What is Development
Economics?
What is Economics?
The study of how scarce resources should be
allocated among competing wants.
Development Economics is “A
comparatively young area of inquiry. It
was born just about a generation ago, as a subdiscipline
of economics”. Many ideas go back
further into economic history however.
Sen argues there were four main themes in the first
generation of development economics.
1) Industrialization (move from agrarian to industrial)
2) Rapid capital accumulation (savings and investment)
3) Mobilization of underemployed labor (move rural to
urban)
4) Planning and an economically active state (coordinated
planning and state intervention)
Sen argues that the empirical evidence suggests these
four themes were not wrong so much as they were themes about income growth.
What we have learned is that income
growth and economic development are not necessarily
the same thing.
Sen argues that we should view income growth as a means
to other objectives and those objectives characterize development. [p. 17-20]
Development needs to add in
concern not only about growth of income, but also concern about the
entitlements of people and capabilities these entitlements generate.
Entitlements – the set of
alternative commodity bundles that a person can command in a society using the
totality of rights and opportunities that he or she faces. Note famine work by Sen: food availability crisis vs. food entitlement
crisis.
Capabilities – the freedoms a
person has in terms of the choices of what to do with the bundles under his or
her control.
What good is more food if you
have parasites? What good is more income
if you are not free to choose how to use it?
Income growth is a means to more freedom, rather than an end in and of
itself. Greater freedom is the goal
(political participation / income growth tradeoff issue).
Todaro lists three goals of
development. (p. 20-21)
1) Provision of basic needs.
2) Self Esteem [ both material as a way to gain self
esteem and the way income is gained if it respects culture and tradition]
3) Enhanced ability to choose.
Increasingly common is
reference to the Millennium Development Goals.
(p.22-26)
Adopted in September 2000,
development goals by 2015.
Goal 1: Eradicate extreme poverty and hunger.
Goal 2: Achieve universal
primary education.
Goal 3: Promote gender equality and empower women.
Goal 4: Reduce child mortality.
Goal 5: Improve maternal health.
Goal 6: Combat HIV/AIDS, malaria & other
diseases.
Goal 7: Ensure environmental sustainability.
Goal 8: Develop a global partnership for development.
18 specific targets and 48
indicators are associated with these goals.
http://unstats.un.org/unsd/mdg/default.aspx
What is a developing economy?
(p. 38 - 41)
To
get some kind of hard and fast categorization, we can go to the World Bank for
their take on the definition of a developing country. First we need to get a few definitions sorted
out.
Gross
domestic product is the total value for final use of output produced by an
economy, both by residents and nonresidents. It is calculated without making
deductions for depreciation of fabricated assets or for depletion and
degradation of natural resources (more on the latter later in the semester).
Gross
national income is the sum of the gross value added by all resident producers
plus any product taxes (less subsidies) that are not
included in the valuation of output plus the net receipts of income from
abroad.
Roughly
speaking, GNI=GDP + income residents receive from abroad for factor services
(as in payments for use of labor and capital) minus payments made to
nonresidents for factor services to the national economy.
The
World Bank classifies countries based on GNI per capita, and as expressed in US
Dollars.
Two main alternative
approaches to expressing these figures in USD.
1)
Exchange rate
conversion. (see description of Atlas
method for details).
2)
Purchasing power
parity. Use a common set of
international prices for all goods and services produced in a given country,
valuing all goods and services in USD.
PPP is defined as the number of units of a foreign country’s currency
required to purchase the identical quantity of goods and services in the local
market as $1 would buy in the
a.
Intuition – how
much does a haircut or a shoeshine cost?
Classify countries using GNI
per capita as converted to USD by the exchange rate / atlas method.
Classifications (changing,
these are currently applicable, the book has the ones
used until July 2004). You can find
these on the World Bank home page
Low income: $905 or less
Lower middle income: $906 to $3,595.
Upper middle income: $3,596, below $11,115.
High income: over $11,116.
Developing is defined as low
and middle (both upper middle and lower middle) income.
By the latest ranking, 84% of
the world’s population lives in developing countries. 75% of countries.
Note also that the World Bank
categorizes countries based on geographical area. They also have categorized by degree of indebtedness
but have recently stopped.
Current table listing a
variety of classifications is an appendix to these notes.
An alternative approach is to
use the Human Development Index. (p. 59-64)
UNDP has published Human
Development Reports, starting in the early 90’s.
The HDI ranks countries on a
scale of 0 (low human development) to 1 (high human development).
There are three components
that to some degree reflect the objectives of development in the sense argued
by Sen.
1)
Life expectancy
2)
Education (composed
of adult literacy and gross enrollment index for primary, secondary and
tertiary education).
3)
Income
index.
Life
expectancy is based on a low of 25 and a high of 85.
Adult
literacy and enrollment are based on 100% standard. Education index gives 2/3 weight to literacy
and 1/3 to enrollment.
Income
is based on a low of 100 and a high of 40,000.
Note that income is logged to reflect the diminishing marginal utility
of income.
According to this, the best
place to live is Iceland, the worst is Sierra Leone.
High human development is 0.8
or above, medium human development is 0.5 to 0.8, and low human development is
below 0.5.
Development is the process
that leads to improvement in this measure.
The correlation between HDI
rankings and GNI per capita rankings is 0.76, the HDI index and the GNP index
is 0.92.
http://hdr.undp.org/en/statistics/indices/hdi/
2007/2008 Human Development
Index rankings
When comparing GNI per capita and HDI, a few
interesting results come out;
South Africa drops 49 places, Tanzania goes up 21 places for
example.
http://hdr.undp.org/external/flash/hdi_gdp/
Lets you play around some
with the data.
There is some interesting
research on HDI ranking by gender, race, ethnicity, and region within countries
as well. (See gender related development
index on the UNDP site for example, where the gender measure makes
Also to preview a topic we
will get to later, there is a Human Poverty Index that focuses on
depravations. This takes the same basic
insight (development is not just higher income) to poverty (poverty is not just
less income).
We will talk more about this
when we consider poverty as a specific topic.
What characteristics were
common to the growth process of most developed countries?
Kuznets identified
characteristics of developing economies by looking at the history of developed
countries.
1) High rates of growth of per capita output and
population. Total output growing at
about 3%, per capita output 2%, population at about 1% during period of rapid
growth.
2) High rates of total factor productivity increase. The output per unit of input. The efficiency with which inputs are used in
the production function. Appears to be
more important than factor accumulation (more on this in growth theory).
3) Structural economic transformation. Ag to industry to services, larger scale of
production, rural to urban / suburban.
4) Transformation in attitudes, institutions,
ideologies. Rationality: science and technology and the approach they
engender. Planning: thought out
coordination of a strategy. Equality as
a goal: promoting actively equality. Institutions:
land tenure reform, change in education and religion’s role,
administration approaches.
5) International economic involvement. Reach out for raw materials, cheap labor and
lucrative markets.
6) Reaching out and economic growth were not contagious –
growth occurred in a particular nation while others the interacted with did not
always grow.
But is the history of how currently
developed countries developed the appropriate model? (p. 71-78)
There are some reasons why
the historical growth patterns may not be applicable to situation for current
LDC’s.
1) The current natural and
human resource endowments in developing countries are not like developed
countries when the developed countries commenced rapid growth.
a.
In some cases
they just don’t have these resources
b.
In others, they
do, but the extraction requires capital, and the capital comes from outside, so
you lose control
c.
Technical skills
of the population not equivalent to that of DC’s in their early growth phase
d.
Technical skills
exist outside, so tempting to import rather than develop.
2)Per capita income and GNP are less than DC’s when they
entered rapid growth phase in real terms.
Also, back then they were top of the heap with lower GNP’s, now there is
this other group already there.
| 0 | 1000 | 1820 | 1998 | |
| (1990 international dollars) | ||||
| Western Europe | 450 | 400 | 1 232 | 17 921 |
| Western Offshoots | 400 | 400 | 1 201 | 26 146 |
| Japan | 400 | 425 | 669 | 20 413 |
| Average Group A | 443 | 405 | 1 130 | 21 470 |
| Latin America | 400 | 400 | 665 | 5 795 |
| Eastern Europe & former USSR | 400 | 400 | 667 | 4 354 |
| Asia (excluding Japan) | 450 | 450 | 575 | 2 936 |
| Africa | 425 | 416 | 418 | 1 368 |
| Average Group B | 444 | 440 | 573 | 3 102 |
| World | 444 | 435 | 667 | 5 709 |
3)Climate – developing countries are located predominantly in
the tropics. Tropical soils have high
soil erosion potential, tropics introduce the potential for high rates of
depreciation, diseases not found in temperate climates. Temperate technologies may not work in
tropical zones.
4)Population size, distribution, growth
a.
LDC pop growing faster than DC’s at DC’s early growth phase. Health care innovations imported, bringing
down death rate in LDC’s.
b.
Per capita land
availability is less in LDC’s than in DC’s in early growth phase.
c.
None of the DC’s
had a population anywhere near as big as the largest LDC current populations
when they were in their early growth phase.
5)Migration. Then, free
movement. Rural population could go to
industrial city in country, if nothing there, US,
6)Trade. DC’s
dominated world trade when they were entering growth phase, now LDC’s have a
small, shrinking, worsening terms of trade with the global economy.
7)Research and Development.
Most R and D takes place in developed countries. It addresses topics relevant to developed
country issues. Not always applicable to
issues in LDC’s. Hard to catch up when
R&D is designed to address issues of the countries already out front.
8)Unstable political and social institutions. Nation-state issues in early growth phase of
DC’s had been more or less worked out historically, or at least were not the
dominant issue. Many
LDC’s are only a generation or two old, and are struggling with arbitrary
borders and establishing a national identity when other identities are more
powerful.
