribution 76217.4.1 The Kuznets curve 76217.4.2 Trends in world income inequality: The global Gini 76317.4.3 Does inequality reduce growth? 76517.4.4 Technological progress and income inequality 76617.4.5 How to reduce inequality in a growing economy 767

xxviii Contents

17.5 What Is the Most Desirable Distribution of Income? 76817.5.1 Elements of a "just society" 76817.5.2 Rawls'"veil of ignorance" 76917.5.3 Can humanity achieve a just society? 77017.5.4 Inequality as a report card grade for a market economy 77217.5.5 The relationship between economic equality and social 773

justice17.6 Poverty 775

17.6.1 Defining poverty 77517.6.2 Poverty throughout the world 77617.6.3 Growth may not reduce poverty " "" " 778

17.7 Further Thoughts on Poverty and Income Equality 779Appendix 17.1: Inequality of Lifetime Per Capita Income 781References 783

CHAPTER 18 Policies for Sustainable Economic Development 785

18.1 The Urgent But Difficult Case for Environmental Policies 78818.1.1 Dealing with uncertainty: The example of global warming 78918.1.2 The costs of controlling global warming 79118.1.3 The other example: Biodiversity 79318.1.4 The momentum of our current path 794

18.2 Environmental Policy 79618.2.1 Environmental costs and economic growth 79718.2.2 The available policy tools 79918.2.3 Taxes versus quantitative restrictions 80018.2.4 The political economy of environmental policy 803

18.3 Cases of Environmental Policy Failures 80618.3.1 Hoy No Circula: A case of policy failure 80618.3.2 Clean coal technology 80918.3.3 Carbon offsets 81118.3.4 Species losses and international policy 81418.3.5 The Jevons effect 81518.3.6 Subsidies for research versus energy taxes 816

18.4 What Technologies Do We Need for Sustainability? 81718.4.1 Sustainability in all three spheres and economic interests 81718.4.2 The rights of nature 82018.4.3 Changing the culture of consumption 82218.4.4 How to change the culture of growth 824

References 827

Contents xxix

Name Index 841

Subject Index 853

Geographic Index 857