Name: Eugene D.

Alipio 20193079
Activity 1
ECOPE05: Economic Development Online

1. How do the poorest two-thirds of the world live?

INEQUALITY BETWEEN THE WORLD'S RICH AND POOR

Development economics focuses primarily on the poorest two-thirds of the world’s population.
These poor are the vast majority, but not all, of the population of developing countries, which
comprise 82 percent of the world’s population. Many of them are inadequately fed and housed, in
poor health, and illiterate. Calculations based on national accounts and income distribution indicate
that about 700–1000 million (10–15 percent) of the world’s 6.5 billion people (5.3 billion in developing
countries) are poor or living on no more than $1 a day.1 Most Americans, Canadians, and Britons
have never seen poverty like that, the overwhelming majority of which is in sub-Saharan Africa,
South Asia, and East Asia.

If you have an average income in the United States and Canada, you are among the richest 5
percent of the world’s population. The economic concerns of this 5 percent are in stark contrast to
those of the majority of people on this planet. The majority see the American with average income
as incredibly rich, perhaps as an average American views the Mellons or Rockefellers. By and
large, a person’s material well-being (whether rich, poor, or in between) is tied to the long-run
growth record of his or her country (Dollar and Kraay 2002:195–225), a focus of this book.

Income inequality is even greater for the world as a whole than for countries having high income
concentration, such as South Africa and Brazil. To see these contrasts more clearly, let us briefly
compare living conditions in North America to those in India, a low-income country, one that is not
as poor as the poorest region of the world, sub-Saharan Africa.

2. What is the meaning of economic development and economic growth?

Economic growth measures an increase in Real GDP (real output). GDP is a measure of the
national income / national output and national expenditure. It basically measures the total volume
of goods and services produced in an economy.

Economic development looks at a wider range of statistics than just GDP per capita. Development
is concerned with how people are actually affected. It looks at their actual living standards and the
freedom they have to enjoy a good standard of living.

Measures of economic development will look at:

 Real income per head – GDP per capita

 Levels of literacy and education standards
 Levels of healthcare e.g. number of doctors per 1000 population
 Quality and availability of housing
 Levels of environmental standard
  Life expectancy.

3. What is the history of economic development? How have developing countries performed
economically in the last half century?

After World War II it was thought that developing countries would require foreign aid in their early
stages of development. This aid would supplement the capital created by domestic savings,
permitting a higher rate of investment and thus stimulating growth. It was expected that their
reliance on official sources of additional capital would continue until their economies had
progressed enough to gain them access to private international capital markets.

Until the 1980s this pattern seemed to evolve as predicted. In the 1950s almost all capital flows to
developing countries were from official sources, in the form of foreign aid from developed
countries or of resources from the multilateral institutions, the World Bank and the International
Monetary Fund. In the 1960s some of the export-oriented, rapidly growing countries began to rely
on private international capital markets. Some, such as Singapore, attracted direct private foreign
investment; others, such as South Korea, relied more on borrowing from commercial banks. In the
1970s many oil-importing developing countries were able to turn to borrowing from private sources
when their economies were hit by the severe oil price increase of 1973.

4. What are the major characteristics and institutions of developing countries?

This chapter surveys the characteristics of developing countries, with particular emphasis on low-
income economies. It looks at income distribution, political framework, family system, relative size
of agriculture and industry, technology and capital levels, saving rates, dualism, international trade
dependence, export patterns, population growth, labor-force growth, literacy and skill levels, and
the nature of economic and political institutions, including governance; democracy and dictatorship;
transparency; social capital; the state bureaucracy; tax-collecting capability; a legal and judicial
system; property and use rights; statistical services and survey data; and land, capital, insurance,
and foreign-exchange markets. Near the end of this chapter, we examine rent seeking and
corruption and their relationships to state weakness and failure. Subsequent chapters expand on
economic patterns of development.

As economic development proceeds, income inequality frequently follows an inverted U-shaped

curve, first increasing (from low-income countries [LICs] to middle-income countries [MICs]) and
then decreasing (from MICs to high-income countries [HICs]). Even so, the proportion of the
population in poverty drops as per capita income increases

5. What are the major theories of economic development?

To many people, a theory is a contention that is impractical or has no factual support. Someone
who says that free migration to the United States may be all right in theory but not in practice
implies that, despite the merit of the idea, it would be impractical. Likewise, the statement that the
idea of lower wealth taxes in India stimulating economic growth is just a theory indicates an
unverified hypothesis.
For the economist, however, a theory is a systematic explanation of interrelationships among
economic variables, and its purpose is to explain causal relationships among these variables.
Usually a theory is used not only to understand the world better but also to provide a basis for
policy. In any event, theorists cannot consider all the factors influencing economic growth in a
single theory. They must determine which variables are crucial and which are irrelevant. However,
reality is so complicated that a simple model may omit critical variables in the real world
(Kindleberger and

Herrick 1977:40). And although complex mathematical models can handle a large number of
variables, they have not been very successful in explaining economic development, especially in
the third world.

This chapter discusses a few of the major theories of economic development, reserving for
subsequent chapters less comprehensive theories dealing with specific economic questions.
As they did in the 1950s and 1960s, economists recently have stressed all-encompassing
theories of development, including neoclassicism and rival theories.