Journal of Economic Perspectives—Volume 24, Number 3—Summer 2010—Pages 45–60

Uneven Growth: A Framework for Research in Development Economics

Debraj Ray

hhee ttextbookextbook paradigmparadigm ofof economywideeconomywide developmentdevelopment restsrests oonn tthehe ppremiseremise ooff ““balancedbalanced ggrowth”:rowth”: tthathat iis,s, oonn tthehe ppresumptionresumption tthathat aallll ssectorsectors wwillill ggrowrow T iinn uunisonnison ooverver ttimeime aass a ccountryountry ggetsets rricher.icher. TThishis vviewiew hhasas sservederved uuss rreason-eason- aablybly wellwell iinn sseveraleveral ccircumstances,ircumstances, pparticularlyarticularly tthosehose ppertainingertaining ttoo mmacroeconomicacroeconomic mmodelsodels ofof long-termlong-term ggrowth.rowth. AAnn iimplicitmplicit vviewiew tthathat ggrowthrowth iiss bbalancedalanced aacrosscross ssectors,ectors, oorr somethingsomething closeclose toto it,it, alsoalso underliesunderlies thethe notionnotion ofof “trickle-down,”“trickle-down,” a stancestance tthathat hhasas stronglystrongly iinflnfl uenceduenced ddevelopmentevelopment ppolicy.olicy. OOff ccourse,ourse, wewe wouldwould allall agreeagree thatthat balancedbalanced growthgrowth isis anan abstraction.abstraction. InIn manymany ddevelopingeveloping ccountries,ountries, eeconomicconomic ggrowthrowth hhasas bbeeneen ffundamentallyundamentally uuneven.neven. FFirstirst oonene sector,sector, thenthen another,another, thenthen a thirdthird havehave growngrown rapidlyrapidly but not all together. A llistist ofof somesome instancesinstances ooff tthishis pphenomenonhenomenon wwouldould iincludenclude ssoftwareoftware ddevelopment;evelopment; tthehe outsourcingoutsourcing ooff sservices;ervices; qquickuick ccompositionalompositional sshiftshifts bbetweenetween aagriculturegriculture aandnd ootherther sectors;sectors; thethe riserise ofof exportexport pprocessingrocessing zzones;ones; aandnd oothers.thers. TThehe qquestionuestion rreallyeally iiss nnotot wwhetherhether growthgrowth isis balanced—itbalanced—it isn’t—butisn’t—but wwhetherhether tthehe aabstractionbstraction iiss a uusefulseful oone.ne. FForor manymany importantimportant developmentdevelopment qquestions,uestions, I bbelieveelieve tthehe aanswernswer iiss nno.o. TThishis iiss wwhyhy I wouldwould likelike toto taketake thethe realityreality ofof “uneven“uneven growth”growth” seriouslyseriously andand useuse itit asas anan oorganizingrganizing ddeviceevice fforor a rresearchesearch pprogram.rogram. I ddivideivide mmyy rresearchesearch aagendagenda iintonto rroughlyoughly twotwo parts:parts: thethe sources and nature ofof uunevenneven growth,growth, andand thethe reactions toto unevenuneven growth.growth. TheThe fi rstrst partpart studiesstudies tthehe waysways iinn wwhichhich unevenuneven growthgrowth mightmight arisearise andand itsits implicationsimplications fforor eeconomicconomic iinequality.nequality. TThehe secondsecond partpart studiesstudies rreactions:eactions: howhow forcesforces areare setset inin motionmotion toto restorerestore balancebalance oorr pperhapserhaps eevenven ttoo tthwarthwart tthehe ggrowthrowth pprocess.rocess. TToo mmany,any, tthehe fformerormer mmayay aappearppear uunimportantnimportant withoutwithout anan appreciationappreciation forfor thethe latter,latter, soso letlet meme statestate aatt tthehe ooutsetutset tthathat

■ DDebrajebraj RayRay isis JuliusJulius SSilverilver ProfessorProfessor ofof Economics,Economics, NewNew YorkYork University,University, NewNew York,York, NewNew YYork.ork. HHisis ee-mail-mail aaddressddress iiss 〈[email protected]@nyu.edu〉. doi=10.1257/jep.24.3.45 46 Journal of Economic Perspectives

tthehe ssecondecond iiss tthehe mmoreore iimportantmportant ssectionection ofof tthehe ppaper,aper, aandnd tthehe iimpatientmpatient rreadereader iiss ffreeree toto turnturn toto itit rightright away.away. BButut a fewfew introductoryintroductory rremarksemarks mmayay hhelpelp aass wwell.ell. IInn tthinkinghinking aaboutbout tthehe eeffectsffects ofof uunevenneven ggrowth,rowth, AAlbertlbert HHirschman’sirschman’s ttunnelunnel pparablearable iiss uusefulseful (Hirschman(Hirschman andand RRothschild,othschild, 1973).1973). I ppresentresent a sslightlylightly aalteredltered vversion.ersion. YYou’reou’re iinn a mmulti-laneulti-lane ttunnel,unnel, aallll llanesanes iinn tthehe ssameame ddirection,irection, aandnd yyou’reou’re ccaughtaught iinn a sseriouserious ttraffiraffi c jjam.am. AAfterfter a wwhile,hile, thethe carscars inin thethe ootherther llaneane bbeginegin ttoo mmove.ove. DDoo youyou feelfeel betterbetter oror worse?worse? AtAt fi rst,rst, movementmovement inin thethe otherother lanelane maymay seemseem likelike a ggoodood sign:sign: yyouou hhopeope tthathat yyourour tturnurn ttoo mmoveove wwillill ccomeome ssoon,oon, aandnd iindeedndeed thatthat mightmight hhappen.appen. YouYou mightmight contemplatecontemplate aann oorderlyrderly mmoveove iintonto tthehe mmovingoving llane,ane, llookingooking fforor ssuitableuitable ggapsaps iinn tthehe ttraffiraffi c.c. However,However, ifif thethe otherother lanelane keepskeeps wwhizzinghizzing bby,y, wwithith nnoo ggapsaps ttoo eenternter aandnd wwithith nnoo cchangehange oonn yyourour llane,ane, yyourour rreactionseactions mmayay wwellell bbecomeecome qquiteuite negative.negative. UnevennessUnevenness without corresponding redistribution cancan bebe toleratedtolerated oror eevenven wwelcomedelcomed iiff iitt rraisesaises eexpectationsxpectations eeverywhere,verywhere, bbutut iitt wwillill bbee ttoleratedolerated fforor oonlynly ssoo llong.ong. TThus,hus, uunevenneven ggrowthrowth wwillill ssetet fforcesorces iinn mmotionotion ttoo rrestoreestore a ggreaterreater ddegreeegree ooff bbalance,alance, eevenven ((inin ssomeome ccases)ases) aactionsctions tthathat mmayay tthwarthwart tthehe ggrowthrowth pprocessrocess iitself.tself. WWee couldcould iignoregnore tthishis ccentralentral iissue.ssue. OOnene rreactioneaction mmightight bbee tthathat wwee ddoo nnotot ccareare aaboutbout distributiondistribution aass llongong aass tthehe aaggregatesggregates wworkork rright.ight. OOrr pperhapserhaps ssomeome fformorm ooff CoasianCoasian oror welfaristwelfarist “compensation“compensation pprinciple”rinciple” iiss bbelievedelieved toto bebe atat work.work. EitherEither rreactioneaction assumesassumes awayaway oror simplysimply negatesnegates a crucialcrucial setset ofof developmentdevelopment pproblemsroblems rrevolvingevolving aaroundround tthehe ppoliticalolitical eeconomyconomy ooff iintersectoralntersectoral oror intergroupintergroup allocation.allocation. TThehe HirschmanHirschman parableparable alsoalso containscontains a parallelparallel implicationimplication ttoo wwhichhich eevenven llessess aattentionttention hashas beenbeen paid.paid. TThehe movementmovement ofof “neighboring“neighboring llanes”anes” uundernder uunevenneven ggrowthrowth notnot onlyonly bringsbrings uuss iinformationnformation aaboutbout wwhathat isis possible,possible, butbut iitt aalsolso ddefiefi nesnes aandnd moldsmolds oourur aspirations fforor thethe future.future. Economists,Economists, mmiredired asas theythey generallygenerally areare iinn a ccontext-lessontext-less ddescriptionescription ooff hhumanuman ppreferences,references, aarere nnowhereowhere ccloselose ttoo a ttheoryheory ooff sociallysocially defidefi nedned aaspirationsspirations aandnd fforor tthehe ddouble-edgedouble-edged wayway inin whichwhich theythey mightmight iinflnfl uenceuence iindividualndividual bbehavior—eitherehavior—either cconstructively,onstructively, vviaia a pprofirofi tabletable cchainhain ofof iinvestmentnvestment aandnd rreward,eward, oror destructively,destructively, viavia frustrationfrustration andand violentviolent conflconfl ict.ict. CConsiderationsonsiderations ssuchuch aass tthesehese sserveerve aass eentryntry pointspoints intointo somesome fundamentalfundamental ddevelopmentevelopment qquestions.uestions. MMethodologically,ethodologically, ttheyhey aalsolso uunderscorenderscore tthehe nneedeed toto looklook bbeyondeyond traditionaltraditional modelsmodels byby explicitlyexplicitly iincorporatingncorporating tthehe ssocialocial bbasisasis ofof individualindividual ppreferencesreferences andand well-being,well-being, oorr bbyy ccallingalling fforor bbetteretter mmodelsodels ooff nnonmarketonmarket aalloca-lloca- ttions,ions, suchsuch aass tthosehose aachievedchieved throughthrough lobbyinglobbying aandnd cconflonfl ict.ict. AAss forfor thethe fi rstrst partpart ofof tthishis ppaper,aper, oonn tthehe ssourcesources ooff uunevenneven ggrowth,rowth, I hhaveave mmoreore pprecedentrecedent ttoo lleanean uupon.pon. SomeSome ofof thethe earliestearliest developmentdevelopment modelsmodels eemphasizedmphasized tthehe vvaryingarying rrolesoles ooff ddifferentifferent ssectorsectors ooff tthehe eeconomy.conomy. RRosenstein-Rodan’sosenstein-Rodan’s ((1943)1943) vviewiew ooff uunderdevelopmentnderdevelopment hingedhinged oonn a ffailureailure ooff ccoordinationoordination aacrosscross a vvarietyariety ooff iinter-nter- llockingocking economiceconomic ssectors.ectors. HirschmanHirschman (1958)(1958) emphasizedemphasized thethe conceptconcept ofof ““leadingleading ssectors”ectors” that—bythat—by virtuevirtue ofof theirtheir sstrongtrong llinkagesinkages ttoo mmanyany ootherther ssectors—wouldectors—would ppullull tthehe restrest ooff tthehe eeconomyconomy tthroughhrough thethe developmentdevelopment ppath.ath. NNurkseurkse ((1953)1953) aandnd LLewisewis ((1954)1954) notednoted howhow agricultureagriculture mightmight serveserve asas a near-inexhaustiblenear-inexhaustible ssupplyupply ooff llaborabor tthathat mightmight fuelfuel industrialindustrial ddevelopmentevelopment wwithoutithout a ddroprop iinn pperer capitacapita ffoodood ooutput.utput. RRaoao ((1952)1952) andand RanisRanis andand FeiFei (1961)(1961) tooktook thesethese ideasideas furtherfurther byby explicitlyexplicitly ddiscussingiscussing a ttwo-sectorwo-sector modelmodel thatthat ccombinedombined thethe wworkingorking ooff a ssurplus-laborurplus-labor aagriculturalgricultural ssectorector Debraj Ray 47

