Dear Students, Ihave ted to prepare short notes which may help your preparation Tor exit exam of 2022-03, higher edueation by saving your time and lead you to concentrate on main points of development economics, Please do not limited on this material and concentration area of this material, [just focused only on main points. Use my Tecture notes and Mikac! Toxlaro development economics text hooks and other development economics textbooks for detail reading. Your hardworking (commitment and effort) will undoubtedly bring you success. Good luck with your exam! Concentration Area of Development Economics (I &ID) for Exit Exam Preparation 1.1. Basie concepts of Development Economies ¥ How development different from Economies growth? —> AASWEF: Development = quantitative aspect (Growth) + qualitative aspects ¥ What are the core values of development? —» AasWer: Sustenance: the ability to meet basic needs; Self-Esteem: a sense of worth and self-respect, of not being used as a tool by others for their own ends; Freedom from Servitude (NAIA 207% 17 a9): to be able to choose. ¥ What are the objectives of development? Answer —> To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health, and protection > To raise levels of living, including, in addition to higher incomes, the provision of ‘more jobs, better education, and greater attention to cultural and human 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 choices available to individuals and nations 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. ¥ What are the Measurement and international comparison of growth and development? Answer > Conventional measurements & Gross National Product (GNP) *& GNP Per Capita & Welfare: improvement in material well-being — Alternative measures of level of development * Social Indicators or Basic Needs such as health, education, food, water, sanitation, and housing. * Human Development Indices 1 Asimamaw B, (MSe.) Lecturer at Department of Economics Email: asmamawhelete18@gmail.com* Physical Quality of Life Index (PQLI): combined three component indicators of infant mortality, life expectancy at age one and basic literacy at age 15. * Human Development Index (HDI): summarizes a great deal of social performance in a single composite index combining three indicators longevity (a proxy for health and nutrition), education, and living standards. "Human poverty Index: focuses on dimensions of deprivations. 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 underweight children under five years old (P3). ¥ What are the obstacles to economic development > Low rate of capital formation > Socio-cultural constraints > Agricultural constraint > > Human resources constraint Foreign exchange constraint > Vicious circles of poverty > Extractive political and economic institution What are factors that promote economic growth? — Natural resources > Capital stock/ accumulation > Inclusive political and economic institutions > Technological progress — Specialization and division of labour — Structural changes Transition from a traditional agricultural society to a modern industrial economy involving a radical transformation of existing institutions, social attitudes, and motivations —> Social attitudes and values —> Human resource —> Political stability and strong administration ¥ Discuss development gap between developed and developing countries? > There is wide development gap between % Level of per capita GDP Level of employment Level of education Level and quality of infrastructure, public service, ete, ich and poor countries in terms of eee 2 Asimamaw B, (MSe.) Lecturer at Department of Economics Email: asmamawhelete18@gmail.com¥ Discuss MDGs and SDGs Kasia tome pean hang —F Hace ale proprio people no ei $day Sey hae poe poe mae rm Moe Aaa ay SSIS — + ese ae pegs oe ee ‘metre onan + Hapa ey guy ota hr ly 308 TS iaee ceo oe PENH Sn liam ma : RESO Ta Renan ee ee eae ertontanding «Ey tc geet ith th 1 th he a ST Aste ned anh coisa sl ian Seep sates ‘nl te nent menos rk oma nama ig team + Etsgeinenc seein oo pee + Incegrrern are eni p aat Sustainable Development Goals (SDGs) 2 Goals: 1. No poverty 8, Decent Work and Economic Growth 2. Zero Hungry 9, Industry, Innovation and Infrastructure 3. Good health and well-being 10, Reduced Inequalities 4, Quality education 11. Sustainable Cities and Communities 5. Gender equality 12, Responsible Consumption and Production 6. Clean water and sanitation 13. Climate Action 7. Affordable and clean energy 14. Life Below Water 1.2, Common characteristics of developing countries Y What are the common characteristics of developing 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: low-income countries often have ethnic, linguistic, and other forms of social divisions 3 Asimamaw B, (MSe.) Lecturer at Department of Economics Emil: amamawhelete 8@gmail.comLarger rural population - rapid migration to cities Lower levels of industrialization and manufactured exports Adverse geography Imperfect markets and incomplete information Exports of primary, products, and imports of consumer goods and machinery. Backward state of technology Underdeveloped Natural Resources: unutilized or underutilized or misutilized Vast open unemployment and disguised unemployment Capital-poor, or low-saving and low-investing” economies Lack of Enterprise and Initiative Colonial Legacy and External Dependence Institutions * Private property # Personal taxation ted deddeddsdd Taxes in cash rather than in kind ¥ How low-income countries today differ from developed countries in their eat Answer "Physical and human resource endowments: Developing countries have large size (both in terms of population and physical area). = Climate: developing countries are situated in tropical or subtropical climatic zones. * Population size, distribution, and growth Wester nations experienced a very slow rise in population growth The populations of many developing countries have been inereasing at annual rates in excess of 2.5% in recent decades, and some are still rising that fast today, "Historical and colonial background The colonial powers of the west had a dramatic and long lasting impact on the economies and political and institutional structures of their colonies by their introduction of new and tradition-shattering ideas. «Ethnic and religious composition Over half of the world’s LDCs have recently experience some form interethnic conflict. 