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Poverty Amidst Wealth: Trends in the World’s Economy

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1968
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John H. Adler

THE DAILY HEADLINES about the balance of payments problems of the United Kingdom and the United States, the occasional news about one developing country or another, and, more recently, the reports from the Second United Nations Conference on Trade and Development in New Delhi form a thoroughly inadequate basis for trying to present an objective view on the growth of the world economy over the last 15 or 20 years. To be sure, it is only natural that close attention is paid to the day-to-day movements and the swift changes in the international scene because it is essential to react to them quickly and effectively. But there is much to be said for taking time out from the preoccupation with day-to-day events and to sit back and try to assess the accomplishments and the failures of the world economy over the last two decades and to grope, however tentatively, for the lessons which emerge from such an assessment.

The World Economy Grows

The two most important findings that emerge from a study which some of my colleagues at the World Bank and I have started are these: first, in the 15 years from 1950 to 1965 the world economy grew at an unprecedented rate. World production just about doubled, and per capita income increased by more than 50 per cent. Second, all parts of the world took part in this growth. By far the more significant finding is the second, because, as far as we know from the record of the nineteenth and the first half of the twentieth centuries, it is the first time that economic growth was not confined to some countries, or to one area, but was truly worldwide. Despite the uncertainty of the data and estimates on which this conclusion is based, this finding should go a long way to put to rest the contention that the economic development efforts of the poor countries, and with it development aid, have failed.

Our study also reveals, however, that the gains in production and income have been distributed unevenly among countries and regions. It is disturbing, though not surprising, that the poorest countries in the world, those with an annual per capita income of $300 or less, have not done well, and that the countries in the lower half of this income bracket show a growth record which is substantially worse than that of the rest. Included in this group are, of course, most of the countries of Africa and South Asia, countries which started poor and, with all their accomplishments, are still poor by any standards.

On the other hand, countries in the middle-income group, with a per capita income from $300 to $1,200, have done remarkably well. The average income has increased at a rate of 7 per cent a year, or almost tripled. The record of this group, which includes such diverse economies as Japan, several Mediterranean countries, several in Eastern Europe, and a few in Latin America, is thus much better than that of the rich countries of Europe and North America.

But So Does Population

If, instead of comparing the rise in total production and income, we focus on per capita income, the picture becomes considerably worse, and gloomier. The most disconcerting aspect of the record of the world economy since 1950 has been the high, and rising, rate of population growth. This, of course, is not a new discovery; the alarm about the population explosion was sounded some years ago, and thoughtful demographers worried and warned about it for at least 20 years. But what is new in the picture is the heavy concentration of high rates of population growth in the poorest countries in the world. The current rate of population growth of 2½ per cent a year, which the poor countries of the world have experienced in the last 5 years, implies that their population, now close to 1,500 million people, will increase to over 3,000 million before the end of the century. Incidentally, these figures do not include estimates for mainland China because for that country we have nothing but vague guesses for both present population and population growth; according to some estimates the 700 million people of mainland China will increase to 2,000 million by the year 2000 if the basic estimate is correct and if the growth rates of recent years continue.

These growth rates are alarming, not so much because of the Malthusian threat of mass starvation and the epidemics which they evoke but because of the limitations which they impose on economic advancement. If we compare the growth of population income in the poor countries with that of the middle-income countries, we find that there is an inverse relation between population growth and growth in total as well as per capita income. This, I suggest, is prima facie evidence that income growth in the poor countries would not be adversely affected and, on the contrary, would be enhanced by a decline in population growth. To put the same proposition in the form of a numerical example: a reduction in population growth rates in the poor countries by one tenth of 1 per cent is equivalent to an increase in capital formation—or foreign aid—of $600 million per annum. Therefore, when we speak about the burden which high rates of population growth impose on the poor countries, we are not just talking about marginal adjustments but about a major factor which bears directly on their growth prospects.

Characteristics of the Growth Process

The growth data and other indicators of economic performance which cover some 75 countries also provide us with some rather conclusive indications of the essential characteristics of the process of economic growth. Although countries which show the widest possible differences in culture, social arrangements, political institutions, and natural endowment are included in the study, certain broad conclusions emerge.

The first is that the rate of capital formation is an important determinant of the rate of growth, that is, the higher the rate of investment the better the prospects for economic advancement. I am not saying that investment is the sole determinant of economic growth. We know by now only too well that it takes much more than investment to accelerate growth. But there is clear evidence that those countries which somehow, by their own savings or through development support from abroad, manage a high rate of investment also seem to achieve a high rate of growth.

Another conclusion is that countries which by luck, or by wise policies, or by a combination of the two, manage to increase their exports also manage to have a high rate of growth.

Third, contrary to expectations, industrial development has turned out to be relatively easy and agricultural development the more difficult. This is an important part of the explanation for the slow economic growth in the poor countries and the fast growth in the middle-income countries. The economic advance of the latter was largely based on rapid industrialization, to which the social and institutional framework was readily adapted. In the poor countries industrial development also proceeded at a rapid pace, but, starting in many countries with an insignificantly small base, it could not move the rest of the economy. This was so because agriculture, which in most of the poor countries accounts for one half of total production and provides a livelihood for as much as two thirds of the population, expanded at a slow pace and remained susceptible to the vagaries of climatic conditions.