wwithith a ddemand-drivenemand-driven iindustrialndustrial ssector.ector. IInn ssomeome wways,ays, mmyy pproposedroposed frameworkframework mmerelyerely ddrawsraws oonn a partpart ofof tthishis eearlierarlier lliteratureiterature aandnd mmarriesarries iitt ttoo mmodernodern rrenditionsenditions ooff tthehe aaggregateggregate growthgrowth model.model. OOurur considerationconsideration ooff uunevenneven ggrowthrowth lleadseads ttoo aallll ssortsorts ooff qquestionsuestions tthathat iinn ssomeome waysways bridgebridge tthehe ggapap bbetweenetween thethe micromicro andand thethe macromacro ofof development.development. ItIt aalsolso highlightshighlights a nnumberumber ooff oongoingngoing iissuesssues iinn ddevelopmentevelopment eeconomicsconomics iinn a uunifinifi eded wway:ay: nnotionsotions ooff tthehe ddualual eeconomyconomy aandnd tthehe ppossibilitiesossibilities ooff ttrickle-down;rickle-down; ttheoriesheories ooff ooccupationalccupational cchoice;hoice; historyhistory ddependence;ependence; tthehe ppoliticalolitical eeconomyconomy ooff iintersectoralntersectoral aallocation;llocation; ssociallyocially ddeterminedetermined aaspirations;spirations; vviolentiolent cconflonfl iict;ct; aandnd thethe questionquestion ofof aappropriateppropriate redistributionredistribution andand compensationcompensation inin thethe processprocess ofof development.development.

TThehe SSourcesources ooff UUnevenneven GrowthGrowth

TThinkhink ofof aann eeconomyconomy ppopulatedopulated bbyy a llargearge nnumberumber ooff ssectors,ectors, ssomeome fi nalnal aandnd ssomeome iintermediate.ntermediate. EachEach sectorsector callscalls uponupon physicalphysical capitalcapital andand variousvarious sortssorts ooff hhumanuman capitalcapital ttoo pproduceroduce ooutput.utput. AAss a sstartingtarting ppoint,oint, iimaginemagine tthathat aallll ppreferencesreferences aandnd pproductionroduction cchangehange ssmoothlymoothly aandnd iinn tthehe ssameame pproportions.roportions. SSupposeuppose ffurtherurther tthathat ttherehere areare nono supplysupply bottlenecksbottlenecks andand thatthat publicpublic resourcesresources areare allocatedallocated evenlyevenly aacrosscross allall ppartsarts ooff tthehe eeconomy.conomy. IInn tthishis hypotheticalhypothetical eeconomy,conomy, ssectoralectoral ggrowthrowth willwill ssimplyimply tracktrack aggregateaggregate changechange iinn a bbalancedalanced wway.ay. IInn rreality,eality, tthesehese aassumptionsssumptions mmakeake littlelittle sense.sense. IIndeed,ndeed, theythey leaveleave outout severalseveral problemsproblems ofof fundamentalfundamental interest.interest. I bbeginegin byby cconsideringonsidering jjustust wwhyhy ggrowthrowth ccomesomes iinn uuneven,neven, ssector-specifiector-specifi c jumpsjumps ratherrather tthanhan inin anan even,even, wwell-diversifiell-diversifi eded spray.spray.

TThehe CCompositionomposition ofof DemandDemand TThehe ttextbookextbook aassumptionssumption ooff mmicroeconomicicroeconomic ttheoryheory iiss tthathat aann iindividual’sndividual’s relative ddemandemand fforor ddifferentifferent pproductsroducts iiss uunaffectednaffected bbyy tthehe iincomencome ooff tthathat iindi-ndi- vvidual.idual. TThishis ppropertyroperty isis referredreferred ttoo aass hhomotheticity.omotheticity. WWithith hhomotheticomothetic ddemand,emand, aann iincreasencrease inin incomeincome isis alwaysalways matchedmatched bbyy a eequiproportionatequiproportionate rriseise iinn thethe quantityquantity ddemandedemanded forfor everyevery good.good. OOff ccourse,ourse, ddemandemand iisn’tsn’t hhomotheticomothetic iinn rreality,eality, andand everyoneeveryone knowsknows it.it. AsAs cconsumers,onsumers, wwee sstarttart ooffff wwithith tthehe bbasics—food,asics—food, clothing—and,clothing—and, asas ourour incomeincome grows,grows, ootherther needsneeds areare metmet withwith otherother goods.goods. AsAs producers,producers, wewe mightmight shiftshift ttoo mmethodsethods tthathat aarere mmoreore iintensiventensive iinn ttechnologyechnology oorr ccapitalapital aass sscalecale iincreases.ncreases. TThehe qquestionuestion iiss wwhetherhether wewe cancan getget aawayway wwithith tthehe hhomotheticityomotheticity aassumptionssumption aass a ssimplifyingimplifying ddevice.evice. NNotot ssurprisingly,urprisingly, tthehe aanswernswer ddependsepends oonn wwhathat wewe areare iinterestednterested iin.n. FForor ssomeome mmacro-acro- eeconomicconomic qquestions,uestions, ssuchuch aass tthehe llong-runong-run rrateate ooff ggrowth,rowth,1 thethe ssimplifiimplifi ccationation mmayay bbee a goodgood oone.ne. FForor oothers,thers, likelike questionsquestions ofof distributiondistribution aacrosscross ssectorsectors oror individuals,individuals, tthehe aassumptionssumption cancan bebe wayway offoff thethe mark.mark.

1 More generally, an assessment of the so-called “Kaldor facts”—the long-run constancy of the growth rate, the capital–output ratio, the real interest rate, and so on—may not require much more than the one-sector growth model. 48 Journal of Economic Perspectives

FFoodood isis perhapsperhaps thethe mostmost dramaticdramatic eexamplexample ofof long-runlong-run unevenuneven development,development, oonene thatthat nnecessitatesecessitates bbasicasic structuralstructural changechange iinn tthehe wworkforceorkforce aandnd iinn rresourceesource uuse.se.2 TThehe majoritymajority ooff IIndia’sndia’s ppopulationopulation lliveive aandnd wworkork iinn tthehe rruralural ssector.ector. IInn tthehe UUnitednited StatesStates andand inin otherother developeddeveloped economies,economies, thethe correspondingcorresponding percentagepercentage ofof tthehe ppopulationopulation iiss ccloselose toto zero,zero, andand lookinglooking atat thethe correspondingcorresponding LLatinatin AAmericanmerican ppercentages,ercentages, wwee sseeee wwherehere IIndiandia iiss ssurelyurely hheadedeaded ooverver tthehe nnextext decadedecade oror so.so. ThisThis ttransitionransition isis a fundamentalfundamental sourcesource ofof unevennessunevenness thatthat iinformsnforms mmuchuch ppoliticalolitical aandnd economiceconomic debatedebate inin manymany developingdeveloping ccountries.ountries. WWhilehile ttherehere aarere aattemptsttempts ttoo iintegratentegrate ssuchuch nnonhomotheticitiesonhomotheticities iintonto ttheoriesheories ooff ddistributionistribution andand trade,trade,3 therethere iiss toto mymy knowledgeknowledge llittleittle oorr nnoo lliteratureiterature tthathat ttiesies tthesehese mmattersatters iintonto tthehe ppoliticalolitical eeconomyconomy ofof development.development. I wwillill rreturneturn ttoo tthishis iissuessue bbelow.elow. TToo bebe sure,sure, thethe generalgeneral pointpoint goesgoes beyondbeyond structuralstructural transformationtransformation fromfrom aagriculturegriculture toto industry.industry. TThehe ccompositionalompositional ppatternattern ooff ddemand—andemand—and iitsts aaltera-ltera- ttionion asas incomeincome grows—isgrows—is iimportantmportant wwheneverhenever ssubstantialubstantial ccostsosts mmustust bbee iincurredncurred ((includingincluding tthehe ccostost ooff mmigrationigration aandnd rrelocation,elocation, nnotot ttoo mmentionention ttraining)raining) ttoo ttransferransfer ffactorsactors ofof pproductionroduction fromfrom oneone sectorsector toto another.another. AAgriculturegriculture aandnd iindustryndustry fi t tthehe bbill,ill, butbut soso do,do, say,say, coalcoal miningmining aandnd ssoftware.oftware. TThehe combinationcombination ofof nonhomotheticnonhomothetic demanddemand andand costlycostly ttransferransfer ooff hhumanuman iinputsnputs cancan reinforcereinforce oorr ccounteractounteract eeachach other.other. PerhapsPerhaps thethe ultimateultimate expressionexpression ooff rreinforcementeinforcement iiss tthehe dual economy, a conceptconcept tthathat ggoesoes bbackack atat leastleast toto NurkseNurkse (1953)(1953) aandnd LewisLewis (1954).(1954). A dualdual economyeconomy isis divideddivided intointo near-independentnear-independent eenclaves.nclaves. IInn tthehe ssimplestimplest vversion,ersion, a ssubsistenceubsistence ssectorector pproducesroduces bbasicasic cconsumptiononsumption ggoods,oods, aandnd tthosehose eemployedmployed iinn ssuchuch ssectorsectors consumeconsume thesethese basicsbasics withwith littlelittle leftleft overover forfor anythinganything eelse.lse. SideSide byby side,side, a rich,rich, ssophisticatedophisticated ssubeconomyubeconomy producesproduces a vvarietyariety ofof ggoodsoods aandnd sserviceservices llargelyargely fforor tthosehose eemployedmployed iinn tthathat llatteratter ssubeconomy.ubeconomy. TThehe ttwowo ssubecono-ubecono- mmiesies coexist,coexist, bbutut nnotot nnecessarilyecessarily iinn a ssymbioticymbiotic wway.ay. IIff tthehe hhigh-techigh-tech ssubeconomyubeconomy uundergoesndergoes a bboom,oom, ttherehere aarere ffewew cconnectionsonnections fforor tthathat bboomoom ttoo ttransmitransmit iitselftself eelse-lse- wwhere.here. Trickle-downTrickle-down won’twon’t workwork wellwell inin thethe dualdual economy.economy. LLikeike aallll abstractabstract concepts,concepts, tthehe ssimplestimplest vversionersion ooff tthehe ddualual eeconomyconomy iiss a ccari-ari- ccature.ature. AAfterfter aall,ll, tthehe rrichich ddoo cconsumeonsume bbasics,asics, andand thethe poorpoor areare oftenoften employedemployed inin pproductionroduction ofof goodsgoods oror servicesservices consumedconsumed byby thosethose withwith higherhigher incomes.incomes. ButBut suchsuch iintersectoralntersectoral connectionsconnections maymay bebe relatively ssparse,parse, aandnd fforor tthathat ttoo bbee tthehe ccase,ase, tthehe nnonhomotheticityonhomotheticity iinn ddemandemand mmustust bbee ooff a pparticulararticular kkind:ind: bbyy aandnd llarge,arge, the rich must consume things that the rich produce. BBothoth tthehe ddirectirect andand indirectindirect demandsdemands (via(via tthehe input–outputinput–output mmatrix)atrix) ooff tthehe rrichich mmustust bbee iintensiventensive iinn ffactorsactors ooff pproductionroduction tthathat tthehe richrich themselvesthemselves supply—andsupply—and a parallelparallel observationobservation mustmust bbee ttruerue ooff tthehe ppoor.oor. IIss thisthis “segregation”“segregation” ssomethingomething tthathat wwee oobservebserve eempirically?mpirically? TThehe qquestionuestion iiss ooff iimmensemmense iimportancemportance iinn eevaluatingvaluating ggrowth-basedrowth-based ddevelopmentevelopment pprocessesrocesses tthathat

