Abstract
This book analyses the evolution of developing countries in the world economy from a long-term perspective and finds that the distinction between industrialised and developing economies is relatively recent, historically. One thousand years ago, Asia, Africa and Latin America together accounted for more than 80 per cent of world’s population and income. However, it is found that during the period from 1820 to 1950, the industrialisation of Western Europe was accompanied with the de-industrialisation of Asia. During this period, Asia, Africa and Latin America were progressively integrated into the world economy, through international trade, international investment and international migration, and this resulted in a division of labour between countries which, it is argued, was unequal in its consequences for development. However, the share of developing countries in world gross domestic product (GDP) stopped its continuous decline in 1962. This was in a sharp contrast to the ‘Great Divergence’ and ‘Great Specialization’ during the period 1820–1950. In continuation of the author’s earlier works, Liberalization and Development (2008) and Economic Liberalization in India: Analytics, Experience and Lessons (1995), this book explores heterodox perspectives to further understanding of the development process and is convincing in its exploration of an institutional perspective. The process of ‘Catch Up’ during 1950–2010, it is argued, was driven by the role played by the State in evolving trade and industrial policies, developing institutions and making strategic interventions. The intersection of economics and history is explored in the context of retreat of the State, advance of the market and increasing momentum of globalisation. The book makes a valuable contribution by highlighting the role of the developmental state, and also by emphasising the role of growth-mediated development rather than growth as an end in itself.
The book is divided into two parts. The first part highlights the overwhelming significance in the world economy of Asia, Africa and Latin America until the middle of the second millennium. It then focuses on their falling behind during the period from 1820 to 1950. The second part brings out the extent and nature of the catch-up on the part of developing countries in the world economy during the period from 1950 to 2010. In doing so, it considers the changes in their share of aggregate output, level of per capita income, engagement with the world economy and catch-up in industrialisation, to focus on the uneven distribution of this process between regions and within countries in the developing world. The book is comprehensive in its analysis of Maddison data and UN data.
It finds that Asia, and within it China and India, accounted for approximately 50 per cent of world population and world income in the period 1000–1820. However, the economic significance of Asia, Africa and Latin America declined sharply, and by 1950 their share in world population was two-thirds and their share in world income was about one-fourth. In a sharp contrast, between 1820 and 1950, Europe, North America and Japan, it is found, increased their share in world population from one-fourth to one-third and in world income from more than one-third to almost three-fourths. In a span of 130 years, from 1820 to 1950, as compared to the percentage of GDP per capita in Western Europe and Western offshoots, GDP per capita in Latin America dropped from three-fifths to two-fifths, in Africa from one-third to one-seventh and in Asia from one-half to one-tenth. This phenomenon is termed the ‘Great Divergence’. Simultaneously, between 1830 and 1913, the share of Asia, Africa and Latin America in world manufacturing production, attributable mostly to Asia, in particular China and India, collapsed from 60 per cent to 7.5 per cent, while the share of Europe, North America and Japan rose from 40 per cent to 92.5 per cent, to stay at these levels until 1950. The industrialisation of Western Europe and the de-industrialisation of Asia led to the ‘Great Specialization’, which meant that Western Europe, followed by the United States, produced manufactured goods, while Asia, Africa and Latin America produced primary commodities. The book, however, does not engage sufficiently with the de-industrialisation debate in terms of examining its causes and likely implications.
There is a sharp contrast, as the book analyses, between the significance of developing countries in the world economy between the period from 1950 to 2010 and the period from 1820 to 1950. In terms of Maddison purchasing power parity (PPP) statistics, the share of developing countries in world GDP stopped its continuous decline in 1962, when it was one-fourth, to increase rapidly after 1980 so that it was almost one-half by 2008, which was close to their share in 1850. It is also found that the divergence in GDP per capita came to a stop in 1980 and was followed by a modest convergence thereafter, but as a proportion of GDP per capita in industrialised countries in 2008 it was somewhat less than one-fifth, which was about the same as in 1900. The three channels of engagement of the developing countries with the world economy included international trade, international investment and international migration. This is an interesting pointer to the plausible implications for developing countries within the context of their ‘demographic dividends’.
