TOPIC: INTRODUCTION

1.1. Definition and Current Interest in Development Studies

 In the current world there is a wide gap in the standard of

living between countries and as well as between individuals
within a country.

It may be difficult to get the right answer as to why such

disparity exists, try to look for solutions which may help to
bridge or reduce the gap.

So, Development Economics focuses on improving conditions

in developing countries.
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A factors that can be account for the change in attitude and

increase of interests in the economics of development and the

economies of poor nations can broadly be classified as;

 Academic interest in development,

 The awareness of developing countries about their

backwardness and their demand for a new international

economic order

 The awareness of the world about the mutual interdependence

of the world economy

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• The study of economic development is one of the newest and most

challenging.

• Though the study economic development has attracted the attention

of economists right from Adam Smith (who wrote “The Wealth of

Nations” in 1776) down to others, yet they were mainly interested

in the problems of European social and cultural institutions.

• It is in the 1940s after World War II that economists started

devoting their attention towards analyzing the problems of less

developed countries (LDCs).

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 Definition of Development Economics

Development Economics is:

 The study of how economies are transformed from stagnation to growth and from low

income to high income.

 The branch of economics that endeavors to explain why poor Countries do not develop

faster and to find polices to help them develop faster.

 It deals with the economic, Social, political and institutional mechanisms (both public

and private) necessary to bring about rapid economic development, in addition to being

concerned with the efficient allocation of existing scarce (or idle) productive resources

and with their sustained growth over time.

 The process of economic and social transformation that is based on complex cultural and

environmental factors and their interactions.

 The process of adding improvements to a parcel of land, such as grading, subdivisions,

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 Is Development Economics is redundant?
• Some writers comment that development economics is redundant because

standard economics theory is as applicable to the scarcity problem that

confronts the low-income countries as to the corresponding problem of the high

income countries. Others also condemn Development Economics because of its

preoccupation with macro issue rather than micro issues.

• According to Todaro (2006) development economics is not the same as

economics of advanced capitalist nations. Nor is it similar to economics of

socialist societies. It is nothing more or less than the economics of the

contemporary poor, underdeveloped nation with varying ideological orientation,

diverse cultural backgrounds, and very complex yet similar economic problems
06/10/2024 6
that usually demand new ideas and novel approaches.
 Cont --
• Today, Development Economics is a field on the crest of a
breaking wave with new data continuously emerging.

• These theories and statistics sometimes confirm and sometime

challenge traditional ways of viewing the world. The ultimate
purpose of development economics is to understand the
problem of developing countries.

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 1.2. Nature of Development Economics

 Traditional economics is concerned primarily with the efficient, least-

cost allocation of scarce productive resources and with the optimal growth
of these resources over time so as produce an ever-expanding range of
goods and services.
• Traditional neoclassical economics deals with an advanced capitalist
world of perfect markets; consumer sovereignty; automatic price
adjustments; decisions made on the basis of marginal, private- profit, and
utility calculations; and equilibrium outcomes in all product and resource
markets. It assumes economic “rationality” and a purely materialistic,
individualistic, self-interested orientation toward economic decision
making.
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 Political economy goes beyond traditional economics to study,

among other things, the social and institutional processes

through which certain groups of economic and political elites

influence the allocation of scarce productive resources now

and in the future, either for their own benefit exclusively or for

that of the larger population as well.

- Political economy is therefore concerned with the relationship

between politics and economics, with a special emphasis on the

role of power in economic decision making.

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 Development economics has an even greater scope. In addition to being concerned

with the efficient allocation of existing scarce (or idle) productive resources and with

their sustained growth over time, it must also deal with the economic, social,

political, and institutional mechanisms, both public and private, necessary to

bring about rapid and large-scale improvements in levels of living for the peoples

of Africa, Asia, Latin America, and the formerly socialist transition economies.

- Unlike the more developed countries (MDCs), in the less developed countries (LDCs),

most commodity and resource markets are highly imperfect, consumers and

producers have limited information, major structural changes are taking place in both

the society and the economy, the potential for multiple equilibria rather than a single

equilibrium are common, and disequilibrium situations often prevail (prices do not

equate supply and demand).