2 Clark (1940) and Kuznets (1957) emphasized such structural change as fundamental aspects of the development process. For models that address such aspects while attempting to retain conformity with the Kaldor facts, see, for example, Caselli and Coleman (2001), Kongsamut, Rebelo and Xie (2001), and Gollin, Parente, and Rogerson (2007). 3 See, for instance, Markusen (1986), Baland and Ray (1991), Mani (2001), Matsuyama (2000, 2002), Foellmi and Zweimüller (2006), and Fieler (2010). Uneven Growth: A Framework for Research in Development Economics 49

rrelyely oonn ttrickle-down.rickle-down. TThehe ddualual eeconomyconomy rrelieselies oonn a pparticulararticular ssortort ooff nnonhomo-onhomo- ttheticityheticity inin directdirect andand inin derivedderived demand.demand. WeWe needneed empiricallyempirically implementableimplementable mmetricsetrics ooff tthehe eextentxtent ooff ““segregation”segregation” ttoo mmeasureeasure tthehe ddegreeegree ttoo wwhichhich tthehe ddual-ual- eeconomyconomy iideadea iiss ttrue.rue.

UUnevenneven GrowthGrowth andand InequalityInequality TThehe dualdual economyeconomy iiss a pparticularlyarticularly ddramaticramatic mmanifestationanifestation ooff uunequalnequal ddevelop-evelop- mment.ent. MoreMore ggenerally,enerally, ttherehere aarere vvaryingarying ddegreesegrees ofof ssegmentationegmentation rratherather tthanhan ffullull ssegregation.egregation. TThishis lleadseads ttoo tthehe bbroaderroader qquestionuestion ooff wwhetherhether aandnd hhowow uunevenneven ggrowthrowth ggeneratesenerates ppersistentersistent iinequalitiesnequalities ratherrather thanthan trickle-downtrickle-down andand convergence.convergence. TTherehere aarere sseveraleveral ttheoriesheories ofof tthehe rrelationshipelationship bbetweenetween ggrowthrowth aandnd iinequality.nequality. FForor example,example, iinn oonene aapproachpproach bbasedased oonn aaggregateggregate growthgrowth mmodelsodels wwithith ddimin-imin- iishingshing rreturnseturns ttoo ffactorsactors ((inin tthehe ttraditionradition ooff SSolow,olow, 11957),957), ppersistentersistent iinequalitynequality iiss eentirelyntirely a mattermatter ofof ongoingongoing stochasticstochastic sshocks.hocks. BBarringarring ““luck,”luck,” tthesehese ttheoriesheories wwouldould ppredictredict nnoo llong-runong-run iinequalitynequality aatt aall.ll. EExamplesxamples ooff tthishis aapproachpproach aarere BBeckerecker aandnd TTomesomes ((1979,1979, 11986)986) aandnd LLouryoury ((1981).1981). A ssecondecond aapproachpproach emphasizesemphasizes thatthat tthehe ppresenceresence ooff fi xedxed costscosts iinn iinvestmentnvestment ccanan ggenerateenerate ssteady-stateteady-state ttrapsraps iinn wwhichhich ppovertyoverty breedsbreeds povertypoverty (for(for example,example, MMajumdarajumdar aandnd MMitra,itra, 11982;982; GalorGalor andand ZZeira,eira, 11993).993). A thirdthird aapproachpproach emphasizesemphasizes occupationaloccupational choice,choice, a ppointoint ttoo wwhichhich I willwill returnreturn iinn a laterlater section.section. TThehe fframeworkramework ooutlinedutlined inin thethe previousprevious sectionsection leadsleads toto a different,different, entirelyentirely ccomplementary,omplementary, andand equallyequally signifisignifi cantcant viewview oonn persistentpersistent inequality:inequality: growthgrowth leadsleads ttoo a changechange iinn tthehe ccommodityommodity mmix,ix, wwhichhich willwill thenthen bebe translatedtranslated intointo a changechange iinn thethe demanddemand forfor factors.factors. WWillill tthishis pprocessrocess bbee eequalizingqualizing fforor iincomes?ncomes? YYes,es, iiff tthehe ooriginalriginal benefibenefi cciariesiaries ofof tthehe processprocess generategenerate ddemandsemands fforor ffactorsactors heldheld bbyy iindi-ndi- vvidualsiduals thatthat ddidid not originallyoriginally benefibenefi t,t, settingsetting iinn mmotionotion a sself-correctingelf-correcting changechange iinn thethe distributiondistribution ooff iincomencome aandnd wwealth.ealth. IIf,f, oonn tthehe ootherther hhand,and, tthehe bbenefienefi ciariesciaries ggenerateenerate a ddemandemand mmixix tthathat ttranslatesranslates iintonto ddemandsemands fforor ffactorsactors hheldeld bbyy tthosehose vveryery ssameame bbenefienefi ciaries,ciaries, thethe systemsystem mmustust sspiralpiral aawayway ffromrom eequality.quality. OOurur ddescriptionescription ooff tthehe dualdual economyeconomy ccanan nnowow bbee vviewediewed asas a “steady“steady state,”state,” wwhilehile thethe modelmodel ofof evolvingevolving iinequalitynequality sketchedsketched herehere representsrepresents aann aaccompanyingccompanying ddynamic.ynamic. A properproper empiricalempirical iinvestigationnvestigation ooff tthesehese cconditionsonditions wwillill rrequireequire uuss ttoo sspecifypecify ddemandemand ssystemsystems tthathat aallowllow fforor ccompositionalompositional cchangehange ((withwith iincomencome ggrowth)rowth) aandnd ttoo eestimatestimate iinput–outputnput–output mmatricesatrices tthathat ssummarizeummarize ddifferentifferent ffactoractor ddemandsemands fforor ddifferentifferent ssectors.ectors. MManyany ooff thethe centralcentral questionsquestions ofof developmentdevelopment eeconomicsconomics fallfall withinwithin tthishis iintui-ntui- ttiveive framework.framework. IssuesIssues ooff eequitablequitable aandnd bbroad-basedroad-based ggrowth,rowth, tthehe rroleole ooff tthehe mmarket,arket, tthehe naturenature andand scopescope ofof governmentgovernment intervention:intervention: thesethese cancan allall bebe betterbetter studiedstudied wwithith thethe basicbasic modelmodel I havehave justjust ddescribed.escribed.

GGlobalizationlobalization andand InequalityInequality TThehe unevenuneven ggrowthrowth fframeworkramework isis particularlyparticularly usefuluseful fforor tthinkinghinking aaboutbout gglobalizationlobalization aandnd iitsts eeffects.ffects. ItIt isis a fairlyfairly generalgeneral ppropositionroposition tthathat iincreasedncreased oopen-pen- nnessess hheightenseightens uunevennessnevenness iinn pproductionroduction aatt tthehe ccountryountry llevel.evel. AAfterfter aall,ll, pproductionroduction 50 Journal of Economic Perspectives

