Nafziger Economic Development (4th ed)

absolute poverty An income below that which secures the bare essentials of food, clothing, and shelter.

absorptive capacity The ability of an economy to profitably utilize additional capital. This ability depends on the availability of complementary factors.

accelerator The tendency for investment to change as aggregate output changes, thus accelerating the effect of the multiplier.

Adelman–Morris theory of growth and inequality A theory to explain why economic development in a dual economy with modern and traditional sectors corresponds to income inequality tracing a Kuznets (inverted-U) curve.

adjusted net savings Gross savings plus educational expenditure minus capital consumption, environmental degradation, and resource depletion (World Bank 2003d).

ment Policies of privatization, deregulation, wage and price decontrol, trade and financial liberalization and reforms in agriculture, industry, energy, and education intended to increase the economy’s efficiency, macroeconomic balance, and growth. In context, “adjustment” may be shorthand for stabilization and adjustment programs, especially those under the auspices of the International Monetary Fund and World Bank.

adverse selection Asymmetric information resulting in poor loans by the financial system, which lacks the capability of making judgments about investment opportunities.

This asymmetry is characterized by lenders having poor information about potential returns of and risks associated with investment projects and potential bad credit risks being most eager to borrow.

aid Official development assistance (ODA), which includes nonmilitary grants or loans made at concessional financial terms (at least a 25 percent grant element) by official agencies.

antiglobalization Opposition to free international trade and capital movements to protect domestic jobs and income and macroeconomic discretion.

apartheid A racially separate and discriminatory economy and society, as in whiteruled South Africa. There, apartheid, which had existed for decades, was legally institutionalized from 1948 to 1994, the beginning of constitutional democracy.

appropriate technology Technology that fits LDC factor proportions (relative price of capital and labor) and culture.

Asian borderless economy The Japaneseled international division of knowledge and function, in which more sophisticated activities are allocated to Japan and the Asian tigers, and less sophisticated production and assembly for other Asian economies.

Asian tigers The economically most advanced Asian economies, including South Korea, Taiwan (China-Taipei), Singapore, and Hong Kong (China), which have had rapid economic growth since 1975.

738Glossary

Association of South East Asian Nations (ASEAN) An organization of 10 nations whose purposes include promoting economic growth and integration. The members – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand, and Vietnam – have formed AFTA, the ASEAN Free Trade Area.

backward linkages Links to enterprises that sell inputs to a given firm. These linkages are part of the way society assesses an investment project, considering not only returns to an industrial project but also the effect of the project on the social profitability of another sector.

balance of payments equilibrium An international balance on the goods and services balance over the business cycle, with no undue inflation, unemployment, tariffs, and exchange controls.

balance of trade Exports minus imports of goods.

balanced growth A synchronized application of capital to a wide range of different industries (Nurkse).

basic-needs approach A development strategy that shifts attention from maximizing output to meeting and attaining a minimal standard of nutrition, primary education, health, sanitation, water supply, and housing for the population.

basis point One-hundredth of a percentage point, used to indicate interest rates.

big push See balanced growth.

bilateral aid Aid given directly by one country to another.

biodiversity Genetic and species diversity in plants and animals that provides humankind with more choices for scientific experimentation, medicines, and grain varieties, and more protection against plant enemies.

black market premium The extent to which the illegal or unofficial market price of a good or currency exceeds the official mar-

ket price. For example, if Ethiopia’s official exchange rate is Birr9 = US$1 and the black market rate is Birr18 = US$1, then the premium is 100 percent (18–9/9 = 1.00).

bourgeoisie The economic class between the aristocracy and the proletariat (industrial working class). For the Marxist, this includes the capitalist class, which is antithetical to the proletariat.

Bretton Woods’ institutions The international monetary system and multilateral development and reconstruction lending agency established by World War II allies at Bretton Woods, New Hampshire, in 1944. Specifically, it refers to two institutions created there, the International Monetary Fund and the World Bank.