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 Meaning of Development

 Development is a multidimensional process involving the reorganization

and reorientation of entire economic and social system. In addition to
improvement in incomes and output, it typically involves radical changes in
institutional, social, political and administrative structures as well as in
people’s attitudes, customs and beliefs. In other words, development is a
broad concept that encompasses social, political and economic development.

 We can say that development has occurred when:

 There has been an improvement in basic needs,

 Economic progress has contributed to greater sense of self-esteem for the

country and individual within it, and

 Material has expanded the range of choice for individuals.

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 Objectives of Development

• We may conclude that development is both a physical and a state of mind in which society has,

through some combination of social, economic and institutional processes, secured the means for

obtaining a better life. Whatever the specific components of this better life are, development in

all societies must have at least the following objective.

 To increase the availability and widen the distribution of basic life sustaining good such as

food, shelter, health and protection.

 To raise levels of living, in addition to higher incomes, the provision of more jobs, better

education and greater attention to cultural and humanistic values, all of which will serve not

only to enhance material well being, but also to generate greater individual and national self-

esteem.

 To expand the range of economic and social choice available to individual and nation by

freeing them from servitude and dependence not only in relation to other people and nation

states but also to the forces of ignorance and human misery.

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 NE
R O
T E
A P
CH
OF
ND
E

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 TOPIC TWO: ECONOMIC
DEVELOPMENT AND
ECONOMIC GROWTH

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 2.1. Concepts of Economic Development vs. Economic Growth

 Though the study of economic development has attracted

the attention of economists right from Adam Smith down

to Marx and Keynes, yet they were mainly interested in

the problems which were essentially static in nature

and largely related to a Western European

framework of social and cultural institutions.

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 Economic Development and Economic Growth
• Generally speaking economic development refers to the
problems of developing countries and economic growth to
those of developed.

• According to Kindleberger “economic growth means more

out put, while economic development implies both more
output and changes in the technical and institutional
arrangements by which it is produced and distributed.
• Growth may well involve not only more output derived from
greater amounts of inputs but also greater efficiency, i.e., an
increase in output per unit of input.
• Development goes beyond this to imply changes in the
composition of output and in the allocation of inputs by
sectors.
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 Cont ----
• Friedman defines growth as an expansion of the system in one or
more dimensions without a change in its structure, and
development as an innovative process leading to the structural
transformation of social systems.

• Thus, economic growth is related to a quantitative sustained increase

in the country’s percapita output or income accompanied by
expansion in its labor force, consumption, capital and volume of
trade. On the other hand, economic development is related to
qualitative changes in economic wants, goods, incentives and
institutions.
06/10/2024 17
 Cont----
• An economy can grow but it may not develop because
poverty unemployment and inequalities may continue to
persist due to the absence of technological and structural
changes.

• But it is difficult to imagine development without economic

growth in the absence of an increase in output per capita,
particularly when population is growing rapidly.

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Economic growth is uni-dimenstional in nature - measured with
reference to increase in national income only. ‘Development’ is multi
dimensional evaluated (rather than precisely measured) with
reference to a host of qualitative factors, apart from quantifiable
aspects.

Improvements in literacy, education and training levels,

improvements in health and nutrition of the people resulting in
reduction in morbidity(incidence of a particular disease) and
mortality and increase in longevity, high levels of living on all
norms, optimum use of all types of resources are indicators of
development.
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 Cont-----
• Schumpeter defines development as a continuous and
spontaneous (self-generating) change in the stationary
state which forever alters and displaces the equilibrium
state previously existing while growth is a gradual by a
gradual increase in the long run which comes about by
a gradual increase in the rate of saving.
• It is taken to mean growth plus change. It is related to
qualitative change in economic wants, institutions or the
upward movement of the entire social system.
• It describes the underlining determinants of growth such
as technological and structural changes.

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 Difference between Economic Development and
Economic Growth
Basis of difference Economic development Economic growth
Meaning Is the process of rise in national Is the rise in the value of
income by changing the structure of everything produced in the
the economy country

Focus Concerned with structural changes Concerned with increases in the

in the economy economy’s output

Scope Economic development is a wider Economic growth is a narrower

concept than economic growth. concept than economic
development.
Implication
progressive changes in socio-
economic structure of output of goods and services in
country(institutional and the country like increase the
technological changes) income in savings, investment etc.
Effect Brings quantitative
Brings both qualitative and changes in the economy
quantitative
changes in the economy
Dimensions Economic development is a multi- Economic growth is a single
06/10/2024 dimensional phenomenon. dimensional phenomenon. 21
 2.2. Core Values of Development Economics

There are three core values serve as standards of development.

