Lecture note: Development Economics I 2021

Chapter 4
Historic Growth and Contemporary Development: Lessons and Controversies
4.1. The Economics of Growth: Capital, Labor, and Technology
Three factors or components of economic growth are of prime importance in any society:
1. Capital accumulation, including all new investments in land, physical equipment, and
human resources
2. Growth in population and hence eventual growth in the labor force
3. Technological progress
Note: The detail already discussed in chapter 3
DETERMINANTS OF ECONOMIC DEVELOPMENT
Introduction

Today, countries of the world are divided into rich (developed) countries and poor (developing)
countries. There is a wide gap between the rich and the poor countries. The statement that
“the rich nations get richer and the poor countries get poorer” has become popular in the
literature in world poverty. But what are the explanations for the poor performance of the
developing countries? There are two approaches to explain the determinants of economic
development the traditional approach and the institutional approach.

4.1 Traditional Approach (Economic Factors) to Development

The traditional approach to development assumes that economic development is determined by

economic factors, like natural resources, capital, technology, etc. Let’s see each of the major
economic factors

a) Natural Resources.
The principals factor affecting the development of an economy is the natural resources or land.
“Land” as used in economic includes natural resources such as fertility of land, its situation and
composition, forest wealth, minerals, climate, water resources, sea resources, geographical
proximity with rich countries etc. For growth, the existence of natural resources in abundance
is essential. A country which is deficient in natural resources will not be in a position to develop
rapidly. As pointed out by Lewis, “Other things being equal, men can make better use of rich
resources than they can of poor.”
In LDCs natural resources are either unutilized, underutilized or misutilized. These is one of the
reasons for their backwardness. The presence of natural resources is not sufficient for
economic growth. What is required is their proper exploitation.
It is often said that economic growth is possible even when an economic is deficient in natural
resources. As pointed out by Lewis, “A country which is considered to be poor in resources
today may be considered very rich in resources at some later time, not merely because
unknown resources are discovered, but equally because new uses are discovered for the known
resources.” Japan is one such country which is deficient in natural resources but it is one of the
advanced countries of the world because it has been able to discover new uses for limited
resources.

1
 Lecture note: Development Economics I 2021

b) Capital Accumulation
Capital means the stock of physical reproducible factors of production. When capital stock
increases with the passage of time, it is called capital accumulation or capital formation. Capital
formation is investment in capital goods that leads to increase in capital stock, national output
and income.
Capital formation is the key to economic development. On the one hand it reflects effective
demand and on the other hand, it creates productive efficiency for production. Capital formation
possesses special importance to LDCs. The process of capital formation leads to the increase in
national output in a number of ways. Capital formation is essential to meet the requirements of
an increasing population in such economies. Investment in capital goods not only raises
production but also employment opportunities. It is capital formation that leads to
technological progress. Technological in turn leads to specialization and the economies of large
scale production. The provision of social and economic over heads, like transport, power
education etc in a country is possible through capital formation. It is also capital formation that
leads to the exploitation of natural resources, industrialization and expansion of markets which
are essential for economic progress.

c) Organization
Organization is an important part of the growth process. It relates to the optimum use of factor
of production economic activities. Organization is complement to capital and labour and helps
in increasing their product activities. In modern economic growth, the entrepreneur has been
performing the task of an organizer and undertaking risks and uncertainties.

The underdeveloped countries lack entrepreneurial activity. Such factors as the small size of
the market, capital deficiency, absence of private property and contract, lack of skilled and
trained labour, non-availability of adequate raw materials and infrastructural facilities like
transport, power, etc increase risk and uncertainties. That is why such countries lack
entrepreneurs.

d) Technological Progress
Technological charges are regarded as the most important factor in the process of economic
growth. They are related to changes in the methods of production which are the result of some
new techniques of research or innovation. Changes in Technology lead to increase in
productivity of labour, capital and other factors of production.

e) Division of labour and scale of production

Specialization and division of labour lead to increase in productivity. They lead to economies of
large scale production which further help in industrial development. Adam Smith gave much
importance to the division of labour in economic development. Division of labour leads to
improvement in the productive capacities of labour. Every laborer becomes more efficient than
before. S/he saves time. S/he is capable of inventing new machines and process in production.
Ultimately production increases manifold. But division of labour depends upon the size of the

2
 Lecture note: Development Economics I 2021

market. The size of the market, in turn, depends upon economic progress, i.e. the extent to
which the size of demand, the general level of production, the means of transport etc are
developed. When the scale of production is large there is greater specialization and division of
labour. As a result production increases and the rate of economic progress is accelerated.
Underdeveloped countries are unable to take advantage of the economics of division of labour
and large scale production due to the presence of market imperfections, which in turn keep the
size of the market small.