Bretton Woods’ system The international monetary system from the early 1950s to the early 1970s in which nations adhered to a fixed exchange rate until forced by international economic imbalances to make a one-off change in the exchange rate.

buffer stock An international arrangement by commodity producer governments to provide for funds and storage to accumulate goods when prices are low and sell when prices are high to smooth fluctuations.

capability The effective freedom of a person to achieve states of beings and doings, or a vector of functionings, such as being adequately nourished, avoiding premature mortality, appearing in public without shame, being happy, and being free. This freedom to attain, rather than the functionings themselves, is the primary goal, meaning that capability does not correlate closely to attainment, such as GNP per capita. See the discussion of Amartya Sen’s approach to poverty and well-being in Chapter 6.

capital flight Private capital outflows by a country’s residents and institutions.

capital goods Produced goods used as inputs in further production. Examples include

Glossary

plant, equipment, machinery, buildings, and inventories.

capital import An inflow of capital from abroad enabling a country to invest in excess of savings.

capital market The resource market in which households and firms supply their savings for interest or potential profits to firms to buy capital goods.

capitalism The economic system dominant in the West since the breakup of feudalism from the 15th to the 18th centuries. Fundamental to this system are the relations between private owners and workers. The means of production are privately held, and legally free but capital-less workers sell their labor to employers. Private individuals operating for profit make production decisions.

capital stock The sum total of previous gross capital investments minus physical capital consumption, natural capital depletion, and environmental capital damage (World Bank 2003c). Also the total amount of physical goods at a particular time that have been produced for use in the production of other goods and services.

cartel An organization of producers that agree to limit output to raise prices and profits.

chaebol Financial conglomerates or cliques that have dominated industry and banking in South Korea. These combines are characterized by the interlocking and crosssubsidization of industrial enterprises and commercial banks.

civil society Institutions independent of the state – private and nongovernmental entities such as labor unions, religious organizations, educational and scientific communities, and the media.

classical theory Analysis based on the works of late-18th- and 19th-century English economists such as Adam Smith, David Ricardo, and Thomas Malthus who believed in natural law, government non-

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interference, and diminishing returns from population growth.

Coase’s theorem The proposition that states that when property rights are well defined and legally enforceable and transactions costs are not prohibitive, participants will organize their transactions voluntarily to achieve efficient (mutually advantageous) outcomes.

coefficient of variation A statistical measure of the deviation of a variable from its mean, viz., the ratio of standard deviation to the mean for the normal (bell-shaped) distribution.

commanding heights For socialist countries, the major sectors of the economy, including heavy industry, metallurgy, military industries, mining, fuel, transport, banking, and foreign trade. Socialist economies tend to identify these key sectors for control by the state.

commodity terms of trade The price index of exports divided by the price index of imports. For example, if export prices increase 10 percent and import prices 22 percent, the terms of trade would drop 10 percent, as 1.10/1.22 = 0.90.

common market Regional integration that removes trade barriers among members, retains common trade barriers against nonmembers, and, unlike a customs union, allows free labor and capital movement among member states.

common property resources An unpaid or open access resource vulnerable to the “tragedy of the commons” (see later) without institutions to limit resource use.

comparative advantage The theory formulated by the classical economists Adam Smith and David Ricardo that states that world (that is, two-country) welfare is greatest when each country exports products whose comparative costs are lower at home than abroad and imports goods whose comparative costs are lower abroad than at home.