1. Sustenance: The Ability to Meet Basic Needs: This refers to the

capacity to meet basic necessities such as food, clothing, and
shelter. Lack of even one of these means that a person's life is
not progressive.

A country develops if its citizens have enough or more than enough

for their basic necessities, there is growth of income, extreme
poverty is addressed, and there is equality among members of
society.
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 Cont---
2. Self-esteem: To Be a Person: refers to existence of respect, trust, and
self-value which leads to good quality of life. Each person has needs
which can be achieved through the presence of respect, dignity, and a good
reputation in society.
A person's worth as an individual cannot simply be measured by the
ownership of material things which is often given emphasis by
progressive capitalist countries such as the United States.
In the Philippines, material wealth is not the only important thing but the
love for one's family, the family's reputation, and a person's dignity and
self-esteem. A country is developed if this unique need of the people is
addressed.
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3. Freedom from Servitude: To Be Able to Choose:

This freedom is drawn from liberation from oppressive systems in

society, poverty and abuse, slavery, ignorance, and the absence of
the freedom to choose one's culture or religion.

This freedom can be seen in the range of choices in a society.

What is good about development is not only the joy of being free from
poverty but also the availability of a wide range of choices.

 In general, freedom prevails if people live a comfortable life, if they

have the freedom to choose their religion, to vote and to express

their opinion about administration and governance, and if they
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enjoy equal opportunities for education and employment.
 Cont---
• Development consists of the removal of various types of únfreedoms’ that
leave people with little choice and opportunity.

• Major categories of únfreedoms include famine and undernourishment,

poor health and lack of basic needs; lack of political liberty and basic civil
rights, and economic insecurity.

• Another notion of development is “Sustainable Development” which is

defined as development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.

• So, the challenge of Development Economics is in the formulation of

economic theory and in the application of policy in order to understand
better and to meet those three core components of development.
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 2.3.Measurements of Economic Development

• Economic Development is measured in four ways:

1. GNP- Gross National Product: refers to the country's total output of final
goods and services. GNP does not reveal the changes in growth of
population. It does not reveal -the costs to society of environmental
pollution. It tells us nothing about the distribution of income in the
economy.

• GNP makes no effort in including the non marketable products (bringing up

children, production of home materials, home bakery, etc).Another difficulty
in calculating GNP is of double counting which arises from the failure to
distinguish properly between final and intermediate products

• There always exists the fear of a good or a service being included more 26than
06/10/2024
 Cont---

2. GNP per capita-it is the GNP divided by the total population of the

country. The real GNP per capita fails to take problems associated with

basic needs like nutrition, health, sanitation, housing, water and

education. The improvement in living standards by providing basic needs

cannot be measured by increase in GNP per capita.

3. Welfare- economic development is regarded as a process whereby

there is an increase in the consumption of goods and services of

individual. Welfare as measurement of development is not free from

limitations like the difficulty in the valuation of the output.

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This measure is the secular improvement in material well being.
 Cont----

4. Social Indicators- economists include a wide variety of items in social

indicators some are input such as nutritional standards or number of

hospital based or doctors per head of population while others may be

output corresponding to these input such as improvements in health in

terms of infant "mortality rates, sickness rates etc, social indicators are

often referred to as the basic needs for development.

It should be known that the merit of social indicators is that they are

concerned with ends being human development.

The social indicators include health, food, water, sanitation, housing

and the like.

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 Measuring Economic Development: The HDI

• We have discussed earlier that the terms “growth” and “development”

are not the same. Thus, using the growth of GDP or per Capita

income (PCI) to measure developments is misleading because of the

following reasons.

1. GNP/GDP measures “productive” activity in a very narrow way,

excluding, for example, the non-marketed productive activities of the

household, including those produced by women and children. That is,

only goods and services provided through the market are counted in

GNP/GDP while many more goods and services produces in LDCs fall

in06/10/2024
this (non-marketable) category. 29
 Cont---

2. GNP measure of development do not include non-monetary

change variable in the economy such as Life expectancy, family
love and affection, peace, and other variables capturing the change
in welfare.