4.2 Institutional Approach to Development

The institutional approach to development is a recent phenomenon. It argues that explanations
of the poor economic development are found not only in economic factors but also non-
economic factors. In fact most of these factors are explained by non-economic factors or
institutional factors.

The institutional approach to development emphasizes importance of the institutional factors

more than the economic factors using the case of a metropolitan city. The central city in a
metropolitan area, while gaining some high-rise buildings, has a stagnant population and an
increasing proportion of poor people. On the other hand suburbs are prosperous and growing
rapidly.

To a certain degree, modern economics is like such a metropolitan area. The traditional
economics is at the center of the city. At the same time, the suburbs of economics are
expanding rapidly in all directions. The institution approach to development is a case in point.
For example, consider shifting the focus from capital and other resources toward the quality of
governance. In the suburbs of economics, governance is a focus, but not in the city center
where capital is the focus.

The institutional factor further argues that most of the economic factors can be obtained in the
globalize market. For example, many MNCs are ready to invest a significant amount of capital if
conditions are favorable. Besides LDCs can also borrow technologies from DCS.

The institutional factors that determine economic performance include.

a) Type of Government
A country with a monarchy system is less likely to develop as compared with a country with a
democratic government. The nature of democracy depends on the level of education, discipline,
culture etc of the people. In maintaining rules, governments could be soft or strong. To
maintain rules and there by prepare the ground for development, governments need be strong.
To provide for the enforcement of contracts, the prevention of anarchy, and the provision of
other public good, the coercive power of government is necessary.

3
 Lecture note: Development Economics I 2021

Good governance is another important factor which determinants economic performance of

countries. According to Olson M. “Governance is a decisive determinant of economic
performance and that with the right economic policy and institutions, poor countries can grow
at a very rapid rate.” Good governance is reflected by long tem vision, correct policies and
effective implementation. For example, in Japan the government decided what type of
industries to develop after World War II. It gave emphasis to textile, iron and steel, shipbuilding
etc. In recent years, the government shifted towards electronics in response to a change in
world market.
Another aspect of good governance is the development of infrastructure. Countries like Hong
Kong, Singapore, Malaysia, etc develop infrastructure and attract foreign capital.

b) Institutions
Availability of technology like the capital good, complementary factors like infrastructure, highly
skilled labor, innovation etc are required for an economy to grow. To have such technological
changes requires a good institution. For example, in making innovations, there could be
resistance. To calm such resistance, government effort is required. Thus, institutions that
encourage technological innovation and suitability of institution for successful adoption of new
ideas is an important question. Political and cultural dynamism help in adoption of new
technology and the negative forces such as labour union orthodoxy should be managed
properly by good governance. Spread of education, scientific culture are necessary for adoption
of new technology
Reservation/Affirmative Action/. Social justice requires that if some sections of the society
are deprived, they must be given special attention i.e. reservation is needed. The supporters of
reservation justify its use in terms of social justice, equity and to rectify historical mistakes.
However, from the point of view of efficiency, it is not justified.

c) Social Structure of Population.

In some countries, we get a homogenous type of population. Homogeneity of the population
leads to the development of national feelings, which is helpful for economic development – for
example China, Japan, Korea, Russia. On the other hand, population of a country could also be
heterogeneous - divided on the basis of language, religion, ethnicity, caste etc. In such
societies, some groups play entrepreneurial role. For example, the Jews in USA.

d) Human Capital and Cultural Traits.

The difference in per capita income among countries could be explained by human capital and
cultural traits. In the DCs, human capital and cultural traits in the form of work culture,
discipline, good entrepreneurship etc have played an important role. Poor countries are poor
because they lack these traits. The cultural traits that perpetuate poverty are the result of
centuries of social accumulation and they can’t be changed quickly. Cultural advancement
according to M. Olson results in two types of human capital:
a) Marketable human capital - these include more skill, propensity to work harder, more
entrepreneurial personality - these qualities result in increase in the quality and

