Development Economics

Scarcity as the Essence of the Study of Economics Other Areas in Economics:

1. Agricultural Economics
Definition of Scarcity
2. Managerial Economics
Scarcity = Limited Supply of Resources + Unlimited
3. Labor Economics
Demand for Resources
4. Monetary Economics
5. International Economics
Aggravating Factors of Scarcity
6. Development Economics
1. rapid increase in population
2. modernization
3. demonstration effect
The Study of Development Economics
4. peer pressure
Source: Economic Development
5. depletion of natural resources
Michael P. Todaro
Opportunity Cost
Development Economics as a Separate Field of Study
Something forgone when choosing an alternative
o Adam Smith is the first development economist.
Economics as Science of Choice His Wealth of Nations, published in 1776 was the
first treatise on economy development.
Definition
o The awarding of 1979 Noble Prize in economics to
It is a social science that deals with the proper allocation
two development economists W. Arthur Lewis of
of scarce resources to satisfy the unlimited needs and
Princeton University and Prof. Theodore Schultz of
wants
the University of Chicago confirmed that
economic development is a separate field within
Economics a Science
the economics discipline.
It observes a procedure in analysing economic problems,
namely: descriptive (data) economic analysis (theory) The Nature of Development Economics
and applied (policy) economics
o Traditional Economics is concerned primarily with
the efficient, least-cost allocation of scarce
Economics as a Social Science
productive resources and with the optimal growth
It deals with the economic activities such as consumption,
of these resources over time so as to produce an
production, distribution and exchange. It is very much
ever-expanding range of goods and services.
related to other social sciences such as:
1. sociology (social problems) o Political Economy is concerned with the
2. psychology (human mind) relationship between politics and economics, with
3. politics (government and the state) a special emphasis on the role of power in
4. history (past events in human affairs) economic decision making
The Nature of Development Economics (cont’n)
Two Main Branches
Microeconomics o Development Economics is concerned with the
Deals with specific economic units such as the consumer, efficient allocation of existing scarce productive
business firm, and the industry. It is concerned with resources and with their sustained growth over
consumer behaviour, least-cost combination of inputs, time and deals with the economic, social , political,
optimum product mix, and product and factor pricing. and institutional mechanisms, both private and
public , necessary to bring about rapid and large-
Macroeconomics scale improvements in levels of living for the
Studies the economy as a whole. It is concerned with masses.
changes in the national output, level of employment and
Why Study Development Economics?
the general price level.
To gain a better understanding of several critical
questions about economies of TWCs.
Some Critical Questions: Meaning of Economic Growth
1. What are the sources of national and international
Definition of Economic Growth
economic growth?
It is a sustained increase in the capacity of the nation to
2. What can be learned from the historical record of
produce diverse output for its population.
economic progress in the now developed world?
3. What are most influential theories of development
Gross National Product/Gross Domestic Product as a
and are they compatible?
Measure of Economic Growth
4. Is rapid population growth threatening the economic
progress of developing nations
Gross National Product (GNP)
5. What do we mean by “environmentally sustainable
Is the total market value of final goods and Services
development”?
produced by nationals regardless of geographical area
6. Is expanded international trade desirable for
per unit of time.
development of poor nations?
7. Should large and powerful multinational
Gross Domestic Product (GDP)
corporations be encouraged to invest in the
Is the total market value of final goods and services
economies of poor nations?
produced within a geographical area regardless of
8. What is the impact of foreign economic aid from rich
nationality per unit of time.
countries?
9. Are free markets and privatization the answer to
The Real Growth Rate
development problems? Nominal GDP
10.What is the role of financial and fiscal policy in Means physical output is valued using price in current
promoting development? year. It is also known as GDP at current price.

