The United Nations declared the 1960s to be the decade of development. In 1961, it “called on all member states to intensify their efforts to mobilize support for measures required to accelerate progress toward selfsustaining economic growth and social advancement in the developing countries.” Each developing country set its own target, but the overall goal was to achieve a minimum annual growth rate of 5% in aggregate national income by the end of the decade.16 The world came close to realizing the UN’s goal. LDCs achieved an average annual growth rate of 4.6% from 1960 to 1967. However, their population also increased. As a result, their per capita gross product (income divided by population) rose only about 2%.

When the UN Development Decade ended in 1970, the gap between rich and poor countries had widened: two-thirds of the world’s population had less than one-sixth of the world’s income. This raised new questions about the meaning of development. Evidently, a tide of rising world income did not lift all—or even most—boats. The UN General Assembly concluded that one of the reasons for the slow progress was the absence of a clear international development strategy. The problem of rising inequality made development economists rethink their focus on growth. Before then, the key work linking growth and inequality was Simon Kuznets’s “inverted U” hypothesis. It stated that economic growth decreases inequality in rich countries but increases it in poor countries.17 It tended to create a sense of complacency about inequality: sure, inequality increases for a while as poor countries grow, but eventually countries “outgrow” it and become more equal.

At least, that’s what Kuznets saw when he used cross-section data to compare rich and poor countries. (Cross-section data are data on different countries at the same point in time. It would have been nice to track the same countries over time to see if inequality first increases then decreases as economies grow, but we didn’t have the data to do that back when Kuznets put forth his novel theory.) As panel data have became available to track individual countries’ growth and inequality, the inverted-U theory has been challenged repeatedly in the development economics literature, though it seems to fit some countries well. (Panel data provide information on the same units [here, countries] over time.) Today, China is growing fast, and inequality there is increasing.

Brazil and Mexico have much higher per capita incomes than China, and inequality there is going down. Then there’s the United States, where inequality fell through the 1970s but is rising again now. Development economics shifted its attention from income growth to income inequality (chapter 5, “Inequality”). In 1974, Hollis Chenery, head of the World Bank’s economic research department, and colleagues published an influential book called Redistribution with Growth. 18 It demonstrated that when assets (such as land) are distributed unequally, economic growth creates an unequal distribution of benefits.

Around the same time (1973), Irma Adelman and Cynthia Taft Morris published a book called Economic Growth and Social Equity in Developing Countries. 19 They found that as incomes grew, not only did inequality increase, but the absolute position of the poor worsened. At the early stages of a country’s economic growth, the poorest segment of society may be harmed, as traditional economic relationships in subsistence economies are displaced by emerging commercial ones. Growth was more equitable in countries that redistributed assets, like land and human capital (education), before the growth happened. Robert McNamara, the World Bank’s president, presented Chenery’s findings at a 1972 UN conference in Santiago, Chile.20 This staked out a new position for the World Bank and development economics profession more broadly that growth alone is not enough. McNamara and many development economists recommended redistribution before growth; for example, land reforms and other measures to raise the productivity of small farmers and widespread rural education programs. The development economics mantra had shifted from income growth (chapters 3 and 7) to poverty (chapter 4) and inequality (chapter 5).

The work of Amartya Sen expanded the scope of economic development yet further to include dimensions of human development such as health, nutrition, education, and even freedom (chapter 6). National planning offices cropped up around the world, often with “five-year plans” inspired by the Soviet Union’s planning models but not necessarily socialistic in nature. (While Ed was an undergraduate student he worked for a year with the National Planning Office in Costa Rica, which had five-year plans but was hardly a communist state!) This period saw the advent of economy-wide models as a tool for development planning and policy. These models were designed to simulate the complex impacts that policies have on whole economies as well as on particular social groups. They continue to be a staple of development economics research and policy design and are often at the crossfire of a lively debate about the role of planning and markets in economic development. The 1970s marked the beginning of what has become an ongoing friction between direct government involvement in the development process and market-led development—a tension we will address throughout this book because it stems from essential ideas in development economics.

The traditional neoclassical economic view, inspired by Adam Smith’s “invisible hand,” is that individuals and firms, in the pursuit of their selfinterest, are led as if by an invisible hand to economic efficiency. For example, competition among profit-maximizing firms drives down prices for selfish, utility-maximizing consumers. However, the invisible hand does not typically lead to fair outcomes, so government intervention can often play a role in promoting social objectives other than efficiency, such as equality or protection of domestic industries.

The 1960s and 1970s witnessed increasing government involvement in markets: setting prices, controlling trade, and creating “parastatal” enterprises that did everything from buying and selling crops to drilling for oil.

1. “Cheap food policies” directly harmed agriculture while helping to keep urban wages low.

2. Steep tariffs and quotas on imported industrial goods and direct subsidies were used to promote industrialization. This increased the profitability of industrial compared to agricultural production.

3. Macroeconomic policies like overvalued exchange rates made im – ported industrial inputs and technologies (as well as food) cheaper. This created yet another bias against agriculture by making traded goods (food) less profitable than nontraded goods (manufactures, which were protected from trade competition).