Development Theories and Policies

(Course code: MSPM 612)

Solomon Kibret ( Ph.D. )

Lunar International College

October 2021
Chapter 1. Introduction to Economic Development

o Economic Development in Historical Perspective

o Economics of Development: Concepts and
Approaches
o Economic Growth and Economic Development
o Measurement of growth and development.
o Obstacles to Development
o Basic Requirements for Development
Economic Development in Historical Perspective

Classical Economists:
• Adam Smith, David Ricardo, Thomas Malthus, John
Stuart Mill and Karl Marx all dealt at some length
with the causes and consequences of economic
advances.
Physiocrats:
• Beyond the classical school, economic development
theory traces its antecedents to the physiocrats who
have generally been considered as the first scientific
school of economics.
 Agriculture was the source of all wealth.
ECONOMIC DEVELOPMENT IN HISTORICAL PERSPECTIVE

Mercantilists

• From the 16th to the 18th century, European economic

thought and practice had been dominated by the
Mercantilists.

 Focused on manufacturing and trade.

As the conventional economic theories could not explain the

development problems of these countries, economists required
recently a separate subject that deals with this issue.
 Economic Development in Historical Perspective

• Although one could claim that Adam Smith was the first
“development economist” (wealth nation, 1776), the systematic
study of the problems and processes of economic development in
Africa, Asia, and Latin America has emerged only over the past
five decades or so.

• The awarding of the 1979 Nobel prize in Economics (W.Arthur

Lewis of Princeton University and Theodore Schultz of the
University of Chicago) for their contribution of development
process, Provided dramatic confirmation of the status of Economic
development as a separate field within economics discipline.

• The relevance of industrial-country macroeconomic analysis to

developing nations has been the subject of debate for some time.
Economic Development in Historical Perspective
Short-run macroeconomic issues in the developing world emerged
largely in the context of the monetarist-structuralist debate about the
sources of inflation in Latin America during the late 1950s and
1960s.

A growing analytical literature has developed since the early 1970s

to address a succession of macroeconomic waves that have afflicted
developing countries.

Change in attitude and upsurge of interests in the economics of

development and the economies of poor nations:
• 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 in general and developed countries in
particular about the mutual interdependence of the world economy.
 Economics of Development: Concepts and Approaches

What is Development Economics?

The study of how economies are transformed from stagnation to
growth and from low income to high-income status and
overcome problems of absolute poverty.

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.
 What is Development Economics?

• Deals with the economic, cultural, and political

requirements for effecting rapid structural and
institutional transformations of entire societies in a
manner that will most efficiently bring the fruits of
economic progress to the broadest segments of their
populations.

• Development is more general – removal of poverty,

malnutrition, access to clean water, raising life
expectancy, reduction in infant mortality, increased
access to schooling (all these for most people, not an
elite!)
ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

Growth: Almost all economists would accept the increase in the

output of goods and services or income per capita of a country as its
definition.
Development: is an elusive term. In the 1950s and 1960s, for example,
development was considered as synonymous to economic growth.

Development is “conceived as a multi-dimensional process involving

major changes in social structures, popular attitudes, sectoral share
change, and national institutions, as well as the acceleration of
economic growth, the reduction of inequality (and unemployment), and
the eradication of absolute poverty”. ( M.Todaro ).
Measurement of growth and
development
Traditional Economic Measures
Development has traditionally meant achieving sustained rates
of growth of income per capita to enable a nation to expand
its output at a rate faster than the growth rate of its population.
Income per capita = Total gross national income of a country
divided by its total population.
Gross Domestic Product (GDP): -it is the total value of
currently produced final goods and services that are produced
within a country’s boundary during a given period of time,
usually one year.
GNP is calculated as the total domestic and foreign value
added claimed by a country’s residents without making
deductions for depreciation of the domestic capital stock.
MEASUREMENT OF GROWTH AND
DEVELOPMENT
 The New Economic View of Development
 The experience of the 1950s and 1960s, when many developing nations
did reach their economic growth targets but the levels of living of the
masses of people remained for the most part unchanged, signaled that
something was very wrong with this narrow definition of development.
 During the 1970s, economic development came to be redefined in
terms of the reduction or elimination of poverty, inequality, and
unemployment within the context of a growing economy.
“Redistribution from growth” became a common slogan.
 Development must therefore be conceived of as a multidimensional
process involving major changes in social structures, popular attitudes,
and national institutions, as well as the acceleration of economic growth,
the reduction of inequality, and the eradication of poverty.

 Leads to improvement in wellbeing, more broadly understood.

MEASUREMENT OF GROWTH AND
DEVELOPMENT
New Economic Measures

1. The Physical Quality of Life Index (PQLI) : Measure the

quality of life or well-being of a country such as Infant mortality, life
expectancy, and literacy.
• The PQLI of each country is given by the following formula.

