A PUZZLE TO EXPLAIN

“The Philippines is one of

the world’s major
development puzzle. In
the immediate
aftermath of the Pacific
war, and despite
extensive wartime
destruction, it has one of
the highest per capita
income in the East Asia;
next to Singapore and
Hongkong, above South
Korea and Taiwan,
higher than Thailand,
Indonesia and China.”

But why our nation fails? What happen

to our economic growth? We made a
significant stride in the last few decades,
with an economist as head of the state,
whilst it lacks fundamental economic
indicators compared to its neighbor
countries. These parameters have been
looked based on the developed country
benchmark such as levels of physical capita
per person, human capital (particularly
education) – both primary and secondary
level, nutrition level and others. I do not
make a list of the features of economic
WWW. STOCKPHOTOS.COM development that goes hand in hand simply
to define the term. We do so because
implicitly or explicitly we are looking for
explanation from the puzzle. Is it
inadequacy to enforce state power, inability

ECONOMIC
to contextualize prosperity and content-
policy program to address poverty that we
need?

- A. Balisacan,

DEVELOPMENT Oxford University Press 2003

ALLAN A . LALOSA , LPT, MPA , DM

Economic Development 2018 - 2019
College of Bus Mgt & Accountancy
Eastern Samar State University
Main Campus
LEARNING MODULE

to accompany

ECONOMIC
DEVELOPMENT
2nd Semester
Version 1

ALLAN A. LALOSA, LPT, MPA, DM

CBMA, ESSU-Main Campus
Subject: ECONOMIC DEVELOPMENT Credit: 3

Course Code: ACC 112; BA 222 Total Hours: 54

Prerequisite/Co-requisite: Basic MacroEcon & Advanced Econ

Course Description: The course introduces students to key concepts of development

economics and the main mechanisms driving economic growth. It covers the main problems
and issues concerning economic development, also by referring to existing theories and
discussing their respective strengths and weaknesses, together with the ensuing policy
implications. Throughout this course, the focus is on two simultaneous themes: economic
theory and its application to development problems; and the interaction between economic
theories and the political arena.

Course Learning Outcomes: The course exposes students to the relevant policy debates and
presents development as a complex issue that goes beyond mere income growth. Specifically,
the students will;
1. Develop a critical understanding of the complex interaction between different facets of
development (poverty and inequality, population growth, natural resources, international
trade, financial development);
2. Explain the main economic drivers of development;
3. Identify and be familiar with the relevant scholarly and policy debates;
4. Recognize that there is not a unique path to economic growth and development;
5. Conclude that right policies are context-specific, by making reference to historical
examples.

Course Requirement: Attendance, quizzes, recitation, assignments, major exams and case
analysis.

POLICIES

1. To ensure successful completion of this course, students are expected to arrive for
class on time and to remain in class until the end of the class session.
2. All students are expected to behave with academic honesty. It is not academically
honest to misrepresent another person’s work as your own, to take credit for someone
else’s words or ideas, to obtain advanced information on confidential test materials, or
to act in a way that might harm other students’ chances for academic success. These
students will automatically have a grade of 5.0 after three (3) offenses of academic
dishonesty.
3. Assignments should be submitted on the set deadline. Late assignments will be
deducted accordingly.
4. All students are expected to take Major Exams (Prelim/Mid-term/Pre-Finals/Finals) on
the specified day. In general, no make-up test or re-test will be given except when
circumstances warrant but with valid supporting documents presented.
5. Group activities will be part of the class participation. Students should participate
actively or get involved in group dynamics and other group assignments.
6. All students are expected to attend classes in the prescribed uniform.
Other course policies will be based on the student handbook.
Strongly recommended: Growth and Development book and videos (read selected chapters)

Recommended texts:
Todaro, Michael P and Smith, Stephen C., Economic Development, 12th ed. Pearson, 2015
Wayne Nafziger, E., Economic Development, 5th Ed. Cambridge University Press 2012
Das, S., Mourmouras, A., and Rangazas, P., Economic Growth and Development: A Dynamic
Dual Approach, 2nd Ed. Springer, 2018
Aghion, P. & Howitt, P., The Economics of Growth, The MIT Press, Cambridge, 2009
Balisacan, A. M. And Hill, H., The Philippine Economy: Development, Policies, & Challenges,
Oxford, 2003
Norton, G. W., Alwang, J. and Masters, W. A., Economics of Agricultural Development: World
Food Systems and Resource Use, 2nd Ed., Routledge, 2010
Krugman, Obstfeld, and Melitz, “International Economics: Theory and Policy”, 11th Ed.,
Pearson 2018
Willis, K., Theories and Practices of Development, 2nd Ed., Routledge, 2005
Lim, T.C., International Political Economy – An Introduction to Approaches, Regimes, and
Issues, Saylor Foundation, 2014
Lord Robbins, The Theory of Economic Development in the History of Economic Thought ,
Reprinted, Palgrave MacMillan 2010
Baldwin, Richard, “The Great Convergence”, Harvard University Press, 2016