4 E.g Just in 1990s, ethnic and religious coniliets leading to widespread death and destruction took place in Afghanistan, Rwanda, Mozambique, Sri Lanka, Iraq, India, Somalia, Ethiopia, Liberia, Angola, Myanmar, Sudan, Yugoslavia, Haiti, Indonesia, and DRC. "Industrial structure: developing countries are agrarian in economic, social, and cultural outlook. = External Dependence: Feonomic, Political, and Cultural stages 4 Asimamaw B. (MSe.) Lecturer at Department of Economics. Emails asmamawhelete8@gmail.com+ Sciemtfic and technological researches, low-income developing nations in particular are in an extremely disadvantageous position vis-a-vis the developed nations. = Developing countries are ruled directly or indirectly by small and powerful elites to 4a greater extent than the developed nations, ¥ Do developing nation catching ~ up developed nation? = Convergence theory vs divergence theory? * Convergence: the tendency for per capita income (or output) to grow faster in lower-income countries than in higher-income countries so that lower-income countries are “catching up” over time. # Divergence: a tendency for per capita income (or output) to grow faster in higher- income countries than in lower-income countries so that the income gap widens across countries over time (as was seen in the two centuries after industrialization began) }. Growth Models and Theories of Development ¥ What determines long-term economic growth rate/prosperity of nations? Answer — According to A. Smith (1776) specialization/division of labor, accumulation of physical capital (investment) and technological progress. According to Thomas Malthus rapid population growth (population growth exceeds economic growth) can constrain economic growth. According to David Ricardo: technological change, free trade based on a country’s comparative advantage and specialization can enhance economic growth. According to Ibn Khaldun demographic growth, technical progress, the principle of private property, the soundness of political and legal institutions, Y List and discuss Rostow’s Stages of Economic Growth * According to Rostow, the transition from underdevelopment to development can be described in terms of a series of steps or stages through which all countries must proceed. traditional society; pre-conditions for take-off; the take-off: drive to maturity; and age of high mass-consumption Please discuss in detail the characteristics of each stages of economic growth. eee What is the key driver for economic growth according to Harrod-Domar Models? 5 Asimamaw B. (MSe.) Lecturer at Department of Economics Email: asmamawhelete18@gmail.com— According to F, Harrod and E, Domar saving and investment plays a key role for economic growth. According to this theory the reason why developing countries are poor is that there are fundamental savings gap; lack of capital accumulation. # Therefore, LDCs should increase saving and productivity of investment. # The savings gap can be facilitated through foreign aid as well as private foreign investment. ¥ Discuss Solow Growth Model briefly. Answer — The Model states that a higher saving rate increases the growth of output, although only temporarily. Sustained growth over long periods of time requires sustained technological progress. ¥ The Solow-Swan neoclassical growth model explains the long-run growth rate of output based on two exogenous variables: the rate of population growth and the rate of technological progress, and that is independent of the saving rate. Y Discuss Endogenous Growth Theory (New growth theory) Answer > The endogenous growth models have been developed by Arrow, Romer, and Lucas among other economists > The endogenous growth theory is a new theory which explains the long-run growth rate of an economy on the basis of endogenous factors as against exogenous factors of the neoclassical growth theory. — The technology still plays an important role in these models, exogenous changes in technology are no longer necessary to explain long-run growth > The endogenous growth models emphasize technical progress resulting from the rate of investment, the size of the capital stock, and the stock of human capital. Y What promotes economic growth according to structural change models? > According to this model economic development takes place when capital accumulates as a result of the withdrawal of surplus labor from the “subsistence” sector to the “capitalist” sector. ¥ Economic development needs transformation of traditional sector (agriculture); investing in modem (industrial) sector determines economic development. Y What is the difference between balanced growth vs unbalanced growth model? Answer > According balanced growth Model investment takes place simultaneously in all sectors or industries at once; proper balance between investment in agriculture and industry. — According to unbalanced growth model investment should be made in selected sectors rather than simultaneously in all sectors of the economy. 6 Asimamaw B, (MSe.) Lecturer at Department of Economics Email: asmamawhelete18@gmail.com¥ Nounderdeveloped country possesses capital and other resources in such quantities as to invest simultaneously in all sectors. ' Other sectors would automatically develop themselves through what is known as “linkages effect. Y Discuss the International Dependence Model. —+ The dependency theory states that the dependence of less developed countries (LDCs) on developed countries (DCs) is the main cause for the underdevelopment of the former. ¥ There are unequal centre periphery relationships whereby LDCs are dependent on DCs in trade, investment, technology, etc. ¥ This dependence results in underdevelopment of the periphery because the cenire is dominated by the powerful capitalist countries that exploit the former for their benefit. Y Whats detrimental for economic growth according to Nelson's Low-Level Equilibrium Trap Model? Answer > The low-level equilibrium trap is a concept in economics developed by Richard R Nelson, in which at low levels of per capita income people are too poor to save and invest much, and this low level of investment results in low rate of growth in national income. + As per capita income rises above a certain minimum level at which