4
 Lecture note: Development Economics I 2021

quantity of productive outputs. These results in increase in income of persons,

groups as well as of nations.
b) Civic culture. A civic culture leads to the election of good government which adopts
good policy. It also results in a disciplined society. Corruption will be less. People
pay tax.
4.2. The Historical Record: Kuznets's Six Characteristics of Modern Economic
Growth
Now, let us discuss the most important factors that have facilitated the growth process of
contemporary developed countries (rich countries) since the 1770s.
Professor Simon Kuzents has developed pioneering work in the measurement and analysis
of the historical growth of national incomes in developed nations. He defined a country's
economic growth as "a long-term rise in capacity to supply increasingly diverse economic
goods to its population. According to him, this growing capacity depends on advancing
technology and the institutional and ideological adjustments that it demands.
Now let us critically look all three principal components of his definition
1. The sustained rise in national output is a manifestation of economic growth, and the
ability to provide a wide range of goods is a sign of economic maturity.
2. Advancing technology provides the basis or preconditions for continuous economic
growth - a necessary but not sufficient condition.
3. To realize the potential for growth inherent in new technology, institutional,
attitudinal, and ideological adjustments must be made. Technological innovation
without associated social innovation will be meaningless.
In his exhaustive analysis, Kuznets has isolated six characteristic features manifested in
the growth process of almost every developed nation:
I. High rates of growth of output per capita output and population.
II. High rates of increase in factor productivity.
III. High Rates of Economic Structural Transformation
IV. High Rates of Social, Political, and Ideological Transformation
V. International Economic outreach
VI. Limited International Spread of Economic Growth
Let us briefly examine each of these six characteristics.
i. High Rates of Per Capita Output and Population Growth
In the case of both per capita output and population growth, all contemporary developed
countries have experienced large multiples of their previous historical rates during the epoch
of modern economic growth, roughly form around 1770 to the present. For the now
industrialized countries, annual growth rates over the past 200 years averaged almost 2%
for per capita output and 1% for population, or 3% for total output (real GNP). These rates,
which imply a doubling time of roughly 36 years for per capita output, 72 years for
population, and 24 years for real GNP, were far greater than those experienced during the
entire era before the industrial revolution began in the late eighteenth century.
ii. High Rates of Total Factor Productivity Increase
The second aggregate economic characteristic of modern growth is the relatively high rate
of rise in total factor productivity (TFP), the output per unit of all inputs. Many finding have
confirmed that total factor productivity growth is what determines the rate of growth in
developing countries. Because TFP shows the efficiency with which all inputs are used in a
production function, economists often measure its growth separately from the growth of
factor inputs. An increase in TFP would cause the production possibility frontier to shift
outward without any increase in labor or capital. Kuzents found substantial rises in TFP

5
 Lecture note: Development Economics I 2021

during the modern growth era.

iii. High Rates of Economic Structural Transformation
The historical growth record of contemporary developed nations reveals a third important
characteristic: a high rate of structural and sectoral change inherent in the growth process.
Some of the major components of this structural change include the gradual shift away
from agricultural to nonagricultural activities and, more recently, away from industry to
services; a significant change in the scale or average size of productive units (away from
small family and personal enterprises to the impersonal organization of huge national and
multinational corporations); and finally, a corresponding shift in the spatial location and
occupational status of the labor force away from rural, agricultural, and related
nonagricultural activities toward urban-oriented manufacturing and service pursuits.
iv. High Rates of Social, Political, and Ideological Transformation
For significant economic structural change to take place in any society, concomitant
transformations in attitudes, institutions, and ideologies are often necessary. Obvious examples of
these social transformations are the general urbanization process and the adoption of the ideals,
attitudes, and institutions of what has come to be known as "modernization."According to
Kuznets, Modernization includes:
1. Rationality- the substitution of modern methods of thinking, acting, producing,
distributing, and consuming for age-old, traditional practices. Accordingly, what
underdeveloped nations need is a scientific and technological society. It employs new
techniques which follows modern thinking. In addition the quest for rationality
implies that opinions about economic strategies and policies should be logically valid
inferences rooted as deeply as possible in knowledge of relevant facts.
2. Economic planning- the search for a rationally coordinated system of policy
measures that can bring about and accelerate economic growth and development
3. Social and economic equalization- the promotion of more equality in status,
opportunities, wealth, incomes, and levels of living.
4. Improved institutions and attitudes- necessary to increase labor efficiency and
diligence; promote effective competition, social and economic mobility, and
individual enterprise; permit greater equality of opportunities; make possible higher
productivity; raise levels of living; and promote development.
Among the social institutions needing change are outmoded land tenure systems, social
and economic monopolies, educational and religious structures, and systems of administration
and planning. In the area of attitudes, the concept of "modern workers" embodies such ideals
as efficiency, diligence, orderliness, punctuality, frugality, honesty, rationality, change
orientation, integrity and self-reliance, cooperation, and willingness to take the long view.
v. International Economic outreach
These relates to the historical and ongoing propensity of rich countries to reach out to the
rest of the world for primary products and raw materials, cheap labor, and lucrative
markets for their manufactured products. Such outreach activities are made feasible by the
increased power of modern technology, particularly in transport and communication. The
propensity of rich countries to look outwards also opened the possibilities for political and
economic dominance of poor nations by their more powerful neighbors.
vi. Limited International Spread of Economic Growth
In spite of the enormous increases in world output over the past two centuries, the spread
of modern economic growth is still largely limited to less than one-fourth of the world's
population. The minority of the world's population enjoys almost 80% of the world's
income. Moreover, unequal international power relationships between developed and