Online resources:
www.neda.gov.ph
https://psa.gov.ph
https://www.oecd.org/countries/philippines
www.asia.nikkie.com
www.dbm.gov.ph
www.worldbank.org
https://sustainabledevelopment.un.org/sdgs
https://www.migrationpolicy.org/research/shortage-amid-surplus-emigration-and-human-
capital-development-philippines
https://www.migrationpolicy.org/article/philippines-beyond-labor-migration-toward-
development-and-possibly-return
http://countrystudies.us/philippines/55.htm
 STRUCTURE

PART I. Economic Development: Principles and Concepts

1. Introduction
2. Economic Development: Historical Global Perspective
3. Meaning and Measurement of Economic Development / Comparative view
4. Theories of Economic Growth and Development
5. Models of Development and Underdevelopment

PART II. Problems and Policies: Domestic and International Treaties

1. Poverty, Inequality, and Development
2. 3C’s of Population Growth and Economic Development
3. Urbanization and Rural-Urban Migration: Theory and Policy
4. Human Capital: Education and Health
5. Rural Poverty and Agricultural Transformation
6. Natural Resources and Environment for Sustainable Growth
7. Market, State and Civil Society Roles in Development Policymaking

PART III. MacroEconomics and International Development: Issues and Policies

1. International Trade Theory & Development Strategy
2. Balance of Payment, Debts, Financial Crises and Stabilization Policies
3. Foreign Finance, Investment, Aid and Conflict: Controversies and Opportunities
4. Financial and Fiscal Policy for Development

Authors Note

My goal in these notes is to speak about a number of this chicken-and-egg standpoint,

that underdevelopment is seen not as a failure of some basic economic parameters, or socio-
cultural values, but as interpolating “equilibrium” that hangs together, probably precipitated by
inertia or by history.

As planned in developing this material, the objective is to enlighten students a better

understanding of the broad-based economic development paying attention to the developing
countries (DC) where low levels of living are a fact of life. Students will soon discover the
process and the focus in analyzing developing countries in their plight for growth and
development – the role of wealthy nations in directly or indirectly promoting or hindering
development. Conceivably, the more important issues to students in the developed nations is
the rapid development of modern transportation and communications, innovations and
technology that makes the earth shrink that we can reach the other side of the globe in real
time without leaving our sets – people of these world are more increasingly interdependent.
What happens to the health and economic welfare of poor rural families and many others in
the developing nations around the world will in one way or another, directly or indirectly, affect
the health and economic welfare of families in rich countries, and vice versa. The steady loss
of tropical forests contributes to global warming; new diseases spread much more rapidly
thanks to increased human mobility; economic interdependence steadily grows. It is within this
context of a common future for all humankind in the rapidly shrinking world of the twenty-first
century that we now commence our study of economic development.

These lecture notes gathered majority from Todaro and Smith, and Nafzinger Economic
Development book and other lesson content compiled from various sources in public domain
but not limited to the internet. For the convenience of the users, such as teachers, professors,
students and other sectors of the community, the Eastern Samar State University has no
proprietary right on the same. Provided, that any suggestions or intended inclusion in the
lesson content is welcome and should be addressed to the author for revision.
 May this work help you in your field of endeavor. To my students and would be my
students may you be enlightened with the intricacies of this course as this would help you a lot
of as future businessman or policy maker. Thank you and happy reading.

PART I. Economic Development: Principles and Concepts

Introduction

The Philippine government has drawn up socioeconomic plans to direct its development
since the beginning of the post-World War II era. The proposals outlined the objectives of
population growth, the targets to be accomplished, the approaches to achieve them and the
instruments for effectively achieving the goals. On average, two such proposals have been
made every ten years. The representative plans include the 1950's Rehabilitation Plan, the
1960's Socio-Economic Development Plan, the 1970's Development Plan, the 1980s Poverty
Eradication Plan, the 1990s Human Development Plan and the early 21st Century Good
Governance Plan. Undoubtedly, these plans were the products of the innate intelligence and
experience of the planners, especially in the early years, but perhaps unfamiliar to them, they
were influenced by growth models.