there is zero saving, a rising proportion of income will be saved and invested and this will lead to higher rate of growth in income. Y What promotes economic growth according to Big-Push Theory? — The large comprehensive programme is needed in the form of a high minimum amount of investment to overcome the obstacles to development in an underdeveloped economy and to launch it on the path to progress. — Launching a country into self-sustaining growth is little like an airplane off the ground. istoric Growth and Contemporary Development: Lessons and Controversies Y Discuss determinants of economic growth. Asimamaw B. (MSe.) Lecturer at Department of Economics Emails asmamawhelete8@gmail.com> Three factors/ components of economic growth ¥ Capital accumulation results from an increase in capital stock and improved human resources ¥ Population and eventually labor force growth- shifts in PPF ¥ Technological progress - L/K augmenting Y What are the Kuznet's six characteristics of modern economic growth? — Six features present in the growth process of every developed nation are: ¥ High rates of per capita output and population growth High rates of total factor productivity increase High rates of economic structural transformation High rates of social, political, and ideological transformation International economic outreach for markets and raw materials Limited international spread of this economic growth to 1/3 of the world’s population, eee Y What are features of economic development: Answer Shift from agriculture to industrial production Steady accumulation of physical and human capital Change in consumer demands Increased urbanization Decline in family size btbidid Demographic transition 1.5. Poverty, Inequality, and Development Y What is inequality? > Income inequality: disproportionate distribution of total national income among households. ¥ How economic inequalities can occur? Answer — Physical attributes: distribution of natural ability is not equal. — Personal preferences: relative valuation of leisure and work effort differs. > Social process: pressure to work or not to work varies across particular fields or disciplines. > Publie pol resources. Y What are the measurements of inequality? tax, labor, education, and other policies affect the distribution of 8 Asimamaw B. (MSe.) Lecturer at Department of Economics. Emails asmamawhelete18@gmail.com> Size distributions (quintiles, deciles): It simply deals with individual persons or households and the total incomes they receive. ~» Lorenz curves: a graph depicting the variance of the size distribution of income from perfect equality. ¥ Lorenz curve shows the cumulative share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis. ¥ More away from the diagonal (line of perfect equality), the greater the degree of inequality represented —> Gini coefficients and aggregate measures of inequality: an aggregate numerical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality). ~— Functional distributions: the share of total national income that each of the factors of production (land, labor, and capital) receives. ¥ What is poverty? —> People live in poverty when they experience well-being below some minimally acceptable level. > Itis unger, lack of shelter, being sick and not being able to see a doctor, not having access to school and not knowing how to read & write, not having a job, fear for the future & living one day at a time. > Poverty is a multidimensional is boundaries. ¥ What are causes of poverty? Answer > Causes of poverty are colonial exploitation, low agricultural productivity, high population growth rate, unemployment and underemployment, social disparity, high inflation, urban - rural divide, disparities of income distribution, extractive institution, ete. Y What is the difference between absolute poverty and relative poverty? ansie — Absolute poverty: the situation of being unable or only barely able to meet the subsistence essentials of food, clothing, and shelter. — Relative povert situation when their living standards are low relative to the typical level in their society. Y What are the measurements of poverty? Answer > Headcount index: the proportion of a country’s population living below the poverty line. sue; it exceeds all social, economic, and politi 9 Asimamaw B, (MSe.) Lecturer at Department of Economies Email: asmamawhelete18@gmail.com¥ The poverty line is set at a level that remains constant in real terms so that we can chart our progress on an absolute level over time. When the head-count is taken as a fraction of the total population, N, we define the headcount index, H/N. Where H is the number of persons who are poor and N is the total number of people in the economy. > Total poverty gap (TPG) is the sum of the difference between the poverty line and actual income levels of all people living below that line. ¥ TYG is the total amount of money that would be required to bring every poor person's income up to the poverty line (if the money could be targeted perfectly and costlessly to the right people). ¥ The poverty gap index (PG): averages proportional income gaps across everyone in the population (poor and non-poor), treating the non-poor as having income gaps of zero (because they need nothing to bring their incomes up to the poverty line), > Average poverty gap (APG): It is the simple average over all the poor of theit proportional income gaps. > Foster-Greer-Thorbecke (FGT) index —» Multidimensional Poverty Index (MPI): focuses on deprivations in health, education, and standard of living: and each receives equal (that is one-third of the overall total) weight. Y Discuss Kuznets’s Inverted-U Hypoth¢ —> Simon Kuznets suggested that in the early stages of economic growth, the distribution of income will tend to worsen; only at later stages it will improve. ¥ What type of policy options needed to reduce income inequality and poverty? — Policies to correct factor price distortions, > Policies to change the distribution of assets, power, and access to education and associated employment opportunities Policies of progressive taxation and directed transfer payments Policies designed to build capabilities and human and social capital of the poor. ++ “End of Part One “ 10 Asimamaw B, (MSe.) Lecturer at Department of Economics Email: asmamawhelete18@gmail.com