6
 Lecture note: Development Economics I 2021

underdeveloped countries have a tendency to exacerbate the gap between rich and poor.
The further economic growth of the former is sometimes achieved at the expense of the
growth of the latter.
Let us conclude by analyzing how the six characteristics conditions have reinforced each
other to speed-up or facilitate economic growth in the contemporary rich counties.The six
characteristics of modern growth reviewed here are interrelated and mutually reinforcing. High
rates of per capita output result from rapidly rising levels of factor productivity. High per capita
incomes in turn generate high levels of per capita consumption, thus providing the incentives
for changes in the structure of production (because as incomes rise, the demand for
manufactured goods and services rises at a much faster rate than the demand for agricultural
products). Advanced technology needed to achieve these output and structural changes
causes the scale of production and the characteristics of economic enterprise units to change in
both organization and location. This in turn necessitates rapid changes in the location and
structure of the labor force and in status relationships among occupational groups. It also
means changes in other aspects of society, including family size, urbanization, and the
material determinants of self-esteem and dignity. Finally, the inherent dynamism of modern
economic growth, coupled with the revolution in the technology of transportation and
communication, necessitates an international outreach on the part of the countries that
developed first. But the poor countries affected by this international outreach may for
institutional, ideological, or political reasons either not be in a position to benefit from the
process or simply be weak victims of the policies of rich countries designed to take advantage
of them economically.
4.2. The Limited Value of the Historical Growth Experience: Differing Initial
Conditions

One of the principal failures of development economics of the 1950s and 1960s was its
inability to recognize and take into account the limited value of the historical experience of
economic growth in the west for charting the development path of contemporary developing
nations. The fact is that the position of developing countries today is in many important ways
significantly different from that of the currently developed countries when they embarked on
their era of modern economic growth. Identify eight significant differences in initial conditions
that require a special analysis of the growth prospects and requirements of modern economic
development: The differences are in terms of
Physical and human resource endowments;
per capita incomes and levels of GNP in relation to the rest of the world;
Climate difference;
Population size and distribution, and growth;
Historical role of international migration;
International trade benefits;
Basic scientific and technological research and development capabilities
Stability and flexibility of political and social institutions.
4.3.1. Physical and Human Resource Endowments
Contemporary developing countries are often less well endowed with natural resources
than the currently developed nations were at the time when the latter nations began their
modern growth. A few developing nations are blessed with abundant supplies of petroleum,
other minerals, and raw materials for which world demand is growing; most less developed
countries, however- especially in Asia, where almost one-third of the world's population
resides- are poorly endowed with natural resources. Moreover, in parts of Latin America