So GNP is a very blurred instrument for measuring economic

development without considerable attention being given to other
variables.

3. PCI tells us nothing about the distribution of the change

income that has appeared in GDP growth.
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 Cont ---

• Realizing the problem of GNP or PCI as a measure of economic

development, most researchers used the “quality of life” to be

regarded as an important index of development.

• It is contended that such an important index of development is

not adequately reflected in the index of PCI growth.

• For instance country X may have a lower PCI than country Y, but

the quality of life enjoyed by the citizens of X may be better than

that of Y. Here, the problem is one of setting up a composite

index to measure the “quality” of life.

06/10/2024 31
 Cont---
• Several factors are involved in the measurement of such “quality”
example.
1. Education and literacy rates
2. Life expectancy
3. The level of nutrition as measured by calorie supply per head
4. Consumption of energy per head
5. Consumption of consumer durable per Capita
6. The proportion of infant mortality per thousand of live population

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 HDI cont----
• In 1990, the United Nation Development Program (UNDP)
published a Human Development Index (HDI), a new measurement
that provides a broad method by which inter-country and inter-
temporal comparisons of living standards can be undertaken.

• Since it has been widely acknowledged that national accounting

concepts do not capture all aspects of economic welfare, E.g.
environmental pollution and quality of life, social justice, etc and
neglect the important issue of non-marketed goods in LDCs, the
need for constructing HDI is an overwhelming one.
06/10/2024 33
 Why was the HDI created?

• There was a need in the development community for more information to be

gathered and for cross-country comparisons to be made.

• This would mean countries themselves and the international community could

observe those making progress in human development and those not.

• The works of Mahbubul Haq and Amartya Sen in the late 1980s focus on

individual development through analysing ‘well-being’ rather than simply GDP

measures and GDP per capita.

• The simplicity of the HDI does open it up to criticism, but as a basic indicator it

allows ranking of countries in terms of human development and as a general rule

is consistent with what country-specific researchers find at a micro and macro-

economic level.
06/10/2024 34
 What is the Human Development Index (HDI)?

• The UNDP defines human development as’ a process of enlarging people’s

choices’’. This depends not only on income but also on other social

indicators such as life expectancy, education, literacy and health provision.

• “The human development index (HDI) is a composite index that measures

the average achievements in a country in three basic dimensions of human

development: a long and healthy life, as measured by life expectancy at

birth; knowledge, as measured by the adult literacy rate and the combined

gross enrolment ratio for primary, secondary and tertiary schools; and a

decent standard of living, as measured by GDP per capita in purchasing

power parity (PPP) US dollars”,(2005 Human Development Report, pp.214,

06/10/2024 35
United Nations)
 Cont ----

• According to UNDP, the HDI comprises of GDP per Capita (Decent

Standard of Living) (Y), longevity (healthy life) (L) and knowledge
(education) (E)
• HDI = f(Y, L, E)
• Where Y – is per capita income
E - Is the literacy rate
L - Is life expectancy at birth?
 The conceptual and methodological problems of quantifying and
measuring human development becomes more complex for
Political freedom
Personal security
Interpersonal relation and
Physical environment
• Special effort must go into development of a simple quantitative
measure to capture the many aspect of human freedom.
06/10/2024 36
 Calculating the HDI
• Calculating the HDI, therefore, requires calculating three

indexes

1. The longevity or life expectancy index (L)

• LE = Average life expectancy – Minimum life expectancy

Maximum life expectancy – Minimum life expectancy

Where:

• The maximum life expectancy is given as 85 years of age

•06/10/2024
The minimum life expectancy is given as 25 years of age 37
 The knowledge or education index (E):-

It has two components: Adult literacy and the combined

gross enrollment ratio (GER) for primary, secondary
and tertiary education. Adult literacy takes 2/3 of the
weight and GER takes 1/3 of the ratio.
• Adult Literacy Index
= Average Adult Literacy – Minimum Adult Literacy
Maximum Adult Literacy – Minimum Adult Literacy
Where:
• The maximum value for Adult Literacy is 100
• The minimum value for Adult Literacy is 0