iinn ssectorsectors withwith a comparativecomparative advantageadvantage willwill growgrow fasterfaster aass tthehe eeconomyconomy oopenspens ttoo iinternationalnternational trade.trade. TThehe eeffectffect ofof globalizationglobalization oonn iinequalitynequality isis complex.complex. TTherehere aarere llow-incomeow-income ccountriesountries fforor wwhichhich anan openingopening toto tradetrade willwill havehave textbooktextbook implications,implications, suchsuch aass tthehe exportexport ooff pproductsroducts tthathat aarere intensiveintensive inin unskilledunskilled labor.labor. ThereThere areare middle-middle- iincomencome developingdeveloping ccountriesountries wwithith a ssubstantialubstantial ssupplyupply ooff hhumanuman ccapitalapital fforor wwhichhich tthehe oppositeopposite isis true:true: thesethese willwill exportexport ggoodsoods wwithith a ssignifiignifi cantcant componentcomponent ofof ttech-ech- nnicalical know-howknow-how andand skill.skill. BBothoth ssetsets ooff countriescountries will,will, ofof course,course, exhibitexhibit factor-pricefactor-price eequalizationqualization forfor factorsfactors activeactive inin thethe tradedtraded goods.goods. BButut iinn tthehe fformerormer sset,et, iinequalitynequality wwillill ffall,all, wwhilehile inin thethe latter,latter, iinequalitynequality willwill rise.rise. Indeed,Indeed, ifif inin thethe latterlatter casecase unskilledunskilled llaborabor iiss llargelyargely ddevotedevoted ttoo nnontradedontraded ggoodsoods oorr sservices,ervices, tthehe rriseise iinn iinequalitynequality wwillill bbee llargearge andand noticeable.noticeable. Globalization-inducedGlobalization-induced unevenuneven growthgrowth ofof thisthis varietyvariety couldcould wwellell bbee a seriousserious concern.concern. A ssecondecond llayerayer ooff eeffectsffects cconcernsoncerns cross--countrycountry iinequality.nequality. SupposeSuppose thatthat ccountry-ountry- llevelevel infrastructureinfrastructure iiss ssuitableuitable forfor eithereither high-techhigh-tech oror low-techlow-tech production,production, butbut nnotot bboth.oth. IIff bbothoth hhigh-techigh-tech andand low-techlow-tech areare importantimportant inin wworldorld pproductionroduction aandnd cconsumption,onsumption, thenthen some ccountryountry hhasas ttoo ffocusocus oonn llow-techow-tech aandnd another oonn hhigh-tech.igh-tech. IInitialnitial historyhistory wwillill cconstrainonstrain ssuchuch cchoices,hoices, iiff fforor nnoo ootherther rreasoneason thanthan thethe factfact thatthat eexistingxisting infrastructureinfrastructure (and(and nationalnational wealth)wealth) determinesdetermines tthehe sselectionelection ooff ffutureuture iinfrastructure.nfrastructure. OOverver ttime,ime, aass tthehe wwholehole wworldorld cclimbslimbs uupp tthehe iincomencome sscale,cale, tthehe ccompo-ompo- ssitionalitional changechange iinn ddemandemand wwillill mmakeake fforor a ggreaterreater pproportionroportion ooff hhigh-tech,igh-tech, aandnd mmoreore aandnd moremore countriescountries willwill bebe ableable toto makemake thethe transition.transition. ButBut onon thethe whole,whole, ifif nationalnational iinfrastructurenfrastructure isis moremore oror lessless conduciveconducive ttoo ssomeome ((butbut notnot thethe full)full) rangerange ofof goods,goods, ttherehere willwill bebe adverseadverse distributionaldistributional eeffectsffects inin thethe worldworld eeconomyconomy aass wwell.ell. TThishis ssortort ooff mmodelodel rraisesaises oobviousbvious qquestions.uestions. WWhathat iiss ssoo sspecifipecifi c aaboutbout “national“national iinfrastructure”?nfrastructure”? WhyWhy isis itit notnot possiblepossible forfor everyevery countrycountry toto producesproduces thethe samesame oror a ssimilarimilar mixmix ofof goods,goods, thusthus guaranteeingguaranteeing cconvergence?onvergence? DDoo ccurrenturrent nnationalational aadvan-dvan- ttagesages ssomehowomehow mmanifestanifest tthemselveshemselves iinn ffutureuture aadvantagesdvantages aass wwell,ell, tthushus eensuringnsuring tthathat tthehe worldworld eeconomyconomy ssettlesettles iintonto a ppermanentermanent sstatetate ooff ggloballobal iinequality?nequality? AAss fframe-rame- wworksorks go,go, tthishis iiss nnotot a bbadad oonene ttoo sstarttart tthinkinghinking aaboutbout tthehe eeffectsffects ofof globalization.globalization. AAss I havehave discusseddiscussed inin moremore ddetailetail iinn RayRay (2007),(2007), itit isis possiblepossible toto enrichenrich thisthis ddiscussioniscussion byby bringingbringing inin thethe rolerole ofof howhow earlyearly institutionsinstitutions setset patternspatterns forfor long-long- ttermerm ggrowthrowth ((asas inin EngermanEngerman aandnd SSokoloff,okoloff, 11997;997; SokoloffSokoloff andand Engerman,Engerman, 22000;000; AAcemoglu,cemoglu, JJohnson,ohnson, aandnd RRobinson,obinson, 22001).001). A sspecifipecifi c colonialcolonial oror institutionalinstitutional historyhistory wwillill actact asas a cconstraintonstraint oon—orn—or mmightight iinflnfl uence—nationaluence—national iinfrastructure,nfrastructure, ddrivingriving tthehe countrycountry intointo a particularparticular productionproduction slotslot inin thethe globalglobal eeconomy.conomy. OOurur viewview ofof unevenuneven growthgrowth fi tsts inin wellwell withwith thethe entireentire debatedebate onon globaliza-globaliza- ttion.ion. OneOne sideside ofof thisthis debatedebate emphasizesemphasizes thethe convergenceconvergence aaspects:spects: outsourcing,outsourcing, tthehe eestablishmentstablishment ofof iinternationalnternational pproductionroduction sstandards,tandards, ttechnologyechnology ttransfer,ransfer, ppoliticalolitical aaccountability,ccountability, andand thethe spreadspread ofof rresponsibleesponsible macroeconomicmacroeconomic policies.policies. TThehe ppersis-ersis- ttent-inequalityent-inequality counterargumentscounterarguments emphasizeemphasize howhow a skewedskewed playingplaying fi eldeld cancan onlyonly kkeepeep ttipping.ipping. NNonconvexitiesonconvexities aandnd iincreasingncreasing rreturnseturns aarere eendemicndemic iinn tthishis vview.iew. IItt iiss ttimeime toto frameframe thethe globalizationglobalization ddisputesisputes wwithinithin a ttheoreticalheoretical frameworkframework thatthat aallowsllows fforor uunevenneven ggrowthrowth aacrosscross ssectorsectors andand acrossacross countries.countries. Debraj Ray 51

RReactionseactions ttoo UnevenUneven GrowthGrowth

IIff eeachach ssectorector wwereere aann iisland,sland, uunevenneven ggrowthrowth aacrosscross tthemhem wwouldould nnotot mmatter,atter, aatt lleasteast ttoo tthosehose uuninterestedninterested iinn iinequalitynequality perper sse.e. BButut ofof course,course, ttherehere aarere mmanyany cconnectionsonnections acrossacross sectors.sectors. OrganizingOrganizing ourour thoughtsthoughts alongalong Hirschman’sHirschman’s tunneltunnel pparable,arable, uunevenneven ggrowthrowth iinitiallynitially pprovidesrovides hhopeope iinn sseveraleveral wways.ays. FFirst,irst, tthosehose wwhoho fi nndd tthemselveshemselves iinn a nnongrowthongrowth ssectorector mmightight bbee aableble ttoo pparticipatearticipate iinn tthehe ssectorsectors tthathat areare growinggrowing byby changingchanging tthehe ssortort ooff hhumanuman ccapitalapital ttheyhey hhave,ave, oor—morer—more rrealistically—changingealistically—changing thethe humanhuman capitalcapital theirtheir cchildrenhildren willwill bringbring ttoo tthehe llaborabor mmarket.arket. ThisThis isis thethe routeroute ofof occupational choice. SSecond,econd, tthehe ggrowingrowing ssectorsectors mightmight ttricklerickle down—ordown—or over—andover—and stimulatestimulate iincomesncomes iinn ootherther ssectors;ectors; tthishis iiss tthehe demand channel. TThird,hird, governmentgovernment mightmight useuse variousvarious supports,supports, subsidies,subsidies, salarysalary adjust-adjust- mments,ents, aandnd pprotectionsrotections toto twisttwist thethe riverriver ooff eeconomicconomic pprogressrogress tthroughhrough ddifferentifferent tterritories.erritories. TThishis iiss tthehe avenueavenue ooff political economy, aatt lleasteast ooff tthehe rrelativelyelatively ppeacefuleaceful kkind.ind. ButBut therethere isis alsoalso thethe possibilitypossibility ofof frustration.frustration. IfIf unevenuneven growthgrowth isis perceivedperceived aass persistentpersistent aandnd eexclusionary,xclusionary, ssocietyociety mmayay eenternter a ddifferentifferent aandnd ddarkerarker rrealm:ealm: tthehe ppossibilityossibility ofof ddevelopmentevelopment bbeingeing sscrappedcrapped oorr tthwarted,hwarted, oftenoften byby violentviolent means;means; thisthis iiss thethe aarearea ofof confl ict.

OOccupationalccupational ChoiceChoice CConsideronsider information-technology-basedinformation-technology-based sserviceservices iinn a ddevelopingeveloping ccountryountry ssuchuch aass AArgentinargentina oorr IIndia:ndia: ccallall ccenters,enters, ddiagnosticiagnostic sservices,ervices, llegalegal sservices,ervices, accountingaccounting aandnd recordrecord keeping,keeping, aandnd ssoo oon.n. IInitially,nitially, tthehe pprocessrocess ssetsets uupp a ssizableizable ddemandemand fforor tthosehose trainedtrained inin thethe EnglishEnglish llanguageanguage aass wwellell aass iinn ccomputeromputer lliteracy,iteracy, bbasicasic bbusi-usi- nness,ess, andand communicationcommunication skillsskills aandnd tthosehose wwithith ssomeome llegalegal oror medicalmedical training.training. TThehe boomboom aattractsttracts aattentionttention aandnd rraisesaises ssectoralectoral iincomes.ncomes. HHowow mmightight tthishis bboomoom ppercolateercolate ttoo tthehe rrestest ooff tthehe ccountry?ountry? TThehe fi r rstst lineline ofof argumentargument isis occupationaloccupational choice.choice. InIn thethe contextcontext ofof ourour example,example, EEnglish-mediumnglish-medium eeducationducation iinn IIndiandia iiss ggoingoing tthroughhrough a ttremendousremendous uupsurgepsurge ((forfor example,example, MMunshiunshi aandnd RRosenzweig,osenzweig, 22006).006). MMoreover,oreover, technicaltechnical institutesinstitutes aarere eeverywhere,verywhere, vvocationalocational ccentersenters aarere wwidespread,idespread, andand privateprivate bbusinessusiness schoolsschools areare ccommandingommanding uunprecedentednprecedented prices.prices. TheThe upsurgeupsurge isis eveneven evidentevident aatt pprimaryrimary aandnd ssecondaryecondary sschoolingchooling llevels.evels. AAtt somesome point,point, schoolingschooling willwill affectaffect thethe compositioncomposition ofof thethe workwork force,force, andand inin tthishis wwayay a cconcentratedoncentrated boomboom ccanan sspread.pread. BButut ttherehere aarere llimitationsimitations ttoo wwhathat ooccupa-ccupa- ttionalional choicechoice cancan achieve,achieve, andand understandingunderstanding thesethese limitationslimitations andand assessingassessing theirtheir ooverallverall sscopecope cconstitutesonstitutes a ffertileertile rresearchesearch aarea.rea. FFirst,irst, cchangeshanges iinn ooccupationalccupational sstructuretructure ccanan ttakeake a generationgeneration oorr mmoreore ttoo iimplement.mplement. TToo bbee ssure,ure, aadultsdults ccanan ssometimesometimes rretrainetrain ttoo mmatchatch nnewlyewly ddemandedemanded sskills,kills, bbutut tthishis iiss ttypicallyypically mmoreore tthehe eexceptionxception tthanhan tthehe rrule.ule. TThishis ttimeime llagag mmeanseans tthathat ttherehere iiss ssubstantialubstantial uuncertaintyncertainty iinn ssector-specifiector-specifi c ooccupationalccupational cchoices.hoices. A sstudenttudent mmayay ttrainrain fforor aann iinformation-technologynformation-technology job,job, bbutut fi nndd tthathat tthehe eeconomicconomic ppendulumendulum hhasas sswungwung iinn a ddifferentifferent ddirection—fromirection—from ssoftwareoftware aandnd sserviceservices ttoo cchiphip mmakingaking oorr bbioengineering,ioengineering, fforor iinstance—whichnstance—which rrequiresequires a differentdifferent setset ofof skills.skills. IInn 52 Journal of Economic Perspectives

