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.
He is making the case 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 of
development.
Todaro lists three goals of
development. (p. 20-21)
1)
Provision of basic needs.
2)
Self Esteem [ both material as
ensuring there is a way to gain self esteem through supporting oneself and also
in 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: $935 or less
Lower middle income: $936 to $3,705.
Upper middle income: $3,706, below $11,455.
High income: over $11,456.
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 (SSA, LAC,MENA,..). 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 to measure
the degree of development 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)
Index of Life expectancy
2)
Index of 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.
GDP per Capita in England Relative to Modern Economies.
|
Country |
Year |
Income Per
Capita (1992$) |
|
UK |
1992 |
16,302 |
|
Mexico |
1992 |
7,867 |
|
Bulgaria |
1992 |
6,774 |
|
Iran |
1992 |
4,161 |
|
South Africa |
1992 |
3,885 |
|
England |
1860s |
2,982 |
|
Indonesia |
1992 |
2,601 |
|
England |
1400s |
2,382 |
|
England |
1760s |
2,359 |
|
Egypt |
1992 |
2,274 |
|
Bolivia |
1992 |
2,066 |
|
India |
1992 |
1,633 |
|
England |
1300s |
1,464 |
|
Ghana |
1992 |
1,249 |
|
Kenya |
1992 |
1,176 |
|
Nigeria |
1992 |
1,132 |
|
Malawi |
1992 |
607 |
|
Chad |
1992 |
504 |
From Clark, G. “The Secret History
of the Industrial Revolution”
www.econ.ucdavis.edu/faculty/gclark/papers/secret2001.pdf
Maddison’s data: http://dx.doi.org/10.1787/301542223888
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.
4)
Migration. Then, free movement. Rural population could go to industrial city
in country, if nothing there, US, Australia, Canada… Now restrictive immigration laws. Also (conversely) note brain drain – back
then they would stay in most advanced, now LDC educated people have another
place to go.
5)
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.
6)
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.
7)
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
