Lecture 1: Development Economics and Economic Development

HOW THE OTHER HALF LIVE

When one is poor, she has no say in public, she feels inferior. She has no food, so there is famine in
her house; no clothing, and no progress in her family. – A poor woman from Uganda

For a poor person everything is terrible—illness, humiliation, shame. We are cripples; we are afraid
of everything; we depend on everyone. No one needs us. We are like garbage that everyone wants
to get rid of. — A blind woman from Tiraspol, Moldova

Life in the area is so precarious that the youth and every able person have to migrate to the towns
or join the army at the war front in order to escape the hazards of hunger escalating over here. —
Participant in a discussion group in rural Ethiopia

When food was in abundance, relatives used to share it. These days of hunger, however not even
relatives would help you by giving you some food. — Young man in Nichimishi, Zambia

We have to line up for hours before it is our turn to draw water. — Mbwadzulu Village
(Mangochi), Malawi

[Poverty is] . . . low salaries and lack of jobs. And it’s also not having medicine, food, and clothes. –
Discussion group, Brazil Don’t ask me what poverty is because you have met it outside my house.
Look at the house and count the number of holes. Look at the utensils and the clothes I am wearing.
Look at everything and write what you see. What you see is poverty. —Poor man in Kenya

A universal theme reflected in these seven quotes is that poverty is more than lack of income – it is
inherently multidimensional, as is economic development.

Partly from Todaro and Smith- Development Economics, Addison-Wesley,2012

THE NATURE OF DEVELOPMENT ECONOMICS

• Greater scope than traditional neoclassical economics and political economy. Rethinking Theory
and Empirics.
– Why Study Development Economics? Some Critical
Questions
– The Important Role of Values in Development Economics
– Growth and Development

1.2 Economics and Development Studies

Economies as SOCIAL SYSTEMS:
The Need to Go Beyond Simple Economics
Social Systems – Interdependent relationships between economic and noneconomic factors.
Success or failure of development policy – Importance of taking account of institutional
and structural variables along with more traditional economic variables.

1.3 What Do We Mean by Development?

TRADITIONAL ECONOMIC MEASURES
1. Gross National Income (GNI)
2. Income per capita
3. Utility of that income?

THE NEW ECONOMIC VIEW OF DEVELOPMENT

● Leads to improvement in wellbeing, more broadly understood

AMARTYA SEN'S "CAPABILITY" APPROACH

● Functioning as an achievement
● Capabilities as freedoms enjoyed in terms of functioning
● Development and happiness
● Well-being in terms of being well and having freedoms of choice “Beings and
Doings”.

9 WELL-BEINGS BY AMARTYA SEN

1. Live a longer life.
2. Well Nourished
3. Healthy enough to function.
4. Something that is being literate.
5. Well Clothed
6. Should be mobile.
7. Physically secured.
8. Being able to be part of the community.
9. Should be happy.
There's a wide gap between the rich and poor.

Equal Distribution of Income - everyone should have income and work.

1.3 What Do We Mean by Development?
3 CORE VALUES OF DEVELOPMENT
1. Sustenance: The Ability to Meet Basic Needs
2. Self-Esteem: To Be a Person
3. Freedom from Servitude: To Be Able to Choose
– Correlation of the Above with levels of Income
– Growth and Distribution

INCOME AND CAPABILITY

– A critical question is how far growth and levels of income are associated with changing
capabilities.
– Public vs. Private provision of resources towards
developmental needs.
– Form and Extent of State Intervention.
– How to tackle problems of Corruption, Leakage,
Accountability.
– Growth related factors more talked about but effectively undermined.

1.3 What Do We Mean by Development?

The Central Role of Women - to make the biggest impact on development, societies must
empower and invest in women.

3 OBJECTIVES OF DEVELOPMENT
● Increase availability of life-sustaining goods
● Raise levels of living
● Expand range of economic and social choices

1.4 The Millennium Development Goals

- MDG started in September 2000
- 189 member countries of the United Nations adopted eight Millennium Development
Goals (MDGs), committing themselves to making substantial progress toward the
eradication of poverty and achieving other human development goals by 2015.
- MDGs are the strongest statement yet of the international commitment to ending global
poverty.
- They acknowledge the multidimensional nature of development and poverty alleviation;
an end to poverty requires more than just increasing incomes of the poor.
- The goals are then assigned specific targets deemed achievable by 2015 based on the pace
of past international development achievements.
- MDG focused on Developing Countries