7
 Lecture note: Development Economics I 2021

and Africa, where natural resources are more plentiful, heavy investments of capital are
needed to exploit them. Such financing is not easy to come by without sacrificing substantial
autonomy and control to the powerful developed-country multinational corporations that alone
are currently capable of large-scale, efficient resource exploitation.
The difference in skilled human resource endowments is even more pronounced. The ability of
a country to exploit its natural resources and to initiate and sustain long-term economic growth
is dependent on, among other things, the ingenuity and the managerial and technical
skills of its people and its access to critical market and product information at minimal cost.
The populations of today's developing nations are generally less educated, less informed, less
experienced, and less skilled than their counterparts were in the early days of economic growth
in the West.
According to economist Paul Romer, today's developing nations "are poor because their
citizens do not have access to the ideas that are used in industrial nations to generate
economic value. For Romer, the technology gap between rich and poor nations has two
components, a physical object gap, involving factories, roads, and modern machinery, and
an idea gap, including knowledge about marketing, distribution, inventory control,
transactions processing, and worker motivation. It is idea gap between rich and poor nations
that lies at the core of the development divide.
4.3.2. Relative Levels of per Capita Income and GNP
The four-fifths of the world's population at present living in developing countries have on
the average a much lower level of real per capita income than their counterparts had in the
nineteenth century. Over 70% of the population of Third World countries is attempting to
subsist at bare minimum levels. Obviously, the average standard of living in, say, early
nineteenth-century England was nothing to envy or boast about, but it was not as
economically debilitating or precarious as it is today for most people in the Third world,
especially those in the 40 or so least developed countries.
Second, at the beginning of their modern growth era, today's developed nations were
economically in advance of the rest of the world. They could therefore take advantage of
their relatively strong financial position to widen the income gaps between themselves and
less fortunate countries. By contrast, today's LDCs begin their growth process at the low end of
the international per capita income scale. Not only is such backwardness economically difficult to
overcome or even reduce, but psychologically it creates a sense of frustration and a desire
to grow at any cost. This can in fact inhibit the long-run improvement in national levels of
living.

4.3.3. Climatic Differences

Almost all developing countries are situated in tropical or subtropical climatic zones. It
has been observed that the economically most successful countries are located in the
temperate zone. This indicates some relation to the special difficulties caused directly or
indirectly by differing climatic conditions. It is undeniable that the extremes of heat and
humidity in most poor countries contribute to deteriorating soil quality and the rapid
depreciation of many natural goods. They also contribute to the low productivity of certain
crops, the weakened regenerative growth forests and the poor health animals. Finally,
extremes of heat and humidity not only cause discomfort to workers but can also weaken their
health, reduce their desire to engage in strenuous physical work, and generally lower their levels
of productivity and efficiency.
4.3.4. Population Size, Distribution, and Growth
Third World population size, density, and growth constitute another important difference

8
 Lecture note: Development Economics I 2021

between less developed and developed countries. Before and during their early growth
years, Western nations experienced a very slow rise in population growth. As
industrialization proceeded, population growth rates increased primarily as a result of falling
death rates but also because of slowly rising birthrates. However, at no time during their
modern growth epoch did European and North American countries have natural population
growth rates in excess of 2% per annum.

By contrast, the populations of many developing countries have been increasing at annual
rates in excess of 2.5% over the past few decades, and some are rising even faster today.
Moreover, the concentration of these large and growing populations in a few areas means that
most LDCs today start with considerably higher person-to-land ratios than the European
countries did in their early growth years.
4.3.5. The Historical Role of International Migration
Of perhaps equal historical importance to the differing rates of natural population increase is
the fact that in the nineteenth and early twentieth centuries, there was a major outlet for
excess rural populations in international migration, which was both widespread and large-
scale. In countries such as Italy, Germany, and Ireland, periods of severe famine or
pressure on the land often combined with limited economic opportunities in urban industry
to push unskilled rural workers toward the labor-scare nations of North America and Australia.
The period since the Second World War has witnessed a resurgence of international
migration within Europe itself, which is essentially over short distances and to a large degree
temporary. However, the economic forces giving rise to this migration are basically the
same; that is, during the 1950s and especially the 1960s, surplus rural workers from
southern Italy, Greece, and Turkey flocked into areas of labor shortages, most notably
West Germany and Switzerland. This migration provided a valuable dual benefit to the
relatively poor areas from which these unskilled workers migrated. The home governments
were relieved of the costs of providing for people who in all probability would remain
unemployed, and because a large percentage of the workers' earnings were sent home,
these governments received a valuable and not insignificant source of foreign exchange.
Then, you might reasonably ask why the large numbers of poor and less educated peoples
in Africa, Asia and Latin America do not follow the example of workers form southeastern
Europe and seek temporary or permanent jobs in areas of labor shortage. There is very little
scope for reducing the pressures of overpopulation in Third World countries today through
massive international emigration. The reasons for this relate not so much to a lack of local
knowledge about opportunities in other countries as to the combined effects of
geographic (and thus economic) distance and, more important, the very restrictive
nature of immigration laws in modern developed countries.
Despite these rustications, at least 46 million legal and illegal migrants from the developing
world have managed to migrate to the developed world since 1960. From the point of view
of recipient industrialized nations, the problem of illegal Third World migrants has become
so serious that drastic action is being called for. These migrants are perceived as taking jobs
away from poor, unskilled citizen workers. Moreover, illegal migrants and their families are
believed to be taking unfair advantage of free local health, educational, and social
services, causing upward pressure on local taxes to support these services. As a result,
major debates are now under way in both the United States and Europe regarding the
treatment of illegal migrants.
Then again ask yourself "what is so unique in the modern international
migration?"The irony of international migration today, however, is not merely that this