PQLI = Life expect .index +infant mort. index +literacy index

3

• The PQLI indirectly reflects the effects on human development of

investment in health service, water and sewage systems, quality of
food and nutrition, education, housing, and changes in income
distribution.
Measurement of growth and development

2. The Human Development Index (HDI)

UNDP is offering the HDI as an alternative to the GNP for
measuring the relative socio-economic progress of nations.
HDI is based on three variables:
1. Longevity:- as measured by life expectancy at birth.
2. Educational attainment:- as measured by a
condition of adult literacy (two third weight) and a
combined primary, secondary, and tertiary school
enrollment ratios (one third weight)
3. Standard of living:- measured by real per capita
income at PPP.
 MEASUREMENT OF GROWTH AND
DEVELOPMENT
To construct the index fixed minimum and maximum values are taken for each
of the variables. For life expectancy at birth the range is 25-85 years. For adult
literacy, the range is 0 – 100 percent.
For real per capita income the range is $100 – 40,000. For any component of the
HDI, the individual indices can be computed according to the general formula
of:

Index = Actual value −Minimum value

Maximum value−Minimum value
Life Index = LE−25

85-25

Education Index = 2/3∗ ALI + 1/3∗ GEI

Adult Literacy Index = ALR−0

10 0- 0
Gross Enrollment index (GEI) = CGER−0

100-0

log (GDPpc)−log (100)

GDP Index =
log (40000)−log (100)

Where: LE: Life expectancy, ALR: Adult literacy rate, CGER:

Combined gross enrolment ratio, GDPpc: GDP per capita at PPP in
MEASUREMENT OF GROWTH AND
DEVELOPMENT

 The index thus ranges from 0 to 1.

 If the actual value is equal to maximum the

index is one.
 The HDI ranks countries into three groups:
 Low human development (0.0 to 0.49),

 Medium human development (0.50 to 0.79) and

 High human development (0.80 to 1.00).

 A BETTER MEASURE OF ECONOMIC DEVELOPMENT ?
HUMAN DEVELOPMENT INDEX MEASUREMENT

Why human indicators are less misleading than income per head?
o the distribution of literacy and life expectancy is much less
skewed than that of income.
o the average of the human indicators tells us something about
the distribution.
o any upward move in a human indicator can be regarded as
an improvement.
o international income gaps, whether relative or absolute, may
inevitably be widening, but to aim at reducing international
gaps in human indicators is both sensible and feasible.
o human indicators show the troubles of overdevelopment or,
better, mal-development, as well as of underdevelopment.
o indicators that measure impact rather than inputs distinguish
between goods and anti-bads (regrettable necessities) which
bring us back to zero
HUMAN DEVELOPMENT INDEX
Critics/Drawbacks:
 Partha Dasgupta (2001) has pointed out that the index
misrepresents concerns about the future, since it does not
deduct capital depreciation.
 it reflects only current well-being, and that it is an index
only of human capital, leaving out natural capital.
 average income per head is that it is an average that can conceal
great inequalities ⇒the components of the Human Development
Index (HDI), namely life expectancy and literacy, are also
averages. They can conceal vast discrepancies between men and
women, boys and girls, rich and poor, urban and rural residents,
different ethnic or religious groups.
MEASUREMENT OF GROWTH AND DEVELOPMENT
3. Human Poverty Index (HPI)
The HPI for developing countries is based on three main indices:
o The percentage of the population not expected to
survive to the age of 40 (P1)
o The adult illiteracy rate (P2)

o A deprivation index based on an average of three

variables: the percentage of the population without access
to safe water; the percentage of population without access
to health service; and the percentage of the under-weight
children under five years old (P3). The formula is given
by:

HPI = 1/3 (P13 + P23 + P 33 )]1/3

Alternative Measures of Level of Development

Sen’s Capability Approach of development

• Amartya Sen, the 1998 Nobel laureate in economics, argues that the
“capability to function” is what really matters for status as a poor or
nonpoor person.
•Amartya Sen’s analysis has been in term of ‘capabilities and
‘functioning’.
Capabilities: The freedoms that people have, given their personal
features and their command over commodities. Capabilities as
freedoms enjoyed in terms of functioning
•The national income is a quite inadequate measure of human
development for several reasons. It counts only goods and services that
are exchanged for money, leaving out of account the large amount of
work done inside the family, mainly by women, and work done
voluntarily for children or older people or in communities.
Alternative Measures of Level of Development

Sen’s Capability Approach of development..

• Functionings: What people do or can do with the commodities of given

characteristics that they come to possess or control. Functionings as an
achievement.
• Freedom of choice, or control of one’s own life, is itself a central aspect of most
understandings of well-being.
• A functioning is a valued “being or doing,” and in Sen’s view, some important
“Beings” and “Doings” in Capability to Function includes:
 Being able to live long – Being well-nourished
 Being healthy
 Being literate
 Being well-clothed
 Being mobile
 Being able to take part in the life of the community
 Being happy as a state of being may be valued as a
functioning
 having self-esteem
ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

Denis Goulet distinguishes three basic components or core values in this

wider meaning of development,
 Life-sustenance: life-sustenance is concerned with the
provision of basic needs.
 Self-Esteem: self-esteem is concerned with the feeling of self-
respect and independence.
 Freedom from servitude: Freedom is ability of people to
determine their destiny. It involves an expanded range of choices
for societies and their members together with a minimization of
external constraints in the pursuit of devolvement.
 OBSTACLES TO
DEVELOPMENT
i. Colonial legacy;
ii. Sociocultural heritage;
iii. Economic structure;
iv. Sociopolitical structure and organization;
v. The political context; and.
vi. Conceptions of time.
BASIC REQUIREMENTS FOR DEVELOPMENT

There are four basic requirements,

A. Natural resources - land, minerals, fuels, climate; their
quantity and quality.
B. Human resources - the supply of labour and the quality
of labour.
C. Physical capital and technological factors - machines,
factories, roads; their quantity and quality.
D. Institutional factors
 READING LIST

 Todaro, M. P., Smith, S.C. (2015). Economic

Development. (12th ed.). Boston: Pearson.
(Chapter 1)

 Nafziger, E. Wayne (2006) Economic Development

4th ed New York: Cambridge University Press.
(Chapter 2 and 3)