a rapidlyrapidly cchanginghanging wworld,orld, tthehe ppursuitursuit ooff ggeneralizedeneralized eeducationducation mmayay bbee wworthwhile,orthwhile, bbutut ooff ccourseourse ggeneralizedeneralized eeducationducation hhasas iitsts llimitsimits iinn aanyny pparticulararticular fi eld.eld. SSecond,econd, aandnd ddespiteespite tthehe ttimescalesimescales iinvolvednvolved inin occupationaloccupational choice,choice, itit isis oftenoften aassumedssumed thatthat pparentsarents wwillill iindirectlyndirectly bbenefienefi t,t, becausebecause theythey internalizeinternalize thethe welfarewelfare ooff theirtheir cchildren,hildren, oorr pperhapserhaps becausebecause theirtheir cchildrenhildren wwillill llookook aafterfter tthemhem iinn ooldld age.age. SSuchuch aaltruismltruism iindeedndeed eexistsxists ((bothboth wways),ays), bbutut iitt cannot serveserve asas unqualifiunqualifi eded cconsola-onsola- ttionion fforor tthosehose wwhosehose boatsboats willwill nevernever bbee lliftedifted byby thethe prosperityprosperity tide.tide. FFinally,inally, andand pperhapserhaps tthehe mmost-studiedost-studied ooff tthesehese tthreehree ppoints,oints, ttherehere aarere tthehe ffundamentalundamental ddiffiiffi cultiesculties ooff eeffiffi cientcient occupationaloccupational cchoicehoice wwhenhen capitalcapital marketsmarkets aarere missingmissing oror imperfectimperfect (for(for example,example, BBanerjeeanerjee andand Newman,Newman, 1993;1993; GalorGalor andand ZZeira,eira, 1993;1993; Ljungqvist,Ljungqvist, 11993;993; GGhatakhatak aandnd JJiang,iang, 22002;002; MMookherjeeookherjee aandnd RRay,ay, 22003).003). TThishis literatureliterature emphasizesemphasizes thethe history-dependencehistory-dependence ofof thethe developmentdevelopment process:process: aann economyeconomy withwith hhighigh iinitialnitial iinequalitiesnequalities ccouldould bbee ttrapped,rapped, uunablenable ttoo mmakeake tthehe eeffiffi ccientient ssectoralectoral choices,choices, andand thereforetherefore loselose outout atat thethe aggregateaggregate level.level. WWhilehile tthishis lliteratureiterature ddoesoes nnotot eemphasizemphasize uunevenneven ggrowth,rowth, iitt iiss eeasyasy enoughenough toto seesee tthehe bbegin-egin- nningsings ofof a lineline ofof researchresearch thatthat ccombinesombines ccapital-constrainedapital-constrained ooccupationalccupational cchoicehoice mmodelsodels wwithith sectoralsectoral ggrowth.rowth.

DDemandemand aass a ChannelChannel forfor SpreadingSpreading IIncomencome A secondsecond avenueavenue ooff ppercolationercolation iiss ccross-sectoralross-sectoral ddemand.emand. SSupposeuppose tthathat ttherehere aarere onlyonly twotwo kindskinds ofof agentsagents inin ourour previousprevious example:example: iinformationnformation ttechnologyechnology sserviceervice providersproviders aandnd ppotatootato ggrowers,rowers, aandnd tthathat tthehe iinformationnformation ttechnologyechnology sserviceservices ssectorector isis inin thethe throesthroes ofof a boom.boom. HHowow ccanan tthehe ppotatootato ggrowerrower bbenefienefi t fromfrom tthehe iinformationnformation technologytechnology boom?boom? AAnn oobviousbvious aanswernswer iiss tthathat tthehe serviceservice providersproviders wwillill sspendpend moremore onon potatoes,potatoes, leadingleading toto moremore incomeincome inin thethe handshands ofof aann iindividualndividual ppotatootato grower.grower. WWe’vee’ve alreadyalready discusseddiscussed somesome potentialpotential strengthsstrengths aandnd llimitationsimitations ooff tthishis eeffectffect ((recallrecall thethe discussiondiscussion onon nonhomotheticnonhomothetic ppreferencesreferences andand trickle-down),trickle-down), butbut I nnowow wwantant toto stressstress a differentdifferent point.point. UnlessUnless tthehe ssupplyupply ooff ppotatoesotatoes iiss ccompletelyompletely eelastic,lastic, tthehe relativerelative ppricerice ofof ppotatoesotatoes must rriseise wwithith tthehe iincreasencrease iinn ddemand.emand. FFromrom a mmacro-acro- eeconomicconomic perspective—andperspective—and pparticularlyarticularly wwhenhen aabsolutebsolute ppricesrices iinn tthehe bboomoom ssectorsectors aarere stickysticky ddownwards—suchownwards—such rrelativeelative ppricerice ““corrections”corrections” willwill generallygenerally causecause somesome iinflnfl aation.tion. CCeteriseteris pparibus,aribus, aann uuneven-growthneven-growth eeconomyconomy mmustust bbee mmoreore iinflnfl aation-tion- ppronerone thanthan a balanced-growthbalanced-growth economy.economy. InIn economieseconomies wherewhere thethe boomboom takestakes placeplace iinn thethe exportexport ssectors,ectors, tthishis cconcernoncern iiss mmultipliedultiplied ifif therethere isis interestinterest iinn kkeepingeeping thethe ddomesticomestic ccurrencyurrency iinexpensivenexpensive ttoo ggenerateenerate iinternationalnternational ccompetitiveness.ompetitiveness. FFromrom a mmacroeconomicacroeconomic pperspective,erspective, tthehe cconnectionsonnections bbetweenetween iinternationalnternational ccurrencyurrency mmanagementanagement aandnd ddomesticomestic mmonetaryonetary ppolicyolicy aarere wwellell aappreciated.ppreciated. FFromrom a pperspectiveerspective tthathat eemphasizesmphasizes uunevenneven ggrowthrowth aacrosscross ssectors,ectors, ttherehere iiss mmoreore ttoo llearn.earn. A particularlyparticularly sstricttrict sstandtand onon domesticdomestic iinflnfl ationation ccouldould hhinderinder aadequatedequate relativerelative ppricerice adjustmentsadjustments aandnd tthereforeherefore thethe percolationpercolation pprocess.rocess. IInflnfl ationation ttargetingargeting inin aann unevenlyunevenly growinggrowing economyeconomy isis a delicatedelicate business,business, andand macroeconomists—withmacroeconomists—with ttheirheir ffocusocus oonn tthehe aaggregativeggregative mmodel—haveodel—have ttoooo llittleittle ttheoryheory wwithith wwhichhich toto educateeducate tthehe ccentralentral bbanker.anker. Uneven Growth: A Framework for Research in Development Economics 53

