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Though macroeconomics was developed for developed countries, developing countries often use this corpus of knowledge — with its competing schools of thought — without any significant modification. It is by no means clear that applying these theories to developing countries is either justified or appropriate. This chapter examines the differences in macroeconomic policy between developing and developed countries. The basic macroeconomic aggregates: output, employment, and inflation are, of course, the same for both developed and developing economies. So too are the basic identities and equilibrium conditions: savings must still equal investment, output must equal income, and aggregate demand is the sum of consumption, investment, government expenditures, and net exports. However, systematic differences between the economies of developed and developing countries and between developing countries themselves, such as the relative effectiveness of macroeconomic tools, give rise to large variation in economic outcomes and policy choices.

The pervasiveness and persistence of nonmarket institutions in developing economies demand an explanation from economists. This essay describes what has been learned about these institutions: why they emerge, why they persist, the inefficiencies that are associated with their presence, and how the presence of these institutions might affect the design of development policy. These institutions serve a useful purpose when markets function imperfectly. At the same time, the restrictions on individual behavior within these institutions may leave the community ill equipped to respond to a changing world. This, in turn, suggests a role for policy. How external interventions can help move the community out of its traditional equilibrium when the economic environment changes is discussed.

The main issues of the book are discussed. The main focus is the development of low-income economies towards catching up with high-income economies, which includes discussion on the major cultural and social changes involved, the choice of economic system – discussing the optimum combination of market, state and community and issues such as the role of technology borrowing as a major means for low-income economies to catch up with advanced ones and identifying the possible means to facilitate this process. While special focus is placed on low-income economies, ‘developing economies’ at various stages of development are covered in broad terms.

This chapter first explains why post-war internationalization, which was the precursor to globalization, eroded the effectiveness of the managed economy. Globalization rendered the ability of public policy to control the external environment in which large corporations were operating and competing ineffective. When competition was primarily domestic, firms, markets, and industries could be managed to enhance targeted firms. With the emergence of global competition, such management of competition no longer works. The chapter documents the shift in competitiveness of leading developed countries, such as the United States and Europe, away from physical-capital based industries and towards knowledge and ideas. As a result of globalization, Europe, like the United States, lost competitiveness in the traditional manufacturing industries. Globalization made it first possible and then essential to locate new investments in capital, that is in factories, plants and establishments, not only in Eastern and Central Europe, but increasingly in Asia, especially China and India. Unless large western firms increasingly located production outside of high-cost Europe and in low-cost regions such as Asia, they would no longer be able to compete in globally linked markets.

Thanks to globalization, the United States along with the other developed economies has eclipsed her glory days and is on the way to managing decline. This chapter questions: is the best the managed economy can do to manage decline? It seems to be true that globalization has rendered physical capital as no longer competitive in economies burdened with high costs in general, and certainly high wages. Is it inevitable that in order to keep capital located in a place, wages must keep dropping until they reach levels so low that the low wages in developing countries no longer seem sufficiently attractive as to lure away capital investment? Ideas and knowledge, were at least as or perhaps even more important than the physical capital, consisting of plants and factories, that had so dependably served as the engine of growth, jobs, and prosperity in the post-war era. Scholars responded to this increasingly apparent insight by expanding their characterization of what matters for growth by starting to focus on knowledge and ideas as the driving force. This became known as the endogenous growth theory in economics, which revolved around the factor of knowledge and ideas as the engine of economic growth.