A fourth conclusion is that the path of economic growth over time is not level, but winds unevenly and haltingly through ups and downs; several years of accleration are usually followed by years of slow growth or stagnation—until growth picks up again. There is no evidence that the developing countries as a rule move easily from a slow start into a period of self-sustaining growth; I am sorry to say there is nothing in the record to support the so-called theory of the take-off.

It is not too difficult to discover specific reasons why the growth performance of virtually all countries is so uneven over time. Sooner or later economic advancement runs up against constraints either within the economic system itself or in the broader social and political setting. A typical example of economic factors limiting growth are the constraints imposed by the flow of export earnings. Breakdowns in law and order and civil strife frequently halt, or even reverse, economic advancement, and so do military ventures. One cannot simply assume away these constraints as the builders of economic growth models are prone to do.

Finally, and more generally, the experience of the postwar period shows the complexity and many-sidedness of the process of economic development, on the one hand, and how little we know and how much we still have to learn about it, on the other. This becomes embarrassingly clear if we get away from the neat and simple averages which the various groups of countries reveal and try to explain why some countries have overcome the limitations and handicaps of their own poverty and moved ahead faster than the rest. It is obviously not enough to explain the success stories of development experience of the last 15 or 20 years in economic terms and on the basis of readily quantifiable information. We must look to the social structure and to cultural traits to find even the beginnings of an explanation as to why some countries, with the same economic features as others, have moved ahead. There is no point in hiding our ignorance by inventing new terms such as the “propensity to develop” and to pretend that we can explain what remains essentially un-explainable and baffling. And it would be foolhardy to insist that the development of all countries can be accelerated because some countries have set good examples which can be readily followed by others. But it would be equally wrong to assert that the experience of the last 15 years shows that any and all attempts to speed the process of growth are bound to fail. There is no question that some policies and some development strategies—to use a fashionable term—are more conducive to growth than others and that improvements in policy formulation and performance are possible.

The Future

What then does the future hold for the poor countries of the world? On the basis of the conclusions which we have just drawn, it would be rash indeed to make any predictions. Instead, it may be more useful to enumerate and evaluate some of the factors which bear directly on the prospects of development and which have changed and are likely to change.

We can list at least three positive factors. The first is the increase in the rates of investment and capital formation which has occurred in the poor countries as well as in the countries in the middle-income group. Although, as I have said, a rising rate of investment alone does not assure a rising rate of growth, it may be argued with a good deal of justification that we may look at the rate of investment not so much as a prime mover of growth but as a leading indicator and a measure of the absorptive capacity of a country for domestic savings and foreign capital. If this is so—and I believe that it is—we may expect that the growth of the poor countries may be somewhat faster than it has been until now.

The second factor on the positive side is the increasing awareness, in the poor countries themselves, of the importance of agricultural development in the growth process. The days when development and industrialization were considered synonyms are over; the political leaders of the poor countries no longer frown when it is suggested to them that they should pay more attention to their agriculture. Moreover, as developments in the last 2 or 3 years in Pakistan, Turkey, China, and, more recently, India indicate, the agricultural revolution which went hand-in-hand with industrial revolution in Europe and North America is finally coming to the poor countries of the world. It is coming in the form of improved seeds, through the rapidly expanding use of fertilizers and insecticides, and in the gradual but perceptible changes in techniques of agricultural production. The expectations of some observers may be too sanguine when they predict that in the next few years a number of countries who now rely heavily on food aid will produce exportable surpluses. But even a modest and gradual acceleration in the growth of agricultural production will go a long way toward speeding the rate of development.

The third positive factor is the possibility that population growth is slowing down. Some demographers are hopeful that the rate of population growth in the poor countries has reached its crest and that the prospects for a gradual decline in population growth are good. Again it would be wrong to expect a sudden, precipitous decline in birthrates. But, as I indicated before, even a moderate downturn could set free sizable resources and thus make for faster growth.

Cooperation of Rich and Poor

A final word about the implications of all this for the cooperation of the rich countries with the poor is that in recent years the flow of development aid and technical assistance from the rich countries of Europe, North America, and elsewhere has amounted to $6,000 to $6,500 million net of repayment and another $4,000 million has come to them in the form of private investment. There is ample evidence that these flows have materially contributed to the development of the poor countries. Data which we have assembled at the World Bank indicate that in the last 5 years about one fifth of all investment in the poor countries has been financed by resources obtained from abroad. If it had not been for foreign aid and flows of private capital, income growth would have been substantially smaller and balance of payments difficulties much more severe. If effectiveness is a valid argument in favor of continuing foreign aid, the rich countries of the world have every reason to continue and even increase it.

But one must also realize that, even with sustained development aid and technical assistance, the problems of the poverty of nations will be with us for a very long time. There is little to be gained from pretending otherwise.

This article was adopted from a talk given on the Third Programme of the British Broadcasting Corporation.

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