In this era of globalization, rapid growth and development, our country the Philippines
swiftly gains its traction yet it will be affected by the coming election results by 2022 that will
come to an end. The progress of BUILD, BUILD, BUILD program of the present government
describes as an audacious economic strategy to catch up with its more vibrant neighbors by
2022 and achieve a high-income economy status for the generations to come. Our political
system is high personalistic that leads to immediate implications to its policy consistency for
growth and development. Investors are more interested for longer policy certainty than our
six-year of regime change. Much of the likelihood that top leaders and lower levels turn over
often and change direction for they want to leave a mark with their pet projects. That is why we
lag behind from our neighbors even with the so called “Sick Man of Asia”.

The rapid growth of China, South Asia and Africa, for the first time in the modern
history is attributed to the great poverty reversal as what Acemoglu and Robinson (2012) call
the “reversal of fortune” and slower growth in rich nations has made a key implication of the
mainstream growth models a reality. Solow-Swan growth model predicts poor countries will
tend to grow faster and “catch up” with richer countries this was largely driven by the reason
that they are poor. Creating a new non-OECD middle class and reducing global inequality is
called “absolute convergence” (B. Richards, 2016, The Great Convergence). This economic
convergence (of income, wealth and level of well-being) leads to the point of view that
theorizes poor countries will tend to grow faster, so that over time rich and poor countries will
come together, or “converge”.

Somehow, this does not seem right. We covet to have a theory that is not belittling or
downplaying the role of social, cultural and political factors and does not merely stop there.
We feel the need to know, for example, whether or not low incomes provoke, in turn, low
savings rates that it would be possible to have a genuine chicken-and-egg illustration. The
same is true of demographics— underdevelopment might be a cause of high population growth
rates, just as high population growth rates themselves retard the development process. Early
on, economist projected that the landlord would become the most important player in the
economy as economies changed over the long term. Thus, the growth model of that time
focused on land as the major factor of production. Later, the limelight turned to the
bourgeoisie, and theories focused on debt and wealth development. These days, the new
development philosophy reflects on structural progress and how markets are changed
including new innovation models that is also seeking to clarify how technological transition is
taking place.

Now back to the puzzle adopted from Balisacan, there is no simple or single theory
suffices. We need to develop a coherent story relating outcomes to an array of external and
internal factors—some narrowly economic, others broader and embedded in political,
historical, and institutional factors. Thus, in our discussion we reflect; What is the real
meaning of development? What about the Millennium Development? Do the goals fit with these
meanings? (Read Chapter 1 of Todaro and Smith or Nafzinger)

Economic Development: Historical Global Perspective

How the other half Live?

Source: Todaro & Smith, Economic Development, 12th Ed. pp 8

One could claim that Adam Smith was the first “development economist” and that his
Wealth of Nations, published in 1776, was the first treatise on economic development,
development economics emerged as a separate sub-discipline within economics in the 1950s
and 1960s. The main concern “modernization” (industrialization) and economic growth rather
than distribution and/or poverty alleviation. Underdevelopment was seen as a “structural”
problem; due to market failures the underdeveloped countries were trapped in “vicious circles
of poverty”: a) Missing markets (e.g. savings and credit markets); b) Market failures (e.g.
wage setting in agriculture); c) Poorly working markets (low supply elasticities).

Capitalism rose in the West from the 15th to 18th centuries with the decline of
feudalism, the breakdown of church authority, strong nation-states supporting free trade, a
liberal ideology tailor made for the bourgeoisie, a price revolution that speeded capital
accumulation, advances in science and technology, and a spirit of rationalism. In the last one to
one and one-half centuries, sustained economic growth occurred primarily in the capitalist
West and Japan. During this period, the economic growth rate of most of these countries was
over 1.5 percent yearly. Thus, the gap between these countries and the developing countries of
Afro-Asia has increased greatly.

During the late 19th century, the Japanese acquired foreign technology, established a
banking system, assisted private business people, aided technical improvement in small
industry, implemented universal education, and kept foreign exchange rates close to market
rates. However, LDCs can learn only limited lessons from Japan, because of its historically
specific conditions and because some components of Japan’s model may have contributed to
its recent growth collapse. The South Korean and Taiwanese approaches have been similar to
those of Japan. Moreover, the Korean–Taiwanese model stressed government-business
cooperation alongside government creation of contested markets among businesses.

After WWII, countries resorted to ‘development planning’ and ‘import-substituting

industrialization’ (ISI). With pervasive market failures and a small private sector, state-led
development efforts were the primary characteristics of this era. Regardless of theories
people subscribed to, whether they be of ‘balanced-’ or ‘unbalanced-growth’ schools of
thought, ISI was the name of the game. After gaining political independence from colonial
rulers, ISI represented a path to economic independence. Dependency theories supported the
ISI thinking as well.