06/10/2024 38
 The combined GER Index

= Average GER – Minimum GER

Maximum GER – Minimum GER
Where:
• The maximum value for the combined GER is 100
• The minimum value for the combined GER is 0
The Education index
= 2/3 (the Adult Literacy Index) + 1/3(The combined GER Index

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 The percapita GDP Index (Y)

• = ln (actual GDP precipita) – ln (Minimum GDP precipita)

Ln (max. GDP precipita) – ln (Minimum GDP
precipita)
Where:
• The maximum value for GDP percapita is $ 40,000
• The minimum value for GDP percapita is $100
• GDP percapita is the actual (average) figure for the
country
• ln is the natural logarithm
The HDI is then:
HDI = 1/3(L) +1/3(E) +1/3(Y)
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 Exercise

#1 Calculating HDI (in 2003) for South Africa

Given:
• Actual Adult literacy rate = 82.4%
• Actual Combined gross enrolment ratio = 78%
• Actual (average) per capita GDP is $10346
• Average life expectancy is 48.4

06/10/2024 41
 Answer
• Life Expectancy Index = (48.4-25)/ (85-25) =0.391
• Adult literacy index = (82.4-0)/ (100-0) = 0.824
• Gross enrolment index = (78-0)/ (100-0) = 0.780
• Education Index = (0.824 x 2/3) + (0.780 x 1/3) = 0.5493 + 0.26 = 0.809.
• GDP Index = [ln (10346) – ln (100)]/ [ln (40000) – ln (100)] = 0.774
• HDI = (1/3 x 0.391) + (1/3 x 0.809) + (1/3 x 0.774)
• HDI = 0.1303+0.2698+0.258 = 0.6581

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• Human Development Index creates for each country a final
coefficient (number) its values range from 0 to 1.
HDI ranks countries into four groups:
• Low human development (0.0 to 0.499),
• Medium human development (0.50 to 0.799),
• High human development (0.80 to 0.90), and
• Very high human development (0.90 to 1.0).

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The physical Quality of Life Index (PQLI)
This index is based on three simple indicators:
• Infant mortality
• life expectancy
• literacy
For each indicator, the performances of individual countries are rated on
a scale of 1 to 100, where 1 represents the worst performance and 100
the best performance

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Infant mortality rate
• Infant mortality rate is the number of infants dying before reaching one year
of age per 1,000 live births in a given year.
• The upper limit of 100 was assigned to 77 years and the lower limit of 1
was assigned to 28 years
Life expectancy
• This measures
• Healthcare quality in a country
• level of sanitation

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• Literacy rate
• The rate, or percentage, of people who are able to
read.
• Measured as percentages from 0 to 100 provide
their own direct scale
• The PQLI of each country is given by the following
formula.
PQLI = Life expec. Index + infant mort. index + literacy index
3

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Human Poverty Index (HPI)

The United Nations has constructed human poverty indices for

developing countries.

The HPI for developing countries is based on three main indices:

 The percentage of the population not expected to survive to the

age of 40 (P1)

 The adult illiteracy rate (P2)

 The percentage of the under weight children under five years old

(P3). The formula is given by

• 06/10/2024 47
 Major Obstacles to Economic Development
At present there are more than 7.9 billion people living in the world. Out
of these, largest number of persons are living in developing countries.

The per capita income in these countries is very low whereas the per
capital incomes in developed countries is very high.
 Why the economic growth in developing countries is low?

 What stops these countries from developing economically?

The answer to these questions is not simple. However, the main obstacles
which the under developed countries, including Ethiopia are generally
facing for promoting development can be identified as under:
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A. Vicious Circle of poverty
It implies a circular association of forces tending to act and react up on
one another in such a way so as to keep a poor country in a state of
poverty. It is the biggest hurdle in the way of economic development.
 Ranger Nurkse in ''Problems of Capital Formation in Underdeveloped
Countries'' describes 'vicious circle of poverty as the basic cause of
under-development of poor countries. According to him, a country is
poor because it is poor.
Vicious circle of poverty would be explained more from demand side
and from the supply side

06/10/2024 49
 On the demand side, when people have low real income the
demand for goods is bound to be small.
In the small size of market, there is no incentive of invest in real or
human capital. When the rate of investment is low, the productivity of
the factors of production is bound to be low. Low productivity leads to
low per capital income which is rapidly absorbed by the rising
population growth. The country, therefore, remained poor.