740Glossary

comparison-resistant services Services, such as health care, education, and government administration, which comprise a substantial portion of most countries’ expenditure and increase the difficulty of determining relative income across nations.

complete economic and monetary union

Regional integration that removes trade barriers among members, retains common trade barriers against nonmembers, allows free labor and capital movement among member states, unifies members’ monetary and fiscal policies, and unlike an economic union, attains political union. An example of this union is the states of the United States beginning in 1789.

concessional funds Grants or loans with a substantial (at least 25 percent) grant component. See also aid.

conditional convergence Convergence with control variables, such as population growth, education, and government spending, held constant.

conditionality Conditions that the International Monetary Fund (IMF) or World Bank sets for lending. For example, the IMF usually requires that the borrower adopt adjustment policies to attain a viable balance of payments position.

consumer price index (CPI) The index of the average price of a basket of goods and services consumed by a representative household or consumer.

contested markets Competition among a few evenly matched firms and their potential competitors without attaining perfect competition.

contingent valuation The use of questionnaires from sample surveys to elicit the willingness of respondents to pay for a hypothetical program, such as a public good.

convergence A narrowing of the relative income per-capita differentials between poor and rich countries. This is consistent with the assumption of similar technology from one economy to another and the

neoclassical presumption of diminishing returns to capital as an economy develops.

corruption Misuse of entrusted power for private gain (Transparency International 2003).

cost–push inflation Increase in the overall price level caused by an increase in costs in an imperfectly competitive market.

crawling peg An exchange-rate system in which a home currency depreciates (or appreciates) continuously, rather than abruptly, against foreign currencies. Monetary authorities limit the exchange-rate change per period.

creative destruction The use of market competition to improve efficiency by the entry of new low-cost producers to replace old high-cost producers, who exit the market through failure or bankruptcy.

crude birth rate The number of births per 1,000.

crude death rate The number of deaths per 1,000.

currency board Central bank that issues domestic currency at a fixed rate to foreign currency.

currency mismatch A situation in which the currency denomination of a country’s (or sector’s) assets differs from that of its liabilities such that its net worth is sensitive to changes in the exchange rate (Goldstein 2002).

current account The income component of the international balance of payments, referring to sales and purchases of goods and services separate from the transfer of capital or assets.

current expenditures Noncapital expenditures in a given year, including recurrent costs, that is, those occurring periodically.

customs union Regional integration that removes trade barriers among members, but, unlike a free trade area, retains common trade barriers against nonmembers.

Davos A Swiss resort that frequently hosts the annual World Economic Forum, a

Glossary

celebration of globalization among the world’s economic elites.

debt exchanges Exchanges in which the creditor swaps the debt instrument for equity, bonds, or some other obligation in the domestic currency of the debtor.

debt-for-nature swap An exchange in which a DC or a DC nongovernmental organization (such as an environmental organization) repays part of the debt of an LDC if that country promotes the environment, for example, by preserving the tropical rainforest or establishing a national park.

Debt Reduction Facility A scheme created by the World Bank in 1989 to help IDAeligible countries with a credible debtmanagement program to buy back their commercial debt instruments at the current market price, substantially discounted on the secondary market.

debt service The interest and principal payments due in a given year on external debt.

debt-service ratio The ratio of annual debt service to exports of goods and services.

demand–pull inflation Increase in the overall price level resulting from consumer, business, and government demand for goods and services in excess of an economy’s capacity to produce.

democratization The process of moving from authoritarian to democratic rule, in which the sovereign power of the state resides in the people as a whole, who exercise power directly or by officers elected by them.

demographic transition The period of rapid population growth between a preindustrial, stable population characterized by high birth and death rates and a later, modern, stable population marked by low fertility and mortality.

dependency ratio The ratio of the nonworking population (under 15 years old and over 64 years old) to the working-age population (ages 15 to 64).