The 1917 communist revolution in Russia provided an alternative to capitalism as a road

to economic modernization. The state took control of economic planning and capital
accumulation. In only a few decades, Soviet centralized socialism transformed Russia. Yet the
major sources for this rapid growth, increased capital formation and increased labor
participation rates, were exhausted in the decade or two before the collapse of communism in
1991. China performed better than Russia during its early industrialization, partly because of
China’s institutional changes and market reforms. The economic growth of developing
countries since World War II has been much more rapid than before the war. Yet, the postwar
growth of developing countries has been no faster than the growth of developed countries.
Whether this means convergence or divergence depends on the time, scope, and definitions.

Development economics is a distinct yet very important extension of both traditional

economics and political economy. While necessarily also concerned with efficient resource
allocation and the steady growth of aggregate output over time, development economics
focuses primarily on the economic, social, and institutional mechanisms needed to bring about
rapid and large-scale improvements in standards of living for the masses of poor people in
developing nations. Consequently, development economics must be concerned with the
formulation of appropriate public policies designed to effect major economic, institutional, and
social transformations of entire societies in a very short time.

As a social science, economics is concerned with people and how best to provide them
with the material means to help them realize their full human potential. But what constitutes
the good life is a perennial question, and hence economics necessarily involves values and
value judgments. Our very concern with promoting development represents an implicit value
judgment about good (development) and evil (underdevelopment). But development may mean
different things to different people. Therefore, the nature and character of development and the
meaning we attach to it must be carefully spelled out. We did this in section 1.3 and will
continue to explore these definitions throughout the text.

The central economic problems of all societies include traditional questions such as
what, where, how, how much, and for whom goods and services should be produced. But they
should also include the fundamental question at the national level about who actually makes
or influences economic decisions and for whose principal benefit these decisions are made.
Finally, at the international level, it is necessary to consider the question of which nations and
which powerful groups within nations exert the most influence with regard to the control,
transmission, and use of technology, information, and finance. Moreover, for whom do they
exercise this power?

Any realistic analysis of development problems necessitates the supplementation of

strictly economic variables such as incomes, prices, and savings rates with equally relevant
noneconomic institutional factors, including the nature of land tenure arrangements; the
influence of social and class stratifications; the structure of credit, education, and health
systems; the organization and motivation of government bureaucracies; the machinery of
public administrations; the nature of popular attitudes toward work, leisure, and self-
improvement; and the values, roles, and attitudes of political and economic elites. Economic
development strategies that seek to raise agricultural output, create employment, and
eradicate poverty have often failed in the past because economists and other policy advisers
neglected to view the economy as an interdependent social system in which economic and
noneconomic forces are continually interacting in ways that are at times self-reinforcing and
at other times contradictory. As you will discover, underdevelopment reflects many individual
market failures, but these failures often add up to more than the sum of their parts, combining
to keep a country in a poverty trap. Government can play a key role in moving the economy to a
better equilibrium, and in many countries, notably in East Asia, government has done so; but all
too often government itself is part and parcel of the bad equilibrium.

Subsistence economy. An economy in which production is mainly for personal

consumption and the standard of living yields little more than basic necessities of life—food,
shelter, and clothing.

Development. The process of improving the quality of all human lives and capabilities
by raising people’s levels of living, self-esteem, and freedom.
What Do We Mean by "Development"?
Because the term development may mean different things to different people, it is
important at the outset that we have some working definition or core perspective on its
meaning. Without such a perspective and some agreed on measurement criteria, we would be
unable to determine which country was actually developing and which was not. This will be our
task for the remainder of the chapter.

Traditional Economic Measures

In strictly economic terms, development has traditionally meant the capacity of a

national economy, whose initial economic condition has been more or less static for a long
time, to generate and sustain an annual increase in its gross national product (GNP) at rates of
perhaps 5% to 7% or more. (A measure similar to GNP, known as the gross domestic product,
or GDP, is also used. The difference between GNP and GDP will be explained in Chapter 2 book
of Todaro & book of Nafziger) A common alternative economic index of development has been
the use of rates of growth of income per capita or per capita GNP to take into account the
ability of a nation to expand its output at a rate faster than the growth rate of its population.
Levels and rates of growth of "real" per capita GNP (monetary growth of GNP per capita minus
the rate of inflation) are normally used to measure the overall economic well-being of a
population—how much of real goods and services is available to the average citizen for
consumption and investment. Economic development in the past has also been typically seen
in terms of the planned alteration of the structure of production and employment so that
agriculture's share of both declines and that of the manufacturing and service industries
increases. Development strategies have therefore usually focused on rapid industrialization,
often at the expense of agriculture and rural development. Finally, these principal economic
measures of development have often been supplemented by casual reference to noneconomic
social indicators: gains in literacy, schooling, health conditions and services, and provision of
housing, for instance. A description of various attempts to generate these social indicators of
development to supplement per capita GNP—in particular, the United Nations' new Human
Development Index—is presented in Appendix 2.1 at the end of Chapter 2 (Todaro & Smith, 12th
Ed). On the whole, therefore, prior to the 1970s, development was nearly always seen as an
economic phenomenon in which rapid gains in overall and per capita GNP growth would either
"trickle down" to the masses in the form of jobs and other economic opportunities or create
the necessary conditions for the wider

