Economic Growth in the First World: Help or Hindrance to the Third World?

Keyfitz, N. (1993). Economic Growth in the First World: Help or Hindrance to the Third World? IIASA Working Paper. IIASA, Laxenburg, Austria: WP-93-018

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Abstract

Many would hold the First World responsible for Third World poverty. Much was written about exploitation of their colonies by the metropolis, and it is worth quickly reviewing this and other more recent points of contention. These have included pushing the colonies towards specialization in the production of tropical raw materials, development of synthetic substitutes as the colonies became restless and then declared independence, handling of loans to the Third World, copyright and other means of protection of intellectual property, environmental protection.

While differences between the First and Third Worlds along these lines persist and are still prominent in discussion, yet they may be less important than something quite different that is holding back the world's poor. That is the example that the First World sets in technology, and that the Third World strives to emulate.

Large projects -- steel mills, aircraft factories, an elaborately automated textile industry, are not without their attractiveness to the elite of a poor country, as a sign that it is catching up, that it need not replicate the labor intensive aspects of the Industrial Revolution as it was played through in the West. Yet putting its scarce capital into these is a great deal short of optimum allocation from a social point of view. Plants built for show played no part in the success of Japan, Korea, and Taiwan since World War II; on the other hand they did play a part in the Iran of Shah Pahlevi, and led to the displacement of the forward-looking, westernizing Shah by the backward-looking Ayatollah Ruhollah Khomeini.

How did the Shah accomplish this unintended outcome of his high-technology programs? He did it by devoting too little attention to the little people. He disposed of exceptionally large amounts of capital, but it was not enough to create employment opportunities for all at the level of technology to which he wanted to jump in one stride. Capital was far less available to Japan in the 1950s, but what it had it used to make labor productive -- starting with agriculture where as in any country a large part of the labor is located at the start of industrialization. By raising productivity across the board, encouraging artisan industry in the countryside and the city alike, rather than concentrating on a few high-tech labor-saving plants, East Asian countries could get their whole population into the act, and ultimately progress to a point that in many respects is ahead of the West.

What we know from Iran, Algeria, Egypt, the Philippines, and to some extent Latin America is that concentration of production may more quickly attain the appearance of development, but the process is unstable. The rural population could be disregarded in Adam Smith's day, but in a time of easy communication and irrepressible politicians the majority refuse to wait their turn while watching a minority become ostentatiously rich.

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