Provides a critical analysis of some widely accepted explanations for the significant changes in income distribution that have occurred in many advanced countries during the last two decades. Much of the vast literature on the subject emphasizes the role of globalization and technology as the primary influence(s) on income distribution in industrial economies during this period, and this study assesses the validity of these propositions and provides an alternative analytical and policy perspective; it also considers whether these globalization and/or technology theses can be applied to developing countries. The study starts with an introduction, and then the second section outlines the main stylized facts about inequality of income distribution and other unfavourable labour market tendencies (high unemployment and deindustrialization) that have come to characterize industrial economies during the 1980s and 1990s; it also reviews the relevant characteristics of North–South trade in manufactured products. The third section outlines the nature of the ‘Transatlantic Consensus’ that has emerged in this area, notwithstanding serious methodological differences between trade and labour economists; this consensus gives a unified explanation for increased income inequality in the US and of high unemployment in Europe within the same conceptual framework. The fourth section provides a critique of the Consensus and suggests an alternative perspective on income inequality, unemployment, and deindustrialization in advanced countries; the fifth and sixth assess the extent to which changes in income inequality in developing countries can be attributed to globalization, technology, and financial liberalization; and the last section sums up the discussion and outlines policy conclusions, which are substantially different than those that follow from the Transatlantic Consensus.

This chapter discusses challenges faced by the capital system. It begins with a description of the unprecedented boom of the economies of the most developed capitalist countries (North America, Western Europe, Japan, and Australasia) in the 1950s and 1960s, dubbed as the ‘Golden Age’, characterized by low unemployment, low inflation, and rapidly growing living standards. This was followed by the apparent decline of the capitalist system during the second half of the 1960s and through the 1970s, characterized by the emergence of organized labour, international disorganization, and productivity slowdown.

Analyses the trends in within‐country inequality during the post‐Second World War period, with particular attention to the last 20 years, on the basis of a review of the relevant literature and of an econometric analysis of inequality trends in 73 countries accounting for 80% of the world's population and 91% of world gross domestic product–purchasing power parities (GDP–PPP). Suggests that the last two decades (the 1980s and 1990s) have been characterized by a surge in within‐country inequality in about two‐thirds of the developing, developed, and transitional nations analysed. Also suggests that in those countries where the upsurge in inequality was sizeable or where inequality rose from already high levels, growth, and poverty alleviation slowed down perceptibly. While this trend towards higher inequality differs substantially across countries in its extent, timing, and specific causes, it marks a clear departure from that observed during the first 30 years of the post‐Second Word War period during which, with the exception of Latin America and parts of sub‐Saharan Africa, a widespread move towards greater egalitarianism was noted in most of the socialist, developing, and industrialized economies.

Provides an overview of the changes in income distribution in developing and transition countries in recent decades, and assesses the incidence of taxes and government expenditure in these countries. For the overview of income distribution, the chapter relies largely on a set of newly available ‘high‐quality’ income‐distribution data. For the assessment of tax and government expenditure incidence, it relies on existing incidence studies on individual countries. The chapter has five sections: Introduction; The Role of Taxes and Social Spending; Selective Literature Survey—a survey of the studies on the incidence of taxes and expenditure, paying particular attention to the incidence of government spending on education and health, and reviewing the available evidence for a large number of developing countries; Role of Taxes and Government Social Spending Policy—this section offers an overview of the changes in income distribution in developing countries from the 1970s to the 1990s, with separate discussion of the nature of tax reforms and social expenditure policy and their distributional implications in selected countries (Hungary, Indonesia, and Thailand); and Summary and Conclusions.

The pathways and the perils evident in US and EU climate policy are microcosms of larger international efforts to address climate change. The pushes, pulls, successes, and failures of transatlantic climate policy reflect the sheer difficulties inherent first, in international policymaking generally and second, in the context of climate change. This chapter suggests that the experiences of US and EU climate policy over the last two decades offer instructive lessons to developed and developing countries alike as they seek to avoid political and regulatory pitfalls in structuring domestic climate change regimes.

Because of technological advances in terms of communications, and because of the liberalization of capital accounts, private capital flows experienced rapid growth at the end of the 20th century across developing economies. This final chapter looks into the differences between the capital flows to Asia and Latin America that seem to have gained much importance during the earlier years of this study rather than in 1990s. Analyzing the scale and the prominent characteristics of global private capital flows aids in identifying the key elements involved in managing capital flows and policy making procedures especially in developing countries. Also, this chapter attempts to provide a comparison of the various policy responses implemented by different developing countries in addressing such issues.