In addition, it is argued that there was a significant catch-up in industrialisation for the developing world as a whole, beginning around 1950 that gathered momentum in the early 1970s. Structural changes in the composition of output and employment, which led to a decline in the share of agriculture with an increase in the shares of industry and services, were an important factor underlying this process. There was a dramatic transformation in just four decades from 1970 to 2010. It is found that the share of developing countries in world industrial production jumped from one-twelfth to one-third in constant prices and from one-eighth to two-fifths in current prices and, in 2010, it was close to its level in the mid-nineteenthcentury. Similarly, the share of developing countries in world exports of manufactures rose from one-twelfth to two-fifths. Industrialisation led to pronounced changes in the composition of their trade as the share of manufactures (particularly medium- and high-technology goods) rose in both exports and imports. It is argued that it was not markets that led to industrialisation but state intervention instead. The creation of initial conditions was followed by a period of learning to industrialise so that outcomes surfaced after a time lag. The historically determined component of institutions and their importance in development is highlighted and this is a significant contribution to the development debate.
Nevertheless, it is premised that convergence and divergence are often simultaneous. Moreover, convergence is often uneven across space and over time. This is borne out by the experience of developing countries in the world economy since 1950, which does not exactly validate the convergence hypothesis. It is found that the distribution of catch-up in industrialisation and development was uneven not only among regions but also between countries within regions. Fourteen countries, it is argued, though latecomers to industrialisation, show evidence of succeeding. These are called the ‘Next 14’—Argentina, Brazil, Chile and Mexico in Latin America; South Africa and Egypt (now Egypt with a question mark) in Africa; and China, India, Indonesia, Malaysia, South Korea, Thailand, Taiwan, Turkey, in Asia. It is argued that these countries face twin challenges in the process of catch up—they would need to create control mechanisms embodied in institutions that impose discipline on the economic behaviour not only of individuals and firms but also of governments, and they would need to develop technological capabilities in firms and in the economy which can advance the technology frontier in at least a few industries or sectors. In the broader context, it is opined argued that catching up is a function not only of technological opportunities but also of social capabilities, which have institutional dimensions that are slow to develop in economies, firms and individuals. Thus, all countries may not be able to realise their potential for catching up since that depends on their social history and initial conditions.
There is more to trade policies than the distinction between import substitution and export promotion or inward and outward orientation; it is suggested, this is an interesting argument. The large number of countries that adopted the reform agenda of the Washington Consensus, it is argued, saw their performance, in terms of economic growth, industrial development and distribution of incomes, turn out to be not only much worse than other parts of the world but also distinctly worse than their own performance in the preceding three decades. Instead that a strategic mix of trade, industrial and technology policy led to the success stories in East Asia and parts of Latin America. Thus, in contrast to orthodox economic theory, the visible hand of the State played a much greater role than the invisible hand of the market. This is particularly relevant in the context of the role of ‘developmental state’ in the East Asian Tigers success story.
Finally, it is propounded that the process of catch-up from 1950 to 2010 was accompanied with new dimensions of divergences in the world economy that need to be given attention. First, inequality between countries and people remained at high levels—most of it attributable to inequality between rich industrialised countries and the poor developing world with some increase in inequality within the latter. Second, the process of catch-up was associated with an exclusion of countries, and regions within countries, in the developing world from the process of development. Third, rapid economic growth in the developing world, underlying the catch-up in terms of aggregate income was not always transformed into meaningful development which impacted the well-being of ordinary people. It is found that during the period from 1981 to 2008, the proportion of the population below the specified international poverty lines (PPP $1.25 per day and PPP $2 per day) declined steadily. However, the number of vulnerable people, defined as those between the two poverty lines, doubled over this period and the absolute number of people below both poverty lines remains large. In the future, it is further argued, the significance of developing countries in the world would be shaped not only in the sphere of economics but also in the realm of politics.
The book contributes to the larger development debate—as reflected in two conflicting views of growth as an end in itself and growth as a means to achieve growth-mediated development—by making the argument that developing countries can sustain the catch-up only if they can transform themselves into inclusive societies where economic growth, human development and social progress move in tandem. The book is an invaluable resource for development policy practitioners and students of developmental economics, and both will find it immensely useful.