Developing countries. Countries of Asia, Africa, the Middle East, Latin America, eastern
Europe, and the former Soviet Union that are presently characterized by low levels of living
and other development deficits. Used in the development literature as a synonym for less
developed countries.

The New Economic View of Development

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. An increasing number
of economists and policymakers clamored for more direct attacks on widespread absolute
poverty, increasingly inequitable income distributions, and rising unemployment. In short,
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.
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.

Why Study Development Economics? Some Critical Questions

An introductory course in development economics should help students gain a better

understanding of a number of critical questions about the economies of Third World nations.
The following is resented in page 11 of the text book (Todaro and Smith, 12th Ed) a sample list of
20 such questions followed by the chapters (in parentheses) in which they are discussed. They
illustrate the kinds of issues faced by almost every developing nation and, indeed, every
development economist.
The answers are often more complex than one might think. Remember that the ultimate
purpose of any course in economics, including development economics, is to help students
think systematically about economic problems and issues and formulate judgments and
conclusions on the basis of relevant analytic principles and reliable statistical information.
Because the problems of Third World development are in many cases unique in the modern
world and not often easily understood through the use of traditional economic theories, we
may often need unconventional approaches to what may appear to be conventional economic
problems. Traditional economic principles can play a useful role in enabling us to improve our
understanding of development problems, but they should not blind us to the realities of local
conditions in less developed countries.

The Nature of Development Economics

- Traditional economics emphasizes utility, profit maximization, market efficiency, and

determination of equilibrium. It assumes economic “rationality” and a purely
materialistic, individualistic, self-interested orientation toward economic decision
making.
- Political economy attempts to merge economic analysis with practical politics— to
view economic activity in its political context. Social and institutional process
through certain economic groups and political elite-emphasis on the role of power
in economic decision making.
- 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. – Todaro
- Economic Development. Activities that lead to greater use of human capital and
natural resources of the nation or community to match global and domestic
markets to build a self-sustaining economic system that fit both the people and the
place. – ALalosa, 2019
- More developed countries (MDCs). The now economically advanced capitalist
countries of western Europe, North America, Australia, New Zealand, and Japan.
- Less developed countries. A synonym for developing countries.
- Globalization. The increasing integration of national economies into expanding
international markets.
- Social system. The organizational and institutional structure of a society, including
its values, attitudes, power structure, and traditions.

Development economics is greater in scope than traditional neoclassical economics

and political economy. Why Study Development Economics? Remember that the ultimate
purpose of any course in economics, including development eco-nomics, is to help students
think systematically about economic problems and issues, and formulate judgments and
conclusions on the basis of relevant analytical principles and reliable statistical information.

Comparison-Resistant Services. Comparison-resistant services, like healthcare,

education, and government administration, which comprise more than 10percent of most
countries’ expenditure, distort cross-national, but not necessarily DC-LDC, GNP comparisons.
People do not buy a clearly defined quantity of university education, crime prevention, health
maintenance, and forest management as they do food and clothing.

Purchasing-Power Parity (PPP). Examine alternatives to GNP at existing exchange

rates as a measure to compare economic welfare. Exchange rates omit nontraded goods, and
that the relative prices of nontraded goods to traded goods are lower in developing than in
developed countries. University of Pennsylvania converts a country’s GNP in its own currency
into purchasing-power parity (or international) dollars (PPP) by measuring the country’s
purchasing power relative to all other countries rather than using the exchange rate.
Summers and Heston compute the price level of GNP(P) as the ratio of the purchasing power
parity (PPP) exchange rate to the actual (or market) exchange rate, where both exchange
rates are measured as the domestic-currency price of the U.S. dollar. (GDP or gross domestic
product, sometimes used, is income earned within a country’s boundaries instead of gross
national product, income accruing to a country’s residents.)