Explores recent trends in developing and transitional economies in rural–urban, rural, and urban inequality of income and poverty risk, and the offsetting trends in inequality hypothesis (OTI), which claims that, underlying the overall inequality trend, there has been a tendency for rising intrasectoral inequality to be offset by falling rural–urban inequality. The data reviewed in the chapter refute OTI with the possible, partial exception of Latin America: first, the data show no overall tendency for within‐country rural–urban inequality to increase or decrease since the 1980s; second, while modest national and regional tendencies exist, they do not, on the whole, offset trends in overall inequality. Urban–rural ratios of both mean consumption and poverty risk have commonly either risen or fallen alongside total inequality, or even been trendless. Changing urban–rural ratios of poverty or per‐person consumption need not imply changing urban bias; they may be caused by exogenous changes in relative returns to urban activities, plus entry or exit barriers, although rural‐urban inequality trends in ‘human development’ indicators (literacy, longevity, etc.) do suggest rising urban bias. The chapter is arranged in three sections: Introduction and Summary; Rural–Urban and Intrasectoral Contributions to Changes in the Overall Inequality of Consumption or Income—an econometric analysis; and Changing Rural–Urban Poverty Ratios and ‘Urban Bias’.

By virtue of their success in growth and development, a number of economies have been transformed to ‘advanced’ countries, and they may offer lessons to today's developing economies. Even though the performance among these countries was rather uneven during the recent 2008–10 global financial crisis for instance, it would be myopic to focus on the concomitant country performance as an indicator of success or lack thereof. Employing historical accounts, the current volume is able to point out useful aspects of each country's development record within a longer-term perspective. Many other studies have focussed on countries in the developing world as ‘role models’ for other developing economies since such successful countries' experiences have been relatively recent. As useful as those case studies are, they nonetheless omit potentially useful lessons from the more advanced countries which exhibit longer development records

This introductory chapter looks at the ways to borrow in France before banks opened their doors, and the big mountain of debt this shadow credit system raised, even by modern standards. Much of this capital was raised for agriculture and urban real estate, sectors critical in a developing economy that banks often shun because of the risks of farming and the long loan maturities of real estate lending. Until now, virtually no one has noticed this big debt, despite its size. In a way, it is like the dark matter that makes up some eighty-five percent of the universe but cannot be directly observed. Worse yet, they have simply assumed that what cannot easily be observed—private credit in the past or in poor countries today—was insignificant or simply not there at all.

This chapter is somewhat unrelated to the rest of the book, since it does not deal with taxation policies but with the calculation of the shadow cost of labour (shadow wage) in less developed countries (LDCs). During the last two decades, there has been growing consensus on the usefulness as well as the limitations of social cost–benefit analysis for project and expenditure evaluation in developing economies, and on the general procedures for determining shadow prices for such analyses. The objective here is to illustrate how the models and approaches developed in the rest of the book can be used for purposes other than taxation analysis, rather than to present a comprehensive shadow price model. The model presented addresses the case of an open economy facing fixed international prices, in which the government cannot (or does not) set different prices in the rural and urban sectors, and in which tariffs are fixed.

This chapter focuses on the role of MNEs in economic development and examines the business strategies of MNEs as they affect economic development. It includes a discussion of the potential for capital and technology transfer, and the role of MNEs as knowledge-based organizations and in a developing-country absorptive capacity. The chapter explores the potential for developing countries to access capital and technology via the MNE, reviews the factors which facilitate and constrain that access, and discusses the evolving understanding of some MNEs as knowledge-based organizations that organize and deploy knowledge assets in various locations. It assesses the potential for developing countries to benefit from the knowledge-diffusion process and the constraints to their “absorptive capacity,” which may be overcome through MNE knowledge and managerial expertise. The chapter also explores how foreign MNEs enter developing economies, and help stimulate and foster economic development.