9
 Lecture note: Development Economics I 2021

traditional outlet for surplus people who migrate legally from poor to richer lands are the
very ones that developing countries can least afford to lose: the highly educated and
skilled. Since the great majority of these migrants move on a permanent basis, this perverse
brain drain not only represents a loss of valuable human resources but could prove to be a
serious constraint on the future economic progress of Third World nations.
4.3.6. The Growth Stimulus of International Trade
International free trade has often been referred to as the "engine of growth" that propelled
the development of today's economically advanced nations during the nineteenth and early
twentieth centuries. Rapidly expanding export markets provided an additional stimulus to
growing local demands that led to the establishment of large-scale manufacturing industries.
Together with a relatively stable political structure and flexible social institutions, these
increased export earnings enabled the developing country of the nineteenth century to borrow
funds in the international capital market at very low interest rates. This capital accumulation
in turn stimulated further production, made possible increased imports, and led to a more
diversified industrial structure. In the nineteenth century, European and North American
countries were able to participate in this dynamic growth of international exchange largely
on the basis of relatively free trade, free capital movements, and the unfettered international
migration of unskilled surplus labor.
Today developing countries face formidable difficulties in trying to generate rapid economic
growth on the basis of world trade. Many developing countries have experienced a
deteriorating trade position. Their exports have expanded, but usually not as fast as the
exports of developed nations. Their terms of trade (the price they receive for their exports
relative to the price they have to pay for imports) have declined steadily. Export volume has
therefore had to grow faster just to earn the same amount of foreign currencies as in
previous years. Moreover, the developed countries through their advanced science and
technology remain more competitive, develop more new products, and obtain international
financing on much better terms. Finally, where developing countries are successful at
becoming lower-cost producers of competitive products with the developed countries, the
latter have typically resorted to various forms of tariff and non-tariff barriers to trade,
including import quotas, sanitary requirements, and special licensing arrangements.
4.3.7. Stability and Flexibility of Political and Social Institutions
The final distinction between the historical experience of developed countries and
the situation faced by contemporary developing nationsrelates to the nature of social
and political institutions. One very obvious difference between the now developed and the
underdeveloped nations is that well before their industrial revolutions, the former were
independent consolidated nation-states able to pursue national policies on the basis of
consensus toward modernization. Modern scientific thought developed in these countries
(long before their industrial revolutions) and a modernized technology began early to be
introduced in their agriculture and their industries, which at that time were all small scale.
In contrast, Third World countries of today have only recently gained political independence and
have yet to become consolidated nation - states with an effective ability to formulate and
pursue national development strategies. Moreover, the modernization ideals embodied in the
notions of rationalism, scientific thought, individualism, social and economic mobility, the work
ethic, and dedication to national material and cultural values are concepts largely alien. Until
stable and flexible political institutions can be consolidated with broad public support, the
present social and cultural fragmentation of many developing countries is likely to inhibit their
ability to accelerate national economic progress.

10
 Lecture note: Development Economics I 2021

The critical importance of political stability for economic growth is underlined by a number
of recent quantitative studies. Researchers have found that growth is more influenced by
the stability of the political regime than by its type (democracy or dictatorship). They also
found that in the transition from dictatorship to democracy, the tremendous pressures from
competing interest groups tend to slow down economic growth, but in the longer run, stable
democracies experience higher growth than dictatorships.
We may conclude that due to very different initial conditions, the historical experience of
Western economic growth is of only limited relevance for contemporary Third World nations.
Nevertheless, one of the most significant and relevant lessons to be learned from this
historical experience is the critical importance complementary technological, social, and
institutional changes, which must take place if long-term economic growth is to be realized.
Such transformations must occur not only within individual developing countries but, perhaps
more important, in the international economy as well. In other words, unless there is some
major structural, attitudinal, and institutional reform in the world economy, one that
accommodates the rising aspirations and rewards the outstanding performances of individual
developing nations, internal economic and social transformation within the Third World may be
insufficient.

11