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dependency theory The theory that contends that subordination of the peripheral economies of Latin America, Asia, and Africa to the industrialized economies of the West contributes to the underdevelopment of these peripheral economies.

developed countries (DCs) Same as highincome countries.

direct investment Real investments in factories, capital goods, land, and inventories where both capital and management are involved and the investor retains control over the invested capital. A large portion of direct investment is by multinational corporations.

direct taxes Taxes levied directly on individuals or businesses, such as property, wealth, inheritance, and personal and corporate income taxes.

dirigiste debate Debate among development economists about the role of the LDC state in promoting macroeconomic stability, national planning, and the public sector.

disability-adjusted life years (DALYs) Number of years lost of a healthy life through premature death, disease, and other disability, expressed per 1,000 population between the ages of 15 and 60 years.

discount rate Interest rate used to allocate investment.

disguised unemployment See zero marginal revenue productivity of labor.

divergence A widening of the relative income per capita differentials between poor and rich countries. See convergence

Doha Development Round Trade negotiations (2001–) under the auspices of the World Trade Organization.

dollarization A situation in which residents of a country extensively use foreign currency (not just dollars) alongside or instead of the domestic currency (Schuler 2004).

dual economies These economies, most lowincome countries, and some middle-income countries, that have a traditional, peasant agricultural sector, producing primarily

742 Glossary

for family or village subsistence, with little or no reproducible capital, using technologies handed down for generation, and having a low marginal productivity of labor, alongside a modern sector. In contrast to the traditional sector, the labor-intensive peasant agriculture (together with semisubsistence agriculture, petty trade, and cottage industry) is a capital-intensive enclave consisting of modern manufacturing and processing operations, mineral extraction, and plantation agriculture, which produces for the market, uses reproducible capital and new technology, and hires labor commercially.

Dutch disease A pathology resulting from the way a booming resource export retards the growth of other sectors through unfavorable effects on the foreign-exchange rate and the costs of factors of production.

economic growth The rate of growth in gross product (or income) per capita.

economic integration A grouping of nations that reduces or abolishes barriers to trade and resource movements among member countries.

economic liberalism The economic ideology that advocates freedom from the state’s economic restraint.

economic rent Payment above the minimum essential to attract the resource to the market.

economic union Regional integration that removes trade barriers among members, retains common trade barriers against nonmembers, allows free labor and capital movement among member states, and, unlike a common market, unifies members’ monetary and fiscal policies.

economies in transition The former communist economies of East-Central European and the former Soviet Union that are making transitions to market economies.

effective rate of protection Protection provided to an industry as a percentage of value-added by production factors at a pro-

cessing stage. The measure considers the effects of tariffs on both inputs and outputs.

elasticity of demand See price elasticity of demand.

elasticity of propoor growth The percentage increase in the consumption growth of the poor/percentage increase in the consumption growth of the nonpoor. If the elasticity is greater than 1, then the process is propoor, if less than 1 antipoor (Bhalla 2002).

elasticity of supply Percentage change in quantity supplied/percentage change in price.

elasticity of the poverty gap with regard to the Gini index The percentage change of the proportion of the population in poverty/percentage change in the Gini coefficient.

elastic tax Tax in which the percentage change in taxation divided by the percentage change in GNP exceeds one.

endogenous Originating internally or explained within the model.

Engel’s law A proposition indicating that as income increases, the proportion of income spent on manufactured goods rises and the proportion spent on primary products falls.

entitlement The set of alternative commodity bundles that a person can command in a society using the totality of rights and opportunities that he or she possesses (Sen).

entrepreneurship The production resource that coordinates labor, capital, natural resources, and technology.

entropy A thermodynamic measure of the amount of energy dissipated in disorder and thus unavailable for human use (Georgescu-Roegen).

euro The common currency used since 1999 (banknotes since 2002) by European Union members France, Germany, Italy, Spain, Portugal, Greece, Austria, Finland, Ireland, Belgium, the Netherlands, and Luxembourg.

Glossary

eurocurrency Currency deposited by companies and governments in banks outside their own countries, usually currency of a nonEuropean country deposited in Europe.

Eurodollars Dollars deposited in banks outside the United States.

European Bank for Reconstruction and Development (EBRD) A development bank, based in London, that loans funds to governments of East and Central Europe and the former Soviet Union.