Millennium Development Goals 8 GOALS ADOPTED BY THE UNITED NATIONS IN 2000-2015

1. Eradicate extreme poverty and hunger
Targets: • Reduce by half the proportion of people living on less than $1 a day
• Reduce by half the proportion of people who suffer from hunger
2. Achieve universal primary education
Targets: • Ensure that all boys and girls complete a full course of primary schooling
3. Promote gender equality and empower women
Targets: • Eliminate gender disparity in primary and secondary education, preferably by 2005, and
at all levels by 2015
4. Reduce child mortality
Targets: • Reduce by two-thirds the mortality rate among children under 5
5. Improve maternal health (Family Planning)
Targets: • Reduce by three-quarters the maternal mortality ratio
6. Combat HIV/AIDS, malaria, and other diseases
Targets: • Halt and begin to reverse the spread of HIV/AIDS
• Halt and begin to reverse the incidence of malaria and other major diseases
7. Ensure environmental sustainability (Climate Change)
Targets: • Integrate the principles of sustainable development into country policies and programs;
reverse the loss of environmental resources
• Reduce by half the proportion of people without sustainable access to safe drinking
water
• Achieve significant improvement in the lives of at least 100 million slum dwellers by
2020
8. Develop a global partnership for development
Targets: • Develop further an open, rule-based, predictable, nondiscriminatory trading and
financial system; includes a commitment to good governance, development, and poverty reduction
—both nationally and internationally
• Address the special needs of the least developed countries; includes tariff and quota free
access for least developed countries' exports; enhanced program of debt relief for heavily indebted
poor countries (HIPCs) and cancellation of official bilateral debt; and more generous official
development assistance (ODA) for countries committed to poverty reduction
• Address the special needs of landlocked countries and small-island developing states
• Deal comprehensively with the debt problems of developing countries through national
and international measures in order to make debt sustainable in the long term
• In cooperation with developing countries, develop and implement strategies for decent
and productive work for youth
 • In cooperation with pharmaceutical companies, provide access to affordable essential
drugs in developing countries
• In cooperation with the private sector, make available the benefits of new technologies,
especially information and communications

In 2015, the 193 countries that make up the United Nations (UN) agreed to adopt the 2030
Agenda for Sustainable Development. The historic agenda layout 17 Sustainable
Development Goals (SDGs) and targets for dignity, peace, and prosperity for the planet
and humankind, to be completed by the year 2030. The agenda targets multiple areas for
action, such as poverty and sanitation, and plans to build up local economies while
addressing people's social needs.

SUSTAINABLE DEVELOPMENT GOALS (SDGS)

- SDG is MDG’s successor
- This highly diverse panel of political leaders from every part of the world agreed upon a
bold approach that is expected to substantially influence the eventual shape of the post-
2015 agenda, the SDGs.
- SDG is a universal agenda
- SDG is also a 15 years timestamp

UNIVERSAL SHIFTS OF SDG

1. Leave no one behind—to move “from reducing to ending extreme poverty, in all its
forms;” in particular, to “design goals that focus on reaching excluded groups.”
2. Put sustainable development at the core, “to integrate the social, economic, and
environmental dimensions of sustainability.”
3. Transform economies for jobs and inclusive growth, while moving to sustainable
patterns of work and life.
4. Build peace and effective, open, and accountable institutions for all, which “encourage
the rule of law, property rights, freedom of speech and the media, open political choice,
access to justice, and accountable government and public institutions.”
5. Forge a new global partnership so that each priority should involve governments and
also others, including people living in poverty, civil society and indigenous and local
communities, multilateral institutions, business, academia, and philanthropy.

