Economic Growth vs. Development: Dreze and Sen’s Analysis

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In “Putting Growth in its Place” Dreze and Sen argue that “Economic growth is not the same thing as development.” Explain what they mean, using examples and data from their article

Development in a country is a result of sustainable economic growth over a long period, which can be decades. Economic growth is a measure of socioeconomic indices such as living standards, health services, sanitation, and education. Notable improvements in these indices across all the people in a population indicate the growth of an economy. Dreze and Sen argue that economic growth fuels development when followed by active policies that enhance sharing of revenues and using them in the provision of social services (35). For economic growth to be evident, the common people should have access to basic social services such as education and health care. Moreover, the common people should participate in meaningful activities, which contribute to the growth of an economy. Sustainable economic growth augments income among the common people and improves the quality of life.

On one hand, India has a minority group, which is doing well after rapid economic growth on their part. This minority group has expectations that economic growth will grow rapidly to reach all poor citizens. On the other hand, the majority of the people in India live with poor living standards with slow economic growth. The data from the World Bank indicates that the ranking of countries outside Africa places India close to the bottom. The low literacy rate of young females, the high rate of child mortality, limited access to improved sanitation, and a high proportion of underweight children are characteristics of the Indian economy. Basing on social indicators, India ranks among the least economically developed when compared to the rest of the countries in South Asia because of its economic development strategy. Comparatively, Bangladesh and Nepal have overtaken India in terms of the basic social indicators even though India has the highest capita income (36). Though there has been significant growth in the Indian economy, the development has been notably slow with poor living conditions among the Indians.

What are the reasons offered by Banerjee and Duo for the lack of specialization and prevalence of high levels of entrepreneurship among the poor?

The majority of the poor people in the slums and villages use small capital to run their businesses. In most cases, these businesses are small and unprofitable, as the owners do not have sufficient capital to start and run big businesses. The businesses have limited assets, which cannot allow them to access loans from financial institutions and expand their businesses. Since the loans available in the financial institutions have high-interest rates, small businesses can only borrow limited capital and save little income they earn from their businesses; hence, taking them a long time to raise capital. The poor performance of businesses with no hope for expansion makes most of the entrepreneurs uncommitted to their businesses. Lack of commitment in their businesses creates a cycle of unprofitable businesses and entrepreneurs, who are reluctant to take up more risks to improve their current situations (Banerjee and Duflo 215). These businesses have meager returns and do not guarantee security and stability in the end.

Acemoglu, Johnson, and Robinson (AJR) argue that the colonization of the world by European powers was a natural experiment” that allows us to test the importance of institutions for economic development. What do they mean by this? Explain by drawing upon examples from AJR as well as Alice Amsden’s work.

The use of institutions to test economic development in societies is important because it focuses on factors that humans influence to affect poverty in societies as compared to the use of geographical factors, which are natural occurrences. Good institutions enforce the property rights of the majority in the society, create constraints for the elites, which prevent them from expropriating the resources of the others and provide equal opportunities to the majority in the society. The colonists, particularly, Europeans formed diverse institutions, which they employed in ruling their colonies. In civilized and rich areas, they set extractive institutions designed to extract resources from their colonies, while in uncivilized and unoccupied areas, they settled and created societies with their forms of institutions (Amsden 35). These institutions became conducive for them to establish investments and economic growth (Acemoglu, Johnson, and Robinson 28). The establishment of good institutions in relatively developed areas and creating extractive institutions in the developed areas led to an institutional reversal, where rich places acquired poor institutions, while the undeveloped places acquired good institutions. Examples of institutions that British and French colonialists left in Africa are Kenya, Uganda, Congo, Nigeria, Rwanda, and Tanzania.

According to Griffin, Khan, and Ickowitz, what were the special historical conditions that enable successful land reforms in East Asia?

Before World War II, the state-owned land and people practiced communal farming causing land in East Asia to be extremely scarce. Since World War II, the land has transformed from communal ownership to individual ownership of peasant farmers following the implementation of land reform policies. The extreme scarcity of land justified the need for redistribution of the land to avoid paying high land rents in Taiwan, South Korea, and Japan. Before the collapse of the Japanese regime, the government determined the maximum amount of land for a household to own, and then it confiscated land from those, who owned massive tracts of land and together with the land owned by the state, and subsequently distributed it to peasant farmers (Griffin, Khan and Ickowitz 308). Moreover, the government allowed the tenants to purchase their land on easy credit terms. The government compensated those, who owned the land before the war in Japan in its nominal value.

Using this graph from Banerjee and Duo (chapter “Reluctant Entrepreneurs”) explain their critique of microfinance. Would Bateman and Chang agree with this critique?

The analysis of the graph shows a situation where the invested capital is small, but the production increases rapidly. Bateman and Change agree with the critique because they hold that microfinance is an illusion, which cannot help the poor in the long-term (1). With this evidence, one would expect that the poor would access loans from microfinance institutions to boost their businesses and increase production, which would then translate into more returns from the venture. However, the graph shows a growth up to a certain level, where the little investment achieves maximum production and then stops. The rate of production at this point can only gain marginal return with no overall return. With more capital invested in production, the growth is great and fast over a short time. There is a high rate of overall return with increased production. The business is profitable to run and the owner can acquire assets and increase the capital for the business, which would be an advantage in case of a required loan for expansion from a microfinance institution.

According to Batema and Chang, reaching the poor in society with microcredit will only bring short-term benefits for a few poor entrepreneurs, but in the end, the overall development of the poor will remain the same. Ultimately, microfinance has a limitation in poverty reduction because it is not a sustainable economic intervention. Hence, Bateman and Change argue that microfinance reduces poverty when used in the formulation of robust development policies (23). Poverty reduction results from creating financial awareness by educating the persons involved, encouraging, and guiding them in the pursuits of their innovative ideas.

Works Cited

Acemoglu, Doron, Simon Johnson, and James Robinson. “Understanding prosperity and poverty: Geography, Institutions, and the Reversal of Fortune.” Understanding Poverty. Eds. Abhijit Banerjee, Roland Benabou, and Dilip Mookherjee. Oxford: Oxford University Press, 2006. 19-35. Print.

Amsden, Alice. Escape from Empire. New York: MIT Press, 2007. Print.

Banerjee, Abhijit, and Esther Duflo. Poor economics: A radical rethinking of the way to fight global poverty. New York: PublicAffairs, 2011. Print.

Bateman, Milford and Ha-Joon Chang (2009). “The Microfinance Illusion.” Social Science Research Network 1.1 (2009): 1-13. Print

Drèze, Jean, and Amartya Sen. “Putting growth in its place.” YOJANA 1.1 (2012): 35-40. Print.

Griffin, Keith, Azizur Khan, and Amy Ickowitz. “Poverty and the Distribution of Land.” Journal of Agrarian Change 2.3 (2002): 279-330. Print.

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Economic Growth vs. Development: Dreze and Sen’s Analysis

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