Development vs. Economic Growth
Source: Economic Development
Michael P. Todaro
Meaning of Development
o Development traditionally meant the capacity of a
national economy to generate and sustain an
annual increase in its Gross National Product
(GNP) or its Gross Domestic Product (GDP).
o Development is conceived 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. (New View of Economic
View of Development)
Core Values and Objectives of Development
Core Values
o Sustenance: The Ability to Meet Basic Needs
o Self-esteem: To be a Person
o Freedom from Servitude: To Be Able to Choose
Objectives
o To increase the availability and widen the
distribution of basic life sustaining goods.
o To raise levels of living
o To expand range of economic and social choices
available to individuals and nations
Real GNP/GDP
Means physical output is valued using price in base year.
It is also called GDP at constant price or deflated GDP.
o Real GDP per Capita = Real GDP divided by Total
Population
o Real Growth Rate (r) = Real GDP per Capita for
Yr 2 – Real GDP per Capita for Year 1
o Real GDP per Capita for Year 1 X 100
Difference Between Growth and Development
o Development is a multidimensional process
o Development is accompanied by significant shifts
in the structure of the economy
o Economic growth without structural change is
often an indicator of the new income being
concentrated in the hands of the few people.
o No sustained development can occur without
economic growth
Economic Growth does not guarantee improvement in
standard of living
Reasons
1. Governments promote economic growth to
augment the power and glory of the state and its
rulers.
2. Resources may be heavily invested in further
growth, with significant consumption gains
deferred to a later date.
 3. Income and consumption may increase, but those
who already are relatively well off may get all or
most of the benefits,
Patterns of Development
(Perkins, et. al.)
Patterns of Development – Malaysia : A Case of
Unprecedented rates of economic growth
o In 1970s, American and Japanese electronics
manufacturers move into export processing zones
established by the Malaysian government.
o Newly industrializing nations benefited from this
because of good infrastructure, English-speaking
workforce and stable government.
o Malaysia used to be known mainly for the export
of rubber, tin, and palm oil, became the world’s
largest exporter of electronics components and
other labor-intensive manufactured goods.
o The average income of the average Malay more
than quadrupled in real terms between 1970 to
2010, IMR fell from 41 to 6 infants per thousand,
and life expectancy rose from 61 to 75 years. Adult
literacy jumped from 83 to 103 percent.
o Agriculture accounted for about one third of
national output in 1970; today it accounts for less
than 10 percent.
o In 1984, Ethiopia was affected by drought and
shortage of food, compounded by multiple births
and lack of emergency postpartum care. Village
school remained closed that year.
o In 1998, war broke out between Ethiopia and
neighboring Eritrea.
o In 2004, Ethiopia started to grow. IMR fell from an
estimated 136 per thousand in 1970 to 67 in 2009;
life expectancy from 56years to 13 years more.
Adult literacy is less than one out of three, but this
improved. Four out of every five Ethiopia’s
children of school age are enrolled in primary
school.
o In 1970, 61 percent of national output was derived
from agriculture; and in 2009, it went down to 51
percent.
Patterns of Development – Ethiopia
o With 80 million population, Ethiopia is one of the
most populous poor nations in the world.
o It is one of Africa’s emerging economies. Exports
of primary products, remittances from Ethiopians
working abroad, and foreign direct investment are
fuelling the nation’s growth. Better economic
policies and management, spread of new
technology and increasing economic relations
with China, India, and the Middle East also
contributed to its growth
Patterns of Development
Ukraine transition resulted in an abrupt and steep
decline in living standards.
o Ukrainians enjoyed modest living in the 1980s.
Most of their everyday needs were met.
Healthcare and daycare were publicly provided.
o In 1991, 90 percent of the voters supported
independence from Soviet Union.
o Negative consequences of independence were
collapsed trade with Russia and inability to pay
fuel imports from Russia because of lack of foreign
exchange.
o Mismanagement of domestic economy led to
hyperinflation in 1993-94, with prices rising to
almost 5,000 percent. Life expectancy was 66
years in 1989 but fell to 62 years in 1995.
Patterns of Development – Ukraine
o They hoped for foreign investment but foreigners
found existing technology backward, products of
poor quality, and corruption rife.
o Ukraine’s economy rebounded during the 2000s.
Income per capita had risen three quarters of its
level in 1989. But its major export was hit by global
recession. Its weak banking sector is vulnerable to
world financial crisis.
o It improved in 2010 but again plagued by political
turmoil and poor governance. Problems of
corruption, cronyism, and unresponsive public
institutions remain unresolved.
Patterns of Development - Observations
o All countries have been affected by dramatic
changes both within their borders and outside of
them.
o Factors that affected development of the 3
countries are:
a. Changes in political system
b. Substantial demographic shifts
c. Spread of endemic disease
d. Global trade
e. Capital movement across borders
f. Information and ideas spread much faster
Approaches to Development
o Industrialization through import substitution (the
replacement of home-produced goods)
o Labor-intensive techniques, income redistribution,
and provision of basic needs
o Dependence on markets to set prices and allocate
resources.
o Export promotion
o Shift from foreign aid and investment from the
richest to the poorest countries
o Debt forgiveness for poor nations that have
difficulty to repay loans