An illustration taken from data in 2003, a Big Mac price of Real 4.55 in Brazil and $2.71
in the United States meant a PPP of Real 1.68 = $1 compared to the actual exchange rate of
Real 3.07 = $1, so that P was 55percent and the Real (Brazil’s currency) was undervalued by
almost 45percent, indicating hamburgers were cheap in Brazil. Similarly, the South Korean Big
Mac price of Wan 3537 indicates a PPP of Wan 1296 = $1 compared to an exchange rate of Wan
1258 = $1, with P of 1.03 percent. According to Kravit and Lipsey (1990) margin of error for the
worst GDP PPP estimates “is still a small range of error compared to that stemming from the
use of exchange rates to convert own-currency to common currency measures of output.”

Economies as Social Systems: Need to Go Beyond Basic Economics. By “social

system,” we mean the interdependent relationships between economic and noneconomic
factors. The latter include attitudes toward life, work, and authority; public and private
bureaucratic, legal, and administrative structures; patterns of kinship and religion; cultural
traditions; systems of land tenure; the authority and integrity of government agencies; the
degree of popular participation in development decisions and activities; and the flexibility or
rigidity of economic and social classes. At the international level, we must also consider the
organization and rules of conduct of the global economy—how they were formulated, who
controls them, and who benefits most from them. This is especially true today with the spread
of market economies and the rapid globalization of trade, finance, corporate boundaries,
technology, intellectual property, and labor migration.

The important role of values in economic development. It is concerned with human

beings and the social systems by which they organize their activities to satisfy basic material
needs - it is necessary to recognize from the outset that ethical or normative value premises
about what is or is not desirable are central features of the economic discipline in general and
of development economics in particular. The very concepts of economic development and
modernization represent implicit as well as explicit value premises about desirable goals for
achieving what Mahatma Gandhi once called the “realization of the human potential.”

Meaning and Measurement of Economic Development / Comparative view

Basic Indicators of Development

Purchasing Power Parity (PPP)

Exchange rates respond to a host of factors which lead to non-equivalence when

comparing what 1$ will buy in two different countries. In order to calculate per capita GNI (=
value added of all goods and services produced by the residents of a nation + factor incomes
from abroad accruing to resident’s w/o controlling for the depreciation of domestic capital
stock), economists prefer to calculate production using the cost of each good in a reference
country. Note that in order to estimate living standards accurately, adjustments are made to
reflect differences in relatively good prices between the two countries.
Based on this measure, developing economies have higher GNI (and GDP) than when
calculated using the official foreign exchange rate, thus decreasing income disparities between
developed and developing economies.

Note : this measure has deficiencies. For example, prices are often estimated using urban
markets, and although we can take an average, there is a loss in precision (urban bias). Also,
necessities can differ significantly, so comparing a same basket of goods is not always
appropriate.

Indicators of Health and Education

 Health and education are core capabilities, which must be assessed in order to
determine the well-being of a country's population. Note that fertility is sometimes used as an
indicator, and that it can both be a cause and consequence of under-development, while
literacy (=ability to read and write) as reported and functional literacy are sometimes known to
diverge substantially.

Characteristics in the developing world

1. Lower levels of living and productivity. This has led to poverty traps, as low levels
discourage investment, thus discouraging economic growth.

2. Lower levels of human capital

3. Higher levels of poverty and inequality. These are both causes and consequences of
under-development. Absolute poverty is defined as not being able to meet one's basic
requirements for survival. The requirements for this vary by region, as do relative prices.
Thus, the international poverty line is but a rough estimate of worldwide absolute poverty.

4. High population growth. The consequence of this is a high dependency ratio, where most
of the dependents (children) have no savings nor is there much aid provided to parents.

5. Greater social fractionalization. Significant social divides are common within the
populations of developing world countries, and have played determining roles in the
course of development.

6. Large rural population coupled with rural exodus

7. Low industrialization and low levels of manufactured exports. Developing countries tend
to rely much more heavily on their agricultural sectors and natural resource sectors. One
of the consequences is a lack of economic diversification and therefore susceptibility to
global demand.

8. Adverse geography. Developing nations share a common set of environmental problems,

making this a useful generalization in many cases. However, note that natural resources
does not spell success in development ("natural resource curse") as can be seen in DRC.

9. Underdeveloped markets. Insufficient transport and communication infrastructures have

resulted in highly imperfect markets and incomplete knowledge, thus hindering optimal
results in economic actions.

10. Colonial legacy

a) Institutions: often geared towards exploitation rather than investment, and often
encouraged inequality along ethnic lines. Note that these also introduced concepts
that were often unknown before-hand such as taxes in cash rather than in kind,
private property and personal taxation.

b) Dependence: low bargaining power has many times led to unfavorable agreements.
Note that cultural dependency is also a problem in the wider development
framework (self-esteem).