06/10/2024 50
From the Supply side vicious circle of poverty, low level of real income
contributes to low rate of saving and this leads to low rate of
investment.
The low level of investment leads to low level of productivity. When the
productivity per worker is low, the real income will obviously be low
and so there poverty and vicious circle is complete.

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 Vicious circle poverty

Demand side Supply side

Capital Low Low

deficienc productiv Capital
deficiency
producti
y ity vity

Low
Low Low Low
investme
investment income income
nt

Low Low
demand saving

06/10/2024 52
B. Political Instability
In most of the developing countries, the governments are not stable.
A new government comes into power overnight; either through coup
defeat or army takes over.
The new government introduces a new system of rules for the
operation of business which causes frustration and discontentment
among the people.

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How political instability affect growth and dev’t of a countries are:
 When there is lack of political stability in the country, it directly
affects economic growth. It closes off sources of internal and
external investments.
 The external investors do not invest in a country where there is
political instability. The flow of investment in countries where there
is civil war coups, army take over etc. is either negligible or zero.
 Political instability also limits internal investment. They avoid
investing in their own country for fear of nationalization of their
projects, large scale interference by militant trade unions, etc.

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C. Corruption
Corruption is another obstacle to economic development in developing
countries. The bribery or gift of money has becomes institutionalized.
The govt. officials think bribery is built into their pay structure.
The businessmen, if they are to stay in business, have to pay bribes to
different departments of the govt. The employees give gift of money to
their superiors.
When bribery is an acceptable practice, it then becomes difficult for
businessmen and industrialists to take part stay and grow in business.
Bribery thus limits economic development

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D. Lack of investment
For an economy to grow, it must have investment. The funds for investment can
come either from domestic savings or from abroad.
(i) Investment funding by domestic savings: In developing countries, the
people with per capita incomes of as low as $ 600 per year hardly meet the
bare necessities of life. They have little to put into savings.
The middle class persons do save for their old age, marriage of children etc
and put their money in saving banks.
The rich people prefer to invest their savings abroad.
The overall result is that domestic savings in most of the developing countries is
as low around 13% of GDP; whereas it should not be less than 25% of GDP to
promote growth.
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(ii) Investment funding from abroad: Another way to generate funds
for investment is to obtain from foreign loans, foreign private
investment or from both.
The individual national governments give financial assistance to LDC's
mainly for their own economic and political interests.
So as long as the developing country is protecting the interest of the
donor countries, the flow of capital countries.
It is stopped or very much slowed down when the recipient country is
of no benefit to them.

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Same is the position now of the multinational assistance organizations
like the Word Bank and International Monetary Fund (IMF).
 These organizations which are mainly funded by the developed
capitalists countries of the world are also using these organizations
to promote their own economic and political interests.
 All the developing countries including Ethiopia are now knee deep in
debts of these organizations. The problem of debt servicing,
rescheduling has adversely affected economic growth of the poor
countries.

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As regards the flow of capital from multinational companies, they make
investment in those countries where infrastructure facilities such as
transportation, power, cheap labour force, raw material etc. are
available.
As these companies do not generally help in establishing
infrastructure in poor countries, therefore they do not contribute
much to economic growth of the LDC's. The problem of lack of
proper investment, therefore, remains in developing countries.

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E. Socio - Cultural Obstacles
LDCs (least developed countries) have social institutions and attitudes,
which are not conducive or suitable to development.
According to the UN’s report on the process’s and problems of
industrialization in LDCs, there are unfavorable factors or elements of
social resistance to economic change in LDCs, which include
institutional factors like
 Rigid stratification of occupations reinforced by traditional beliefs
and values
 Attitudes involving inferior valuation attached to business roles
 06/10/2024
Backward social attitudes 60
 Unfavorable political conditions
 Stratification and classification based on class, religious groups, caste
system, ethnic groups. Etc
F. Inadequate Infrastructure Facilities
The under developed countries suffer from lack of basic infrastructure
such as transport and communication system, power supply, banking
and other financial facilities.
The provision of inadequate infrastructure facilities stands in the way of
economic development of the poor countries.

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