TThehe PPoliticalolitical EEconomyconomy ooff UUnevenneven GrowthGrowth DDeliberateeliberate ggovernmentovernment ppolicyolicy ccanan ggenerateenerate ccomparativeomparative aadvantagedvantage iinn ccertainertain ssectors,ectors, oror atat thethe veryvery leastleast iitt ccanan hhelpelp a bboomoom ssectorector aalonglong ooncence iitt sstarts.tarts. BButut wwhichhich ssectorsectors aarere ttoo bbee nnurturedurtured inin thisthis way,way, aandnd wwhichhich ssectorsectors aarere ttoo bbee aabandoned,bandoned, say,say, ttoo eexistingxisting fforeignoreign ssuppliers?uppliers? TThroughhrough mostmost ooff tthehe developingdeveloping wworldorld tthesehese qques-ues- ttionsions aarere a ssubjectubject ofof constantconstant debate.debate. A keykey startingstarting ppointoint iiss tthathat ggovernmentovernment ssupportupport cannot be provided to every activity at once. RResourcesesources aarere llimited,imited, whetherwhether allocatedallocated toto infrastructure,infrastructure, taxtax bbreaks,reaks, ssubsidiesubsidies oonn tthehe uusese ooff eelectricitylectricity oror fertilizer,fertilizer, oror otherother forms.forms. TheThe allocationallocation ofof ppublicublic rresourcesesources wwillill uultimatelyltimately ddependepend oonn ddebate,ebate, ddiscourse,iscourse, aandnd llobbying.obbying. AAtt aanyny oonene ppointoint ooff ttime,ime, a ssmallmall ssubsetubset ofof economiceconomic aactivities—perhapsctivities—perhaps ““chosen”chosen” iinn aann eentirelyntirely randomrandom wway—appearay—appear ttoo bbee ffocal,ocal, aandnd tthehe aattentionttention aandnd eenergiesnergies ooff tthehe ccountryountry aarere ddrawnrawn ttoo iit.t. SSuchuch isis thethe casecase withwith outsourcedoutsourced businessbusiness inin IndiaIndia fromfrom thethe UUnitednited StatesStates andand Europe:Europe: itit accountsaccounts forfor a smallsmall fractionfraction ofof IndianIndian employment,employment, ooutut ofof proportionproportion toto thethe attentionattention andand mediamedia interestinterest iitt ggenerates.enerates. YYetet tthehe ppowerower ttoo iinflnfl uenceuence tthehe mmediaedia aandnd tthehe governmentgovernment ddependsepends oonn ttwowo tthings.hings. TThehe fi rrstst ffactoractor isis thethe economiceconomic gaingain toto bebe hadhad fromfrom thatthat inflinfl uence.uence. TToo tthehe extentextent tthathat ssectoralectoral rrankingsankings iinn eeconomicconomic ggainain aarere ccorrelatedorrelated wwithith ttheirheir rrelativeelative social vvalues—aalues—a cclaimlaim tthathat wwillill nnotot aalwayslways hholdold ttrue!—lobbyingrue!—lobbying cconveysonveys uusefulseful informationinformation tthathat ccanan bbee uusedsed iinn eeffiffi cientcient rresourceesource allocationallocation ((forfor eexample,xample, AAusten-Smith,usten-Smith, 11994;994; AAusten-Smithusten-Smith aandnd BBanks,anks, 22002).002). TThehe ssecondecond ffactoractor isis thethe wwealthealth ofof potentialpotential lobbyists.lobbyists. WWhilehile pprofirofi tabletable ssectorsectors havehave moremore ofof aann iincentivencentive ttoo llobby,obby, ssectorsectors dominateddominated byby wealthywealthy interestinterest ggroupsroups fi ndnd iitt easier ttoo llobby.obby. CConse-onse- qquently,uently, ppolicymakersolicymakers oonn tthehe rreceivingeceiving eendnd ooff ssuchuch llobbies—evenobbies—even iiff ttheyhey aarere hhonest—canonest—can mmakeake bbadad rresource-allocationesource-allocation ddecisions.ecisions. RRelativeelative ttoo tthishis sscenario,cenario, ccorruptionorruption amongamong ppolicymakersolicymakers mmayay nnotot mmakeake tthingshings tthathat mmuchuch wworseorse ((EstebanEsteban aandnd Ray,Ray, 22006).006). IIndeed,ndeed, unevenuneven growthgrowth andand thethe politicalpolitical economyeconomy ofof sectoralsectoral allocationallocation ttogetherogether ddescribeescribe tthehe cchannelhannel tthroughhrough wwhichhich “reversals“reversals ofof ffortune”ortune” iinn tthehe ssenseense ooff AAcemoglu,cemoglu, Johnson,Johnson, aandnd RRobinsonobinson (2002)(2002) mightmight work.work. A countrycountry maymay havehave builtbuilt uupp pastpast wwealthealth iinn ccertainertain ssectors.ectors. TThehe iinterestsnterests iinn tthosehose ssectorsectors wwillill bbecomeecome ppoliti-oliti- ccallyally entrenchedentrenched andand willwill resistresist changechange toto newnew sectors.sectors. TheThe implicitimplicit aargumentrgument hhereere ttypicallyypically iinvokesnvokes ccorruption,orruption, bbutut tthehe aargumentrgument iiss bbroaderroader tthanhan tthat:hat: iiff iinforma-nforma- ttionion aboutabout newlynewly pprofirofi tabletable ssectorsectors iiss nnotot ccommonommon kknowledge,nowledge, eveneven a well-meaningwell-meaning ggovernmentovernment ccanan ssuccumbuccumb ttoo eentrenchedntrenched interests,interests, leadingleading toto a reversalreversal ofof fortunefortune iinn hhigh-inequalityigh-inequality ccountries.ountries. A largelarge fractionfraction ofof thethe everydayeveryday ppoliticalolitical eeconomyconomy ofof developingdeveloping ccountriesountries rrelateselates toto oneone ofof thethe mostmost ubiquitousubiquitous iinstancesnstances ooff uunevenneven ggrowth:rowth: sspecifipecifi ccally,ally, tthehe ddeclineecline ofof agricultureagriculture asas a dominantdominant livelihoodlivelihood forfor thethe majoritymajority aandnd tthehe aaccom-ccom- ppanyinganying riserise ofof industryindustry aandnd sservices.ervices. TThehe ppoliticalolitical eeconomyconomy iissuesssues hhereere iincludenclude aagriculturalgricultural ssubsidies,ubsidies, aattitudesttitudes ttoo gglobalization,lobalization, aagrariangrarian llandand rrights,ights, uurbanrban ppropertyroperty rrights,ights, compensationcompensation relatedrelated toto damdam placement,placement, tthehe transfertransfer ofof landland fromfrom aagrariangrarian ttoo ccommercialommercial useuse suchsuch asas industryindustry andand cashcash crops.crops. MuchMuch recentrecent researchresearch iinn developmentdevelopment eeconomicsconomics emphasizesemphasizes thesethese issuesissues (for(for example,example, BBesley,esley, 11995;995; 54 Journal of Economic Perspectives

BBinswanger,inswanger, DDeininger,eininger, aandnd FFeder,eder, 11995;995; SStiglitz,tiglitz, 22002;002; GoldsteinGoldstein aandnd UUdry,dry, 22008;008; DDuflufl o aandnd PPande,ande, 2007;2007; Field,Field, 2007;2007; Wang,Wang, 22008).008). TTwowo recentrecent examplesexamples cconcernoncern tthehe pproposedroposed acquisitionacquisition ofof landland inin SingurSingur andand NNandigramandigram (in(in WestWest BBengal,engal, IIndia),ndia), tthehe fformerormer ttoo ssetet uupp a ccarar mmanufacturinganufacturing plantplant fforor TTata,ata, tthehe llatteratter ttoo ssetet uupp a mmega-chemicalega-chemical hhubub ((oneone ooff hhundredsundreds ofof ““SpecialSpecial EEconomicconomic ZZones”ones” pproposedroposed aallll aaroundround IIndia).ndia). TThehe pproposedroposed acquisitionsacquisitions amountedamounted ttoo lessless thenthen 1 percentpercent ofof overalloverall arablearable landland inin WestWest Bengal.Bengal. YYetet politicalpolitical conflconfl ictict ooverver thisthis movemove hhasas beenbeen considerable.considerable. IIntensentense pprotestsrotests aandnd agitationsagitations ooverver tthehe issueissue ooff landland acquisitionacquisition havehave resultedresulted iinn vviolenceiolence aandnd llossoss ooff llives.ives. TTataata hhasas ssinceince ppackedacked uupp aandnd left,left, andand thethe NandigramNandigram plansplans hhaveave bbeeneen sshelved.helved. OOtherther ccompaniesompanies hhaveave ssoughtought greenergreener pasturespastures eelsewherelsewhere inin India.India. TThehe Singur–NandigramSingur–Nandigram eexamplesxamples rraiseaise iissuesssues tthathat aarere rrelevantelevant ttoo sstructuraltructural ttransformationransformation iinn mmanyany ddevelopingeveloping ccountries.ountries. WWhenhen ttrickle-downrickle-down iiss mminimal,inimal, oorr pperceivederceived ttoo bbee sso,o, tthehe qquestionuestion ooff hhowow ttoo ccompensateompensate tthosehose wwhoho loselose duringduring eeconomicconomic ttransitionsransitions isis ofof vvitalital iimportance.mportance. PPropertyroperty rrightsights fformorm a ccentralentral aaspectspect ooff tthishis pproblem.roblem. AAss oonene instance,instance, oonene mmightight tthinkhink ooff wwell-defiell-defi nned,ed, iidentifidentifi ableable llosers—say,osers—say, a ssituationituation iinn wwhichhich aallll llandand iiss ffarmedarmed byby landownerslandowners andand allall factorsfactors ofof pproductionroduction aarere paidpaid ttheirheir oopportunitypportunity ccost.ost. TThenhen tthehe oownerwner rreapseaps aallll tthehe rresidualesidual ssurplusurplus andand hishis consentconsent toto sellsell shouldshould ggenerallyenerally llineine uupp wwithith ssocialocial eeffiffi ciency.ciency. AsAs aanothernother instance,instance, typifitypifi eded byby WestWest Bengal,Bengal, otherother agentsagents havehave useuse rightsrights toto thethe assetasset ((sharecropperssharecroppers inin thethe casecase ofof lland)and) aandnd wwillill aalsolso cclaimlaim ppartart ooff tthehe ssurplus.urplus. IInn tthishis ssetting,etting, offioffi cialcial ownersowners willwill bebe happyhappy toto sellsell landland atat a fractionfraction ooff iitsts truetrue socialsocial valuevalue bbecauseecause mmuchuch ooff tthathat vvaluealue hhasas ““leaked”leaked” ttoo tthehe iindividualsndividuals wwithith uusese rrights.ights. IItt iiss iineffineffi cient,cient, tthen,hen, toto leaveleave ssellingelling ddecisionsecisions ttoo tthehe oownerswners aalone.lone.4 ThisThis aargumentrgument cancan bbee eextendedxtended toto anyany activityactivity inin whichwhich non-ownernon-owner agentsagents receivereceive a ssurplusurplus overover andand aabovebove thethe outsideoutside ooptionsptions fforor tthathat aagent.gent. EEffiffi cientcient shutdownshutdown ooff tthathat aactivityctivity wwillill nneedeed thethe consentconsent ofof thosethose agents.agents. NNext,ext, thethe formform ofof compensationcompensation deservesdeserves consideration.consideration. AnAn excessiveexcessive eemphasismphasis oonn one-offone-off compensationcompensation exposesexposes recipientsrecipients toto a riskrisk thatthat unexpectedunexpected highhigh inflinfl a-a- ttionion maymay erodeerode theirtheir ppayments.ayments. AAlternativelternative pproposalsroposals iincludenclude ccompensationompensation iinn tthehe fformorm ooff aann iinflnfl aation-adjustedtion-adjusted monthlymonthly pensionpension combinedcombined withwith a savingssavings bondbond tthathat cancan bebe soldsold (so(so thatthat peoplepeople havehave accessaccess toto thethe equityequity valuevalue ifif a distressdistress salesale isis rrequired);equired); paymentspayments linkedlinked toto thethe futurefuture valuevalue ofof transferredtransferred land;land; oror eveneven sharesshares iinn tthehe nnewew companies.companies.5 TThehe fi nalnal pointpoint concernsconcerns credibility;credibility; inin particular,particular, thethe setting-upsetting-up ofof a struc-struc- ttureure ttoo eensurensure thatthat promisedpromised paymentspayments areare actuallyactually made.made. TheThe historyhistory ooff ccredibleredible ccompensationompensation iinn IIndiandia isis problematic,problematic, toto saysay thethe least.least. ThereThere isis roomroom hhereere fforor sserious,erious, aappliedpplied eexercisesxercises iinn mmechanismechanism ddesign.esign. TheThe studystudy ofof compensationcompensation andand ttransfersransfers iinn tthehe ffaceace ooff uunevenneven ggrowthrowth iiss oonene ooff tthehe mmostost iimportantmportant rresearchesearch aareasreas iinn developmentdevelopment eeconomics.conomics.