Developing nations: now & then

1. Knowledge and resource gaps. Many of today's developing countries are lacking in both
resources and know-how relative to now-developed countries during their development
periods. One major issue is the gap in technical knowledge between developed and
developing countries.
 2. Income and GDP gaps. Although living standards were low in early developing countries,
they were well above those experienced by large portions of today's developing country
populations. Note also that early industrializing countries were already economically
ahead before undergoing major development, while today's developing countries are
attempting to catch up.

3. Climate. Most developing nations are either tropical or sub-tropical, while most developed
nations are temperate. There is evidence that tropical climates play a role in decreasing
productivity by allowing for certain diseases such as malaria, encouraging extractive
colonial institutions, etc.

4. Population growth rates. Before and during their development phases, now-developed
countries averaged much less than 2% population growth per annum. Many now-
developing countries have been growing at over 2% for decades. Note also that excepting
the Soviet Union, no country has embarked on a development path with a population the
size of China, India, Nigeria, Brazil...

5. International migration. This was very present for early developing countries (USA,
Canada, Australia especially), and succeeded and relieving pressure, both lack of workers
in host countries, and lack of employment in countries of origin. Today, developing
countries have tended to adopt highly restrictive immigration laws, thus preventing mass
migrations.

Note that migration has a two-way effect. First, it helps increase incomes for those
who emigrate, and increases incomes in countries of origin through remittances.
However, those who emigrate tend to be skilled workers, and thus we witness a 'brain
drain'.

6. International trade. Free trade was a major factor fueling early development. Today's
developing countries however, have often encountered restrictive trade barriers. This has
dampened their growth because their exports are made less attractive in potential
markets in developing nations.

7. Research and development. Early developing nations were scientifically ahead when they
began to industrialize. This allowed them to concentrate their research activities on
production which would ultimately favor their own economic needs in the long term. This
tradition has continued today, with the vast majority of the world's research and
development concentrated in developed countries, and primarily serving their needs.

In today's developing nations, however, there is very little research and

development. This hinders the development of technological improvements which could
suite their economic needs, and potentially provide a motor for economic growth.

8. Institutions. Early developing nations had generally gone through national consolidation
periods before industrializing, and had relatively stable and flexible social and formal
institutions in place which encouraged mobility and entrepreneurship. Today's developing
countries, by contrast, are often the result of colonial borders, and possess institutions
which were designed to favor exploitation rather than investment.

Traditional economic measures Gross National Income (GNI), Income per Capita, Utility
of that income. In strictly economic terms, 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. Levels and rates of growth of “real” per capita
gross national income (GNI) (monetary growth of GNI per capita minus the rate of inflation) are
then used to measure the overall economic well-being of a population—how much of real
goods and services is available to the average citizen for consumption and investment.
Development strategies is more focused on industrialization, at the expense of agriculture and
rural development. It has been seen as economic phenomenon where overall gains and per
capita GNI growth “trickle down to the masses” resulted to a wider disparity of the economic
and social benefit of growth. Poverty, unemployment, discrimination etc., still a problem in
getting the growth job done, hence, emphasis is measured on increased output – measured by
Gross Domestic Product (GDP). The countries GDP is measured based on total final output of
goods and services produced by the country’s economy, within the country’s territory, by
residents and nonresidents, regardless of its allocation between domestic and foreign claims.

Convergent Economy (of incomes, wealth, and levels of well-being). There’s a

“convergence” theory in economics that suggests, over time, that “poor nations should catch up
with rich nations.” The theory argues that countries that are poor will have higher marginal
products of capital (human and physical) and consequently a higher rate of return to capital –
the law of diminishing returns. This means that a dollar (as standard) of extra savings will
have a higher payoff in less developed countries, allowing it grow faster. The phenomenon:
poor countries will end to grow faster (catch-up effect), that poorer economies' per capita
incomes will tend to grow at faster rates than richer economies. As a result, all economies
should eventually converge in terms of per capita income. Developing countries have the
potential to grow at a faster rate than developed countries because diminishing returns (in
particular, to capital) are not as strong as in capital-rich countries. Furthermore, poorer
countries can replicate the production methods, technologies, and institutions of developed
countries. Economic growth literature the term "convergence" can have two meanings. The
first kind un-conditional or absolute beta-convergence (sometimes called "Sigma-
convergence") and "Beta-convergence". This is not the place to examine the convergence
hypothesis in detail, as my intention is to cover other views of development and you may find
and read it in other books of economic development, I suggest read the book entitle “The Great
Convergence” by Baldwin, Richard.

Types of Convergence

Relative convergence. This looks at relative changes in economic growth rates over
time, and has found very little evidence for unconditional relative convergence. Indeed, the
more striking trend has been divergence among developing countries.

