economic homework 2
Unit 3 - Growth, Poverty, and Income Distribution
What do we know about the relationship between economic growth, poverty rates and income distribution? Are there fixed relationships, or does policy make a difference? Can choices be made?
Early development thinking emphasized industrialization and a shortage of physical capital. As a result rural areas and agricultural development were either ignored, or taxed to provide the resources to stimulate industrial development in the cities.
Initially there was much euphoria. New modern industries were established and GDP appeared to rise rapidly, compared to the earlier, often colonial days.
But when we look closer the results were often disheartening. Too often poverty increased, rural incomes fell, agricultural productivity seemed to stagnate, unemployment went up. What was going on?
India may be a typical case. The vast majority of the population and most of the poverty was in rural areas. Yet the rural areas were largely ignored and indeed industrialization efforts had created too little employment to make a dent in poverty levels. Subsidized capital often led to capital being substituted for labour, and employment would fall rather than rise.
From the 1950s to the early 1980s Indian development was highly regulated and led by the state. The term the Raj economy alludes to the degree of government ownership and regulation of the economy. These were extremely inefficient firms, they were generally unable to compete with the private sector in more open economies. Only the high degree of government protection kept it alive. The Indian countryside was heavily taxed to support this lopsided pattern of development.
Similar results were evident elsewhere. Clearly, rapid growth, although desirable, was not sufficient to promote development and reduce poverty. The pattern or structure of development was at least as important as the rate of growth.
This led to an important change in thinking. What patterns of development tended to promote equitable growth or widely shared development? What kinds of policy options should be considered?
The experience of East Asia suggested that economies could both, grow rapidly and reduce poverty quickly when they undertook a number of specific supporting policies. Investing in broad-based education and small farms, developing competitive labour markets, relying more on private sector firms that were competitive and export-oriented.
However, in many of these Asian tigers market forces did not operate in isolation from the state. In fact vigorous industrial policies and cooperation between the state and the export-oriented private sector appeared to be a key part of the solution.
This unit closes with a case study of the Grameen Bank, one of the first microfinance institutions that promote development by bringing credit for small businesses and small farms to the desperately poor. The banks founder, Mohammed Yunus, an Economics professor in Bangledesh, was recently awarded the 2006 Nobel Peace Prize for his work with Grameen and microfinance.