4 Ghatak and Mookherjee (2009) address this question with a somewhat different emphasis, focusing on investment incentives by landlord and tenant before such land is sold. 5 For more discussion of this in the case of West Bengal, see Banerjee et al. (2007). Debraj Ray 55

CConflonfl ictict TThehe issueissue ofof ssocialocial cconflonfl ictict inin thethe processprocess ofof economiceconomic developmentdevelopment hhasas onlyonly rrecentlyecently begunbegun toto receivereceive attentionattention fromfrom economists:economists: forfor example,example, seesee thethe compre-compre- hhensiveensive ssurveyurvey byby BlattmanBlattman andand MiguelMiguel (2010).(2010). InIn principle,principle, oneone mightmight iincludenclude aallll ssortsorts ofof socialsocial unrestunrest uundernder tthishis rrubric,ubric, rranginganging ffromrom ppeacefuleaceful ddemonstrations,emonstrations, pprocessions,rocessions, andand strikesstrikes ttoo vviolentiolent rriotsiots aandnd eevenven ccivilivil wwar.ar. IInn ppractice,ractice, ddataata llimita-imita- ttionsions havehave restrictedrestricted studystudy toto violentviolent incidents,incidents, suchsuch asas civilcivil war,war, guerillaguerilla attacks,attacks, aandnd rriots.iots. TThehe llinkagesinkages bbetweenetween economiceconomic growthgrowth aandnd cconflonfl iictct areare obviouslyobviously ccomplex.omplex. OOnene cconnectiononnection isis betweenbetween overalloverall growthgrowth (or(or incomeincome levels)levels) andand conflconfl ict.ict. CollierCollier aandnd HHoeffloeffl eerr ((1998,1998, 22004)004) aandnd FFearonearon aandnd LLaitinaitin ((2003)2003) cconductedonducted ccross-sectionross-section sstudiestudies ooff ccivilivil wwarar aacrosscross a llargearge ssampleample ooff ccountries.ountries. TTheyhey ppresentresent ccorrelationsorrelations sshowinghowing thatthat per-capitaper-capita iincomencome iiss negativelynegatively relatedrelated ttoo cconflonfl iict.ct. IInn a studystudy aimedaimed aatt exploringexploring ccausalausal llinkages,inkages, MMiguel,iguel, SSatyanath,atyanath, aandnd SSergentiergenti ((2004)2004) uusese aannualnnual rrainfallainfall shocksshocks aass aann iinstrumentnstrument fforor eeconomicconomic ggrowth,rowth, aandnd ssupportupport thethe fi ndingsndings iinn ssub-Saharanub-Saharan Africa:Africa: negativenegative growthgrowth shocksshocks aappearppear ttoo rraiseaise cconflonfl ict.ict. BButut overalloverall growthgrowth isis mademade upup ofof twotwo kindskinds ofof changes:changes: oonene tthathat ccreatesreates a llargerarger ppotot ttoo fi ghtght ooverver aandnd tthereforeherefore raisesraises cconflonfl ict,ict, aandnd anotheranother thatthat rraisesaises tthehe oopportunitypportunity costcost ttoo fi ghtingghting aandnd ssoo llowersowers iit.t. WWhetherhether cconflonfl iictct iiss ppositivelyositively oror nega-nega- ttivelyively relatedrelated toto growthgrowth wwillill tthereforeherefore ddependepend oonn tthehe type ofof ggrowth;rowth; sspecifipecifi cally,cally, hhowow unevenuneven itit isis acrossacross sectorssectors oror groups.groups. Cross-countryCross-country studiesstudies aarere ttoooo bbluntlunt ttoo ppickick tthesehese eeffectsffects upup inin anyany ddetail,etail, tthoughhough aagaingain CCollierollier aandnd HHoeffloeffl erer (1998,(1998, 2004)2004) aandnd FearonFearon andand LaitinLaitin (2003)(2003) ledled thethe wayway withwith cross-sectioncross-section studiesstudies tthathat cconnectonnect ccivilivil warwar toto thethe abundanceabundance ofof naturalnatural resources.resources. DubeDube andand VargasVargas (2009)(2009) studystudy civilcivil cconflonfl ictict inin ColombiaColombia andand obtainobtain moremore nuancednuanced results:results: positivepositive shocksshocks toto resourcesresources ssuchuch aass ooilil wwherehere thethe fundsfunds aaccrueccrue ddirectlyirectly ttoo ggovernmentsovernments iincreasencrease tthehe ppayoffayoff ffromrom conflconfl ictict aandnd ttherebyhereby iincreasencrease mmeasuredeasured violence.violence. OnOn thethe otherother hhand,and, ppositiveositive sshockshocks ttoo rresourcesesources ssuchuch aass ccoffee,offee, wwhichhich aarere ggrownrown pprivately,rivately, iincreasencrease tthehe ooppor-ppor- ttunityunity ccostost ooff eengagingngaging iinn cconflonfl ict:ict: violenceviolence declines.declines. CComplicatingomplicating tthehe ttaskask ooff ddrawingrawing cconnectionsonnections fromfrom ggrowthrowth ttoo cconflonfl ictict isis thethe ffactact tthathat mmanyany cconflonfl ictsicts aappearppear ttoo bbee llargelyargely eethnic,thnic, ggeographical,eographical, andand religiousreligious iinn nnature,ature, wwhilehile outrightoutright economiceconomic classclass strugglestruggle isis relativelyrelatively rare.rare. HorowitzHorowitz (1985),(1985), a lleadingeading rresearcheresearcher iinn tthehe aarearea ofof conflconfl ict,ict, oobservedbserved tthathat ““inin mmuchuch ooff AAsiasia aandnd AAfrica,frica, itit isis onlyonly modestmodest hhyperboleyperbole ttoo aassertssert tthathat tthehe MMarxianarxian pprophecyrophecy hhasas hhadad aann ethnicethnic fulfifulfi llment.”llment.” IIndeed,ndeed, uusingsing mmeasureseasures ddevelopedeveloped iinn mmyy ppreviousrevious wworkork wwithith JJoanoan EstebanEsteban (Esteban(Esteban andand Ray,Ray, 1994),1994), MontalvoMontalvo andand Reynal-QuerolReynal-Querol ((2005)2005) hhaveave observedobserved thatthat eethnicthnic aandnd rreligiouseligious ppolarizationolarization iiss ssignifiignifi ccantlyantly aandnd ppositivelyositively rrelatedelated ttoo cconflonfl iict.ct. RecentRecent modelsmodels ooff eethnicthnic cconflonfl ictict iincludenclude CaselliCaselli aandnd CColemanoleman ((2006),2006), EEstebansteban aandnd RayRay (2008,(2008, forthcoming),forthcoming), aandnd RRobinsonobinson ((2001).2001). TTherehere iiss nnoo ccontradictionontradiction betweenbetween thethe useuse ofof nnoneconomiconeconomic mmarkersarkers iinn cconflonfl iictct aandnd thethe viewview thatthat cconflonfl iictct maymay bebe drivendriven byby economiceconomic forces.forces. NNoneconomiconeconomic ddivi-ivi- ssionsions cancan bebe andand frequentlyfrequently areare usedused toto obtainobtain economiceconomic oror politicalpolitical gainsgains byby vviolentiolent mmeans,eans, ooftenften tthroughhrough exclusion.exclusion. NNothingothing ddictatesictates tthathat tthehe ggroupsroups mmustust bbee economically distinct.distinct. IIndeed,ndeed, oneone mightmight argueargue thethe contrary:contrary: ifif twotwo groupsgroups areare veryvery 56 Journal of Economic Perspectives

ssimilarimilar economically,economically, itit isis moremore likelylikely thatthat ttheyhey wwillill iintrudentrude oonn eeachach oother’sther’s tturf:urf: tthehe mmotivesotives forfor exclusionexclusion aandnd rresource-grabbing—andesource-grabbing—and tthereforeherefore forfor violence—mayviolence—may bbee eevenven hhigher.igher. OOnene classicclassic exampleexample ofof a noneconomicnoneconomic markermarker isis religion,religion, asas epitomizedepitomized bbyy tthehe recurrentrecurrent episodesepisodes ofof Hindu–MuslimHindu–Muslim violenceviolence inin India.India. InIn recentrecent researchresearch wwithith AnirbanAnirban Mitra,Mitra, wewe exploreexplore tthehe ppossibilityossibility tthathat ggrowthrowth iinn tthehe iincomesncomes ooff oonene rreligiouseligious ggrouproup mmightight sspurpur cconflonfl ict,ict, asas thethe otherother ggrouproup fi ndsnds iitselftself tthreatenedhreatened andand aattemptsttempts ttoo nnullifyullify tthathat ggrowth.rowth. TheThe econometriceconometric aanalysisnalysis wwee cconductonduct iiss eeminentlyminently ssupportiveupportive ofof thisthis hypothesis.hypothesis. ItIt isis alsoalso complementedcomplemented byby severalseveral casecase studiesstudies thatthat ssuggestuggest thatthat oneone religiousreligious groupgroup maymay reactreact toto thethe economiceconomic successsuccess ofof anotheranother ggrouproup byby eexcludingxcluding tthathat ggrouproup tthroughhrough cconflonfl iictct ((seesee MitraMitra andand Ray,Ray, 2010,2010, andand thethe rreferenceseferences therein).therein). TThishis sortsort ooff rresearchesearch raisesraises furtherfurther questions.questions. WhichWhich kindskinds ofof economiceconomic ggrowthrowth rreduceeduce cconflonfl ict,ict, andand whichwhich kindskinds exacerbateexacerbate it?it? WhatWhat isis thethe relationshiprelationship bbetweenetween iinequalitynequality andand conflconfl ict?ict? HowHow iiss cclasslass cconflonfl ictict relatedrelated toto ethnicethnic conflconfl ict,ict, andand howhow cancan wwee separateseparate thethe rolesroles playedplayed byby economiceconomic incentivesincentives andand byby long-standinglong-standing distrustdistrust aandnd hostility?hostility? TThesehese eempiricalmpirical aandnd ttheoreticalheoretical qquestionsuestions gogo wwellell bbeyondeyond tthehe nnarrowarrow cconfionfi nesnes ofof economics.economics. FForor oourur presentpresent purposes,purposes, thethe bottombottom llineine iiss tthathat wwhilehile long-long- tterm,erm, sustainedsustained growthgrowth shouldshould fi nallynally tametame conflconfl ict,ict, therethere isis everyevery possibilitypossibility thatthat mmedium-termedium-term uunevenneven ggrowth,rowth, aamongmong ggroupsroups oorr ssectors,ectors, couldcould inflinfl ameame it.it.