17 SUSTAINABLE DEVELOPMENT GOALS

Goal 1: No Poverty: End poverty in all its forms everywhere.
Goal 2: Zero Hunger: End hunger, achieve food security and improved nutrition and
promote sustainable agriculture.
Goal 3: Good Health and Well-being: Ensure healthy lives and promote well-being for all
at all ages.
Goal 4: Quality Education: Ensure inclusive and equitable quality education and promote
lifelong learning opportunities for all.
Goal 5: Gender Equality: Achieve gender equality and empower all women and girls.
Goal 6: Clean Water and Sanitation: Ensure availability and sustainable management of
water and sanitation for all.
Goal 7: Affordable and Clean Energy: Ensure access to affordable, reliable, sustainable
and modern energy for all.
Goal 8: Decent Work and Economic Growth: Promote sustained, inclusive and
sustainable economic growth, full and productive employment and decent work for all.
Goal 9: Industry, Innovation, and Infrastructure: Build resilient infrastructure, promote
inclusive and sustainable industrialization, and foster innovation.
Goal 10: Reduced Inequality: Reduce inequality within and among countries.
Goal 11: Sustainable Cities and Communities: Make cities and human settlements
inclusive, safe, resilient, and sustainable.
Goal 12: Responsible Consumption and Production: Ensure sustainable consumption
and production patterns.
Goal 13: Climate Action: Take urgent action to
combat climate change and its impacts.
Goal 14: Life Below Water: Conserve and sustainably use the oceans, seas, and marine
resources for sustainable development.
Goal 15: Life on Land: Protect, restore, and promote sustainable use of terrestrial
ecosystems,sustainably manage forests, combat desertification, and halt and reverse
land degradation and halt biodiversity loss.
Goal 16: Peace, Justice, and Strong Institutions:
Promote peaceful and inclusive societies for
sustainable development, provide access to
justice for all and build effective, accountable,
and inclusive institutions at all levels.
Goal 17: Partnerships to Achieve the Goal: Strengthen the means of implementation and
revitalize the global partnership for sustainable development.
● Unfortunate Exclusion of Social Mobility as a major indicator of
Underdevelopment. Research has not made it into Text Books.
● It is a critical indicator measuring probability distribution of jumping the fence.

4 CONCLUSIONS
– The importance of Development Economics
– Inclusion of non-economic variables in designing development strategies
– Understanding why we need to go beyond Markets and Technology and Designing
Policy Intervention
– Financing of Development

COMMON CHARACTERISTICS OF DEVELOPING COUNTRIES

These features in common are on average and with great diversity, in comparison with
developed 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
– Larger rural population - rapid migration to cities
– Lower levels of industrialization and manufactured exports
– Adverse geography
– Underdeveloped financial and other markets
– Colonial Legacies - poor institutions etc.

BASIC INDICATORS OF DEVELOPMENT: REAL INCOME, HEALTH, and EDUCATION

● Gross National Income (GNI)
● Gross Domestic Product (GDP)
● PPP method instead of exchange rates as conversion factors .
● Other possible Innovative Measure
● Degree of Income/Social Mobility

WHAT IS THE NEW IN THE NEW HDI?

1. Calculating with a geometric mean
– Probably most consequential: The index is now computed with a geometric mean,
instead of an arithmetic mean.
– New HDI takes the cube root of the product of the three component indexes.
– The traditional HDI calculation assumed one component traded off against another as
perfect substitutes, a strong assumption.
– The reformulation now allows for imperfect
substitutability
– Note that individual impact is now conditional on other elements.
2. Other key changes:
– Gross national income per capita replaces gross domestic product per capita.
– Revised education components: now using the average actual educational attainment
of the whole population, and the expected attainment of today’s children
– The maximum values in each dimension have been increased to the observed
maximum rather than given a predefined cutoff.
– The lower goalpost for income has been reduced due to new evidence on lower
possible income levels.
– ENVIRONMENT AND GENDER ISSUES –LESS DISCUSSED IN FORMATION OF INDICES.
UNFORTUNATELY CAN'T COVERING THIS COURSE BUT THESE ARE CRITICAL ISSUES.

Characteristics of the Developing World: Diversity within Commonality

9. Underdeveloped Financial and Other markets
– Imperfect markets
– Incomplete information

10. Colonial Legacy and External Dependence

– Institutions
– Private property
– Personal taxation
– Taxes in cash rather than in kind

How Low-Income Countries Today Differ from Developed Countries in Their Earlier
Stages
8 DIFFERENCES
– Physical and human resource endowments
– Per capita incomes and levels of GDP in relation to the rest of the world.
– Climate
– Population size, distribution, and growth
– Historic role of international migration
– International trade benefits
– Basic scientific/technological research and development capabilities.
– Efficacy of domestic institutions.

Are Living Standards of Developing and Devolved Nations Converging?

– Evidence of unconditional convergence is hard to find.
– But there is increasing evidence of “per capita income convergence,” weighting
changes in per capita income by population size.

9 NATURE AND ROLE OF ECONOMIC INSTITUTIONS

1. Institutions provide “rules of the game” of economic life
2. Provide underpinning of a market economy
3. Include property rights; contract enforcement
4. Can work for improving coordination,
5. Restricting coercive, fraudulent and anti-competitive behavior
6. Providing access to opportunities for the broad population7. Constraining the power of elites,
and managing conflict
8. Provision of social insurance
9. Provision of predictable macroeconomic stability