European Union accession countries Countries joining the European Union in 2004 including Poland, Hungary, Czech Republic, Slovakia, Estonia, Latvia, Lithuania, Slovenia (making the transition from communism to capitalism), Malta, and Cyprus. The prospect of membership, together with E.U. assistance, has encouraged these countries to undertake trade, capitalaccount, legal, financial, enterprise, and other socioeconomic reforms.

exchange control A government or central bank limitation of citizens’ purchase of foreign currency for foreign capital, materials, consumer goods, and travel.

exchange rate See price of foreign exchange.

exit option The leaving of a group or withdrawal of membership when dissatisfied with a group or organization yet unable to effect change. A specific manifestation of “exit” is the decision not to buy a product of a firm when dissatisfied, leading to a shift to that of another and thus perhaps spurring the management of the firm to search for ways to correct whatever faults have led to an exit. In economics, the term was coined by Albert Hirschman.

exogenous External to the system.

expected income In the Harris–Todaro model, the product of the wage and the probability of finding a job. The product becomes relevant in urban areas where this probability is less than 100 percent.

expenditure-reducing policies Contractionary monetary and fiscal policies, especially the cutting of government spending.

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expenditure-switching policies Switching spending from foreign to domestic policies, viz., through devaluing the local currency.

export commodity concentration ratio The ratio of the three to four leading merchandise exports as a percentage of total merchandise exports.

export purchasing power Same as income terms of trade.

external balance An international balance or equilibrium. See balance of payments equilibrium.

external diseconomies See negative externalities.

external economies Cost advantages rendered free by one producer to another.

external (international) deficit Exports less than imports of goods and services.

factor price distortions Situations in which factors of production are paid prices that do not reflect their competitive market price because of institutions, state interference, or monopolistic or oligopolistic restraints on market supply and demand. Distortions in LDCs typically include unsuitable technology, subsidized capital and foreign exchange costs, and labor paid more than its market price because of labor unions or political pressure.

factor proportions theory The theory of Heckscher and Ohlin that shows that a nation gains from trade by exporting the commodity whose production requires the country’s relatively abundant (and cheap) factor of production and importing the good whose production requires the intensive use of the relatively scarce factor.

factors of production Resources or inputs required to produce a good or serve. Basic factors include land, labor, and capital.

failed state A state that provides virtually no public goods or services to its citizens.

family-planning programs Government-run schemes to provide propaganda and contraceptives to regulate or reduce the number of births.

744Glossary

Fel’dman model The Soviet model (1928) that emphasized rapid investment in machines to make machines. Long-run economic growth was a function of the fraction of investment in the capital goods industry.

financial intermediaries Institutions that serve as middlemen between savers and investors; examples are commercial banks, savings banks, community savings societies, development banks, stock and bond markets, mutual funds, social security, pension and provident funds, insurance funds, and government debt instruments.

financial liberalization Eliminating or reducing government intervention into financial markets, allowing supply and demand to determine interest rates, foreign exchange rates, and other financial prices.

financial repression Government intervention into financial markets that constrain investment or distort interest rates, foreign exchange rates, and other financial prices, usually through setting interest rates or prices of foreign exchange below marketdetermined rates.

fiscal incentives Tax concessions or subsidies used to attract investment by business, often from abroad.

fiscal policy Government policies regarding taxes and expenditures.

floating exchange rates Exchange rates that are left free to be determined by supply and demand on the free market without intervention by a country’s monetary authorities.

flow A variable with a time dimension, viz., so much per unit of time.

foodgrain deficit Foodgrain imports as a percentage of foodgrain consumption.

foreign exchange rate See price of foreign exchange.

formal sector The part of the LDC urban economy with large-scale firms with more

than ten workers, paying competitive wages, with formally acquired skills, capital intensity, and entry barriers.

forward linkages Links to units that buy output from a given firm. These linkages are part of the way society assesses an investment project, considering not only returns to an industrial project but also the effect of the project on the social profitability of another sector.

free riding A problem intrinsic to people enjoying the benefits of public goods even when they do not pay for them.

free trade area Regional integration that removes trade barriers among members, but in which each country retains its own barriers against nonmembers.

fungible Aid that is of a nature that is substitutable, interchangeable, or in which the aid can be replaced by another expenditure that is equally satisfactory.

GDP (gross domestic product) A measure of the total output of goods and services in terms of income earned within a country’s boundaries.

GDP deflator The ratio of nominal GDP to real GDP multiplied by 100, which serves as an overall measure of prices.

Gender-related Development Index (GDI)

The U.N. Development Program’s alternative measure of welfare that combines the Human Development Index (HDI) with female shares of earned income, the life expectancy of women relative to men, and a weighted average of female literacy and schooling relative to those of males.

General Agreements on Tariffs and Trade (GATT) A multilateral organization of market economies founded in 1947 that administered rules of conduct in international trade through 1995, when WTO became all-encompassing. WTO maintains continuity with GATT, whose precedents WTO recognizes.

Glossary

Genuine Progress Indicator (GPI) An alternative measure of welfare to GDP that adjusts gross product for resource depletion and environmental degradation.

Gini coefficient An index of inequality or concentration (where perfect equality is 0 and perfect inequality, i.e., one has everything, is 1) used to measure, say, the distribution of income or land holdings. Gini is the area between the perfect equality (45 degree) line and the Lorenz curve (Chapter 6) divided by the total area of the line to the right of the perfect equality right. The higher the Gini, the higher the income inequality; the lower the Gini, the lower the income inequality.

globalization The world’s spreading modernization and growing economic integration in the late 20th and early 21st century.

global production networks (GPNs) A valueadded chain or division of labor of manufacturing output, organized by multinational corporations, usually with DC headquarters, in which production is broken into discrete stages in a number of countries, with each performed in countries best suited for stages. Export production by developing countries in GPNs usually contains a high proportion of duty-free imported intermediates.

global public goods Goods characterized by nonrivalry in consumption, so that consuming nations cannot exclude other nations from their benefits, and nonexclusion in consumption, so that consuming nations cannot exclude other nations from enjoying their benefits. Examples include the atmosphere, biosphere, high-yielding grains from the Green Revolution, and polio vaccination.

GNI (gross national income) Same as GNP.

GNP (gross national product) A measure of total output of goods and services in terms of income earned by a country’s residents or institutions.

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GNP deflator The ratio of nominal GNP to real GNP multiplied by 100, which serves as an overall measure of prices.

Golden Age of Capitalist Growth The period, 1950–73, when world economic growth per capita was faster than for any period of comparable length.

Grameen Bank A microlending bank, established in Bangladesh in 1988, which lends to peer borrowing groups of, say, five or so people with joint liability. The group approves loans to other members as a substitute for the bank’s screening process. Failure to repay by any member jeopardizes the group’s access to future credit.

green markets Markets modified by government action to affect prices through taxes and subsidies to correct market failure and distortions pertaining to the environment. The object of government interference is to bring prices closer to those that would maximize social net benefits.

Green Revolution The increased productivity of agriculture, especially in Asia, from the development of high-yielding varieties of grain and accompanying inputs, infrastructure, pricing policies, research, extension, and technology.

green taxes Taxes on fossil fuel that ensure that emitters bear the costs that they transmit to third parties.

greenhouse gases Carbon dioxide (from coal, oil, natural gas, and deforestation), methane, nitrous oxide, water vapor, and chlorofluorocarbons injected into the atmosphere. These gases, the concentration of which is increased through vehicle and factory energy use and other human activity, change temperature, climate, and ocean circulation, and thus affect economic activity.

group lending A scheme in which a bank lends to peer borrowing groups of, say, five or so people with joint liability. The group approves loans to other members as a substitute for the bank’s screening