UUnevenneven Development:Development: FinalFinal RRemarksemarks

I eendnd tthishis eessayssay wwithith ttwowo bbroadroad rremarksemarks tthathat ppertainertain ttoo uunevenneven ggrowthrowth aandnd iitsts implications.implications. TThehe fi rstrst hashas toto dodo withwith institutions.institutions. TThehe ssecondecond hhasas ttoo ddoo wwithith ppsychologicalsychological responsesresponses toto economiceconomic change,change, pparticularlyarticularly ttoo uunevenneven ggrowth.rowth. OOff course,course, institutionalinstitutional ssuccessuccess aandnd ffailureailure aarere aatt tthehe hhearteart ooff tthehe iissuesssues ddiscussediscussed here.here. AfterAfter all,all, institutionsinstitutions aarere tthehe sstructurestructures tthathat ssafeguardafeguard oorr hhinderinder ppropertyroperty rights,rights, compensationcompensation mechanisms,mechanisms, legallegal structures,structures, ppoliticalolitical pparticipa-articipa- ttion,ion, llandand rreform,eform, fi scalscal structure,structure, aandnd a wwholehole llotot bbesides.esides. BButut ““institutions”institutions” iiss pperhapserhaps ttoooo bbroadroad a term—andterm—and tootoo gliblyglibly iinvoked—tonvoked—to bebe particularlyparticularly useful.useful. ItIt mmayay bebe moremore productive,productive, iinstead,nstead, toto thinkthink ofof thethe politicalpolitical andand economiceconomic agentsagents tthathat havehave controlcontrol overover variousvarious aspectsaspects ofof institutionalinstitutional creationcreation andand implementation.implementation. SSokoloffokoloff andand EngermanEngerman ((2000)2000) aandnd ffollowingollowing tthem,hem, AAcemoglu,cemoglu, Johnson,Johnson, andand RRobinsonobinson ((2002)2002) aandnd oothersthers hhaveave eemphasizedmphasized ssituationsituations ooff sstagnationtagnation iinn wwhichhich tthehe loserslosers (or(or potentialpotential losers)losers) controlcontrol institutions.institutions. LosersLosers defenddefend anan oldold system—system— llikelyikely oneone bbornorn uundernder a ccolonialolonial uumbrella—andmbrella—and ssoo iimpedempede pprogress.rogress. BButut iinn tthehe ddevelopingeveloping worldworld ofof rapidrapid andand unevenuneven growth,growth, itit isis entirelyentirely possiblepossible asas wellwell thatthat thethe winners areare thethe onesones grantedgranted institutionalinstitutional control.control. ThisThis cancan bebe deeplydeeply pproblematicroblematic aass well,well, forfor unlessunless theirtheir hhorizonsorizons aarere llongong eenoughnough ttoo eencompassncompass tthehe ppossibilityossibility tthathat they,they, too,too, couldcould bebe loserslosers inin succeedingsucceeding rounds,rounds, theythey willwill blockblock allall redistribu-redistribu- ttionsions tthathat sspreadpread tthehe ggrowthrowth pprocessrocess ttoo ootherther ssectors.ectors. TheThe reactionreaction toto suchsuch lacklack ooff ccompensationompensation iiss ooftenften vviolentiolent cconflonfl iict.ct. IItt wwillill bebe ofof greatgreat importanceimportance toto buildbuild a Uneven Growth: A Framework for Research in Development Economics 57

uusefulseful taxonomytaxonomy ofof institutionalinstitutional pperformanceerformance ((andand rreactionseactions ttoo ssuchuch pperformance)erformance) ddependingepending oonn wwhoho hashas control.control. I eendnd tthishis aarticlerticle withwith a remarkremark onon psychologicalpsychological reactionsreactions toto economiceconomic cchange.hange. TThehe ffactact tthathat uunevenneven ggrowthrowth ccanan bbothoth rraiseaise oourur aambitionsmbitions aandnd uunleashnleash oourur frustrationsfrustrations shouldshould bbee ffundamentalundamental ttoo oourur uunderstandingnderstanding ooff eeconomicconomic ddevel-evel- oopment.pment. TheThe aspirationsaspirations ooff aann iindividualndividual aarere typicallytypically generatedgenerated aandnd cconditionedonditioned bbyy thethe eexperiencesxperiences ooff oothersthers iinn tthathat iindividual’sndividual’s ““cognitivecognitive nneighborhood.”eighborhood.” SSuchuch cconditioningonditioning wwillill aaffectffect a plethoraplethora ooff ssocioeconomicocioeconomic ooutcomes:utcomes: tthehe rrateate ooff ssavings,avings, tthehe ddecisionecision toto migrate,migrate, fertilityfertility choices,choices, technologytechnology adoption,adoption, thethe adherenceadherence ttoo nnorms,orms, tthehe choicechoice ofof ethnicethnic oror religiousreligious identity,identity, thethe workwork ethic,ethic, thethe strengthstrength ofof mmutualutual iinsurancensurance mmotives,otives, oorr tthehe ccollectiveollective ddecisionecision ttoo eengagengage iinn cconflonfl iict.ct. YYetet tthehe mmodelsodels tthathat economistseconomists writewrite downdown andand applyapply aarere bblissfullylissfully devoiddevoid ooff ssuchuch socialsocial iinflnfl uuencesences oonn bbehavior.ehavior. TThehe greatgreat bulkbulk ofof individualsindividuals livingliving inin developingdeveloping ccountriesountries aarere cconstantlyonstantly eexposedxposed ttoo eeconomicconomic sstandardstandards thatthat comprehensivelycomprehensively exceedexceed theirtheir own.own. ThisThis isis ttrue,rue, nnotot jjustust ooff tthehe ppoor,oor, bbutut aalsolso ooff tthehe mmiddleiddle cclasslass aandnd tthehe rich.rich. AAfterfter aall,ll, ddevel-evel- oopingping countriescountries existexist iinn a ggloballobal ccontextontext iinn wwhichhich tthehe wwealthealth ooff tthehe ““fifi rstrst world”world” iiss cconstantlyonstantly oonn ddisplay.isplay. IItt iiss uunclearnclear wwhetherhether tthishis cconstantonstant eexposurexposure ttoo hhigherigher llivingiving sstandardstandards isis conduciveconducive ttoo a ggreaterreater commitmentcommitment toto productiveproductive economiceconomic better-better- mmentent oorr ttoo ddespairespair aandnd ffrustrationrustration ((Ray,Ray, 11998,998, SSectionsections 33.3.2.3.2 aandnd 77.2.4;.2.4; Ray,Ray, 2006;2006; GGenicotenicot aandnd RRay,ay, 22009).009).6 A ssmallmall andand “reachable”“reachable” economiceconomic gapgap maymay encourageencourage iinvestmentsnvestments aandnd eeffort,ffort, whilewhile a largelarge andand persistentpersistent gapgap maymay stiflstifl e it.it. TThehe rraisingaising ooff aaspirationsspirations iiss a ttwo-edgedwo-edged sword.sword. ThereThere isis scopescope forfor a self-sustainingself-sustaining failurefailure ofof aspi-aspi- rrationsations andand economiceconomic ooutcomesutcomes jjustust aass ttherehere iiss fforor eever-progressivever-progressive growthgrowth inin them.them. A researchresearch agendaagenda inin developmentdevelopment economicseconomics shouldshould nnotot iignoregnore thisthis compo-compo- nnentent ooff humanhuman behavior.behavior. InIn particular,particular, economistseconomists should:should: 1)1) buildbuild databasesdatabases fromfrom qquestionnairesuestionnaires tthathat iincludenclude ssocialocial ddeterminantseterminants ooff bbehavior,ehavior, ssuchuch aass aaspirations,spirations, iinn wwaysays tthathat aallowllow sseparatingeparating tthehe iinformationalnformational eeffectffect ffromrom tthehe hhopeope aandnd ddesireesire eeffect;ffect; 2)2) conductconduct moremore researchresearch onon inequalityinequality tolerancetolerance andand evolution;evolution; 33)) sstudytudy rredistributiveedistributive policypolicy withwith thesethese ideasideas inin mind,mind, notnot necessarilynecessarily fromfrom a nnormativeormative pperspectiveerspective7 bbutut ffromrom a ppositiveositive ppolitical-economyolitical-economy pperspective.erspective. I writewrite tthishis wwhilehile onon sabbaticalsabbatical inin India:India: a desperatelydesperately poorpoor countrycountry thatthat nnever-ever- tthelessheless hhasas aann aactivective nnuclearuclear programprogram andand hashas sentsent anan unmannedunmanned probeprobe toto thethe mmoon.oon. JJustust aass iindividualndividual aaspirationsspirations ddriverive tthehe ddynamicsynamics ooff aaccumulationccumulation within ccountries,ountries, ttherehere iiss aalsolso a rroleole pplayedlayed bbyy nnationalational aaspirations,spirations, ddrivenriven bbyy iintercountryntercountry ddisparitiesisparities iinn cconsumptiononsumption aandnd wwealth,ealth, wwhichhich affectaffect publicpublic policypolicy asas wellwell asas thethe iinternationalnternational distributiondistribution ooff iincome.ncome. EEvenven tthehe ssimplestimplest ggrowthrowth mmodelodel thatthat exhibitsexhibits tthehe usualusual featuresfeatures ofof convexityconvexity iinn iitsts ttechnologyechnology aandnd bbudgetudget cconstraintsonstraints ccouldould ggiveive rriseise iinn tthehe endend toto a worldworld ddistributionistribution tthathat iiss bbipolar.ipolar. FForor iinstance,nstance, ccountriesountries iinn tthehe

6 These remarks are also related to Dufl o’s (2006) hypothesis that “being poor almost certainly affects the way people think and decide.” 7 Indeed, once we open the door to socially determined preferences, normative economics suffers a setback. That is not to say that welfare economics is impossible in this context, but several aspects of it need to be looked at afresh. I do not emphasize this important research area here. 58 Journal of Economic Perspectives

mmiddleiddle ooff tthathat ddistributionistribution wouldwould tendtend toto accumulateaccumulate faster,faster, bebe moremore dynamicdynamic andand ttakeake moremore risksrisks aass ttheyhey sseeee tthehe possibilitypossibility ofof fullfull catch-upcatch-up withinwithin a generationgeneration oror lless.ess. OneOne mightmight expectexpect tthehe greatestgreatest ddegreeegree ofof “country“country mobility”mobility” inin thisthis range.range. IInn ccontrast,ontrast, ssocietiesocieties tthathat aarere ffarar awayaway ffromrom tthehe eeconomicconomic ffrontierrontier mmayay sseeee eeconomicconomic ggrowth—exponentialrowth—exponential oorr ootherwise—astherwise—as ttoooo limitedlimited andand tootoo long-termlong-term anan instru-instru- mment,ent, leadingleading toto a failure,failure, asas itit were,were, ofof “international“international aspirations.”aspirations.” GGroupsroups wwithinithin tthesehese societiessocieties maymay wellwell resortresort toto otherother methodsmethods ofof ppotentialotential economiceconomic ggain,ain, ssuchuch aass rrentent sseekingeeking oorr cconflonfl ict.ict.

■ This paper was written while I was a Fulbright-Nehru Research Fellow at the Indian Statistical Institute, New Delhi. I am grateful to both the Fulbright Foundation for their support and the Indian Statistical Institute for their warm hospitality. I thank Maitreesh Ghatak, Ashok Kotwal, Julia Schwenkenberg, Rohini Somanathan, and the editors of this Journal—David Autor, Chad Jones, and Timothy Taylor—for many useful comments and expository suggestions.

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