Lecture 1

Development Economics and

Economic Development

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 (Partly from Todaro and Smith- Development
Economics, Addison-Wesley,2012.)

– The Nature of Development Economics

• Greater scope than traditional neoclassical economics and

political economy. Rethinking Theory and Empirics.

– Why Study Development Economics? Some Critical

Questions

– The Important Role of Values in Development Economics

– Growth and Development

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 Figure 1.1 World Income Distribution

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 1.2 Economics and Development Studies

• Economies as Social Systems: The Need to Go Beyond Simple

Economics
• Social Systems
– Interdependent relationships between economic and non-
economic factors
• Success or failure of development policy
– Importance of taking account of institutional and structural
variables along with more traditional economic variables

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 1.3 What Do We Mean by Development?
• Traditional Economic Measures
– Gross National Income (GNI)
– Income per capita
– Utility of that income?
• The New Economic View of Development
– Leads to improvement in wellbeing, more broadly understood
• Amartya Sen’s “Capability” Approach
– Functionings as an achievement
– Capabilities as freedoms enjoyed in terms of functionings
– Development and happiness
– Well being in terms of being well and having freedoms of choice
– “Beings and Doings”:
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 1.3 What Do We Mean by Development? (cont’d)

• Three Core Values of Development

– Sustenance: The Ability to Meet Basic Needs
– Self-Esteem: To Be a Person
– Freedom from Servitude: To Be Able to Choose
– Correlation of the Above with levels of Income
– Growth and Distribution

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 Income and Capability
– A critical question is how far growth and levels of income
are associated with changing capabilities
– Public vs. Private provision of resources towards
developmental needs
– Form and Extent of State Intervention
– How to tackle problems of Corruption, Leakage,
Accountability
– Growth related factors more talked about but effectively
undermined

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 Figure 1.2 Income and Happiness: Comparing Countries

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 1.3 What Do We Mean by Development? (cont’d)
• The Central Role of Women
– To make the biggest impact on development, societies must
empower and invest in women
• The Three Objectives of Development
– Increase availability of life-sustaining goods
– Raise levels of living
– Expand range of economic and social choices
Can all three above be achieved by better credit conditions,
markets and technology? Social Choice is the Issue with Health
and Education.

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 1.4 The Millennium Development Goals

• Millennium Development goals (MDGs)

– Eight goals adopted by the United Nations in 2000
• Eradicate extreme poverty and hunger
• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDS, malaria, and other diseases
• Ensure environmental sustainability
• Develop a global partnership for development

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• Unfortunate Exclusion of Social Mobility
as a major indicator of Underdevelopment.
Research has not made to the Text Books.

• It is a critical indicator measuring

probability distribution of jumping the
fence.

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 1.5 Conclusions

• The importance of Development Economics

• Inclusion of non-economic variables in designing
development strategies
• Understanding why we need to go beyond Markets and
Technology and Designing Policy Intervention
• Financing of Development

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 Common Characteristics of Developing Countries

• These features in common are on average and with great

diversity, in comparison with developed countries:
– Lower levels of living and productivity
– Lower levels of human capital
– Higher levels of inequality and absolute poverty
– Higher population growth rates
– Greater social fractionalization
– Larger rural population - rapid migration to cities
– Lower levels of industrialization and manufactured exports
– Adverse geography
– Underdeveloped financial and other markets
– Colonial Legacies - poor institutions etc.

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2.2 Basic Indicators of Development: Real Income, Health,
and Education

• Gross National Income (GNI)

• Gross Domestic Product (GDP)
• PPP method instead of exchange rates as conversion
factors
• Other possible Innovative Measure
• Degree of Income/Social Mobility

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 Figure 2.2 Income Per Capita in Selected Countries (2008)

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 Table 2.2 A Comparison of Per Capita GNI, 2008

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2.3 Holistic Measures of Living Levels and Capabilities

• Health
• Life Expectancy
• Education
• Human Development Index

• Basic Index= (Actual – Min)/(Max- Min)

• Must lie between 0 and 1
• HDI as a holistic measure of Quality of Life

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Table 2.3 Commonality and Diversity: Some Basic Indicators

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 Table 2.4 2009 Human Development Index for 24 Selected
Countries (2007 Data)

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 Table 2.5 2009 Human Development Index Variations for Similar
Incomes (2007 Data)

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What is new in the New HDI?
1. Calculating with a geometric mean

• Probably most consequential: The index is now computed with a

geometric mean, instead of an arithmetic mean
• New HDI takes the cube root of the product of the three component
indexes
• The traditional HDI calculation assumed one component traded off
against another as perfect substitutes, a strong assumption
• The reformulation now allows for imperfect substitutability
• Note that individual impact is now conditional on other elements

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What is new in the New HDI?
2. Other key changes:

• Gross national income per capita replaces gross domestic product per
capita
• Revised education components: now using the average actual
educational attainment of the whole population, and the expected
attainment of today’s children
• The maximum values in each dimension have been increased to the
observed maximum rather than given a predefined cutoff
• The lower goalpost for income has been reduced due to new
evidence on lower possible income levels
• ENVIRONMENT AND GENDER ISSUES –LESS DICSUSSED IN
FORMATION OF INDICES. UNFORTUNATELY CANT COVER
IN THIS COURSE. BUT THESE ARE CRITICAL ISSUES.

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Table 2.6
The 2010
New Human
Development
Index,
2008 Data

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 Figure 2.5 Under-5 Mortality Rates, 1990 and 2005

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 Table 2.8 Primary School Enrollment and Pupil-Teacher Ratios,
2010

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 Figure 2.7 Number of People Living in Poverty by Region,
1981–2005

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 Table 2.10 The Urban Population in Developed Countries and
Developing Regions

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 Table 2.11 Share of the Population Employed in the Industrial
Sector in Selected Countries, 2004-2008 (%)

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 2.4 Characteristics of the Developing World: Diversity within
Commonality

9. Underdeveloped Financial and Other markets

– Imperfect markets
– Incomplete information
10. Colonial Legacy and External Dependence
– Institutions
– Private property
– Personal taxation
– Taxes in cash rather than in kind

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 2.5 How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages

• Eight differences
– Physical and human resource endowments
– Per capita incomes and levels of GDP in relation to the rest of the
world
– Climate
– Population size, distribution, and growth
– Historic role of international migration
– International trade benefits
– Basic scientific/technological research and development
capabilities
– Efficacy of domestic institutions

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 2.6 Are Living Standards of Developing and Devolved
Nations Converging?

– Evidence of unconditional convergence is hard to find

– But there is increasing evidence of “per capita income
convergence,” weighting changes in per capita income by
population size

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 Figure 2.8 Relative Country Convergence: World, Developing
Countries, and OECD

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 Figure 2.8 Relative Country Convergence: World, Developing
Countries, and OECD (cont’d)

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 Nature and Role of Economic Institutions

• Institutions provide “rules of the game” of economic life

• Provide underpinning of a market economy
• Include property rights; contract enforcement
• Can work for improving coordination,
• Restricting coercive, fraudulent and anti-competitive behavior
• Providing access to opportunities for the broad population-
• Constraining the power of elites, and managing conflict
• Provision of social insurance
• Provision of predictable macroeconomic stability

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