Conditional relative convergence has however been noted among OECD countries. Note
that these studies suffer from a selection bias (if OECD then necessarily all rich, therefore
poorer had to grow faster to be included in the study).

Absolute convergence. The question here is whether in absolute terms, the income-
gap has widened or converged. This is a more robust measure of convergence because there
is a lag period during which income accumulates to the point where relative changes make
enough difference to outweigh more modest increases in developed countries.

Population weighted. This gives relative importance to countries based on their

populations. These studies highlight that increases in high-population countries such as India
and China have outweighed relative stagnation in a large number of smaller developing
countries.

World-as-one. This approach uses house-hold level data across all countries to measure
income divergence between the rich and poor. This has the advantage of capturing intra-
national divergence, and has suggested that incomes are diverging.

Better Measure of Economic Development

Using income as a measure of development is a weak tool, and efforts have been made
to replace GNP per capita with a more reliable measure – usually an index of several
economic and social variables.

PHYSICAL QUALITY OF LIFE INDEX (PQLI)

 One alternative measure of welfare is the PQLI, which combines three indicators –
infant mortality rate, life expectancy (at age one, to not overlap with infant mortality), and adult
literacy rate, the ability to read and write in any language (in percentage). The first two
variables represent the effects of nutrition, public health, income, and the general
environment. Life expectancy is positively correlated with GNP per capita through the impact
of GNP on incomes of the poor and public spending, especially on health care; indeed, GNP
adds no extra explanation to those of poverty and public health expenditure (Sen 1999:44;
Anand and Ravallion 1993). Infant mortality reflects the availability of clean water, the condition
of the home environment, and the mother’s health. Literacy is a measure of well-being as well
as a requirement for a country’s economic development. Critics of this measure stress a close
correlation between the three PQLI indicators and the composite index and GNP per capita. For
instance, China’s life expectancy and infant mortality rates, matching those of the United States
in 1940, were achieved at a per-capita income of $490. By contrast, a relatively high per capita
does not necessarily reflect widespread well-being, as in the case of affluent oil countries such
as Saudi Arabia and Oman.

HUMAN DEVELOPMENT INDEX

The UN Development Program (UNDP) defines human development as “a process of

enlarging people’s choices. The most critical ones are to lead along and healthy life, to be
educated and enjoy a decent standard of living” (U.N. Development Program 1990:10). The 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.
Educational attainment is a composite of two variables: a two-thirds weight based on the adult
literacy rate (in percentage) and a one-third weight on the combined primary, secondary, and
tertiary gross enrollment rate (in percentage). Longevity is measured by average life
expectancy (in years) at birth, computed by assuming that babies born in a given year will
experience the current death rate of each age cohort (the first year, second year, third year,
and so forth through the nth year) throughout their life time. The indicator for living standards
is based on the logarithm of per capita GDP in PPP dollars.

The attainment of basic needs is the solution of the limited impact against economic
growth in reducing third-world poverty. Almost 40-50 percent of the population are
experience or living with inadequate basic needs. The basic needs approach is necessary
because of the continuing serious maldistribution of incomes; because consumers, lacking
knowledge about health and nutrition, often make inefficient or unwise choices in this area;
because public services must meet many basic needs, such as sanitation and water supplies;
and because it is difficult to find investments and policies that uniformly increase the incomes
of the poor. The measure of basic-needs approach shifts attention from maximizing output to
minimizing poverty. The stress is not only on how much is being produced but also on what is
being produced, in what ways, for whom, and with what impact. Is the satisfaction of basic
needs is a human right? Is Development a Freedom and Liberation?

Note: An in-depth discussion of this topic could be found in Chapter 2 of Todaro and
Smith.

Theories of Economic Growth and Development

Theories of Development. To many people, a theory is a contention that is impractical or
has no factual support – 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.
 Keynesian growth theory (1940-50’s) -process of capital of formation is determined by
savings and investment. The domestic savings are channeled to productive investments such
as manufacturing which result –usually-in high productivity. Growth is market driven as
income levels rise, savings rises and frees capital for alternative investment

Modernization Theory - this theory suggests that economic dimension alone is

insufficient and adds theories on institutional and social change. In McClelland, Achieving
Society, I suggest that growth and development incorporate non-economic elements such as
social practices, beliefs, values and customs. Further it stresses that diffusion and speed of
change is critical as is removal of various cultural and social barriers. Backward internal
structures-rather than external factors-cause underdevelopment.

Neoliberal Development Theory- grew in the 1970s and designed to counteract impact
of Keynesianism. It was experimental experience on the new emphasis on supply side