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References

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1

The author is indebted to participants in an IMF African Department seminar and other IMF staff members for useful comments on an earlier version of this paper. Any remaining errors, however, are the responsibility of the author.

2

Contemporary growth theories are described in Barro and Sala-i-Martin (1995), mostly from a neoclassical point of view. For an attempt to synthesize various growth models, see Bleaney and Nishiyama (2002); the authors note (p. 45) that explanatory variables tend to take extreme values for the OECD and sub-Saharan Africa, two groups that epitomize the strongest and weakest performers in terms of growth.

3

In the standard production function, Yt = At f (Kt, Lt), where Y is final output, K the capital stock, and L the quantity of labor; A is generally defined as the index level of technology.

4

For example, only one-half of economic growth in France over 1913–63 could be explained by the growth in production factors, even after taking into account the improved quality of labor and capital (Malinvaud and others, 1972, Chapter VII). For recent references and estimates, see Barro and Sala-i-Martin (1995), Chap. 10.

5

Schumpeter identified five cases of new combinations: (1) the introduction of a new good or a new quality of good; (2) the introduction of a new method of production; (3) the opening of a new market; (4) the conquest of a new source of supply of raw materials or semi-manufactured products; and (5) the carrying out of a new organization of any industry (see Theory of Economic Development, 1934, p. 66, and Business Cycles, Vol. I, Chap. 3). Schumpeter provides an overview of the historical precedents for his theory in a long footnote in Chapter II of Theory of Economic Development (pp. 59–60). See also Capitalism, Socialism, and Democracy (1942), Chap. VII. As is well known, Schumpeter’s theory was largely anticipated by Wicksell, as well as shared to some extent by Hayek (see Hagemann, 2001).

6

Additional references are in Nelson and Winter (2002) and Fagerberg (2003). Nelson and Winter did not address the question of comparative development in their 1982 book, but listed to topic among those that would deserve further research (1982, p. 409). The issue of convergence (or catching up) versus divergence is discussed from an evolutionary point of view in Verspagen (1991 and 2000), and Caniëls and Verspagen (2001).

7

The classification of countries in the WEO is described in IMF (2003), Statistical Appendix.

8

The countries in transition comprise 15 central and east European countries, the 12 members of the CIS, and Mongolia.

9

These estimates are at constant market prices. Measured at purchasing power parity (PPP) exchange rates, the drop in sub-Saharan Africa’s income would be significantly smaller because a large share of domestic product is not traded (foodstuffs and services, in particular, are inexpensive in poor countries, but they are hardly saleable on international markets).

10

Much of the literature on “convergence” remained inconclusive through the 1980s. By the early 1990s, it seemed well established that the catching up tendency applied mainly within the group of developed countries, or within large advanced economies such as the United States, and much less to poor countries (see Verspagen, 1991, p. 375). However, a numbers of authors have argued that the evidence if favor of convergence is much stronger once differences in human capital are controlled for (see, e.g., Caselli and others, 1997).

11

Easterly (2001) points out that the failure of poor countries to develop cannot be blamed squarely on development agencies such as the World Bank, given the absence of a counterfactual. Indeed, it is likely that most poor countries would have been worse off without external assistance.

12

The WEO group of exporters of manufactures comprises Brazil, China, India, Malaysia, Pakistan, and Thailand; the newly industrialized Asian economies also grew out of manufactures exports.

13

The calculations are based on a hypothetic US$15,000 car (at 2000 prices), using the average price index for new vehicles in the United States, as published in the U.S. Statistical Abstract (the calculation ignores shipment costs, which would be expected to affect both sides of the transaction); commodity prices are drawn from the International Financial Statistics Yearbook. Poor African farmers may console themselves by noting that the 2000 car comes generally equipped with air conditioning and power steering, and perhaps even anti-lock brakes and improved fuel economy…

14

The list does not include the two top performers in Box 2 above (Botswana and Equatorial Guinea), which should be seen as exceptions to the rule that countries do not grow out of mineral resources. Obviously, jackpot winners hardly qualify as models for success stories, even though using a large windfall wisely is always a challenge.

15

A similar revolution took place in India in the late 1970s and 1980s, when many Brahmins left their spiritual studies (or, in some cases, careers in the civil service) to pursue more earthly matters in Mumbai, Kolkata, New Delhi, Chennai, or Bangalore. For a discussion of “culture as destiny,” see Zakaria (2003), pp. 51–55.

16

Relatively successful countries may well include special cases or even mirages due to faulty statistics. A broader analysis would need to assess growth sustainability as well as progress in various indicators.

17

Although technology in the broad sense of the term is the fundamental explanation for long-term economic growth, this does not mean that poor countries need to jump into hi-tech lines of business. Progress is often the result of unconventional thinking rather than cutting-edge invention.

18

Huang and Khanna (2003) argue that India’s long-term development potential is probably greater than China’s, mainly because the former has laid out a strong infrastructure to support private enterprise while the latter has grown primarily through FDI.

19

There is no universal yardstick to distinguish successful entrepreneurs from rent-seekers at any point of time. However, a major difference lies with the scope for progress and welfare enhancement. For example, an importer with trade preferences who merely repackages goods to sell them on the domestic market with a large profit does not foster economic growth, whereas a low-cost producer generates gainful employment and a sustained expansion of output.

20

In many places around the world, politicians could well raise the question asked by a famous deputy, Piloo Mody, to Indira Gandhi: “Can the prime minister explain why Indians seem to thrive economically under every government in the world except hers?” (quoted in Zakaria, 2003, p. 53).

21

As a case in point, which is more than merely anecdotal, consider the priorities for infrastructure development in those countries that have dual capital cities: the political capital nearly always get the better share of available funds, while the economic capital is left with decrepit facilities and equipment. The examples of Cameroon, the Republic of Congo, Côte d’Ivoire, and Nigeria readily come to mind. See Easterly (2001, pp. 133-34) about “the curious case of Côte d’Ivoire.”

22

See Rodrik and others, 2002; Easterly and Levine, 2003; and the survey in IMF, 2003, Chapter III. Easterly and Levine conclude that institutions matter above everything else: “In sum, measures of tropics, germs, and crops explain cross-country differences in economic development through their impact on institutions. These findings are consistent with the institutions hypothesis and inconsistent with the geography hypothesis. Furthermore, policies do not explain cross-country differences in GDP per capita once one controls for the impact of endowments on institutions and on to economic development” (2003, p. 35).

23

This is the point where the Austrian theories of Mises and Hayek meet Schumpeterian economics; see Nelson and Winter, 1982, p. 356. As these authors note, “modern advocacy of private enterprise solutions tends to suffer from vagueness or utopianism in its treatment of institutional matters,” adding “three particularly important (and closely interrelated) ones involve the treatment of property rights, contracts, and law enforcement” (p. 363).

24

“Whatever progress is made on governance will almost certainly have a positive impact on other sectors. Probably no other dimension of foreign assistance yields so many synergies” (Diamond, 2003).

25

In Bangladesh, the development of garment factories and the extension of microcredits by the Grameen Bank resulted in a surge of female employment, which created tensions in a traditionally male-dominated society. In many countries, a rich minority group tends to grow into a dominant economic and financial power, which may appear threatening to the rest of the population. While such tensions have the potential to turn into civil war, they can also be managed successfully (e.g., as in Malaysia or South Africa).

26

Kuznets (1977), p. 6. The wide scope of political and social changes accompanying economic development is noted recurrently in Maddison (2001).

And Schumpeter Said, "This is How Thou Shalt Grow": Further Quest for Economic Growth in Poor Countries
Author: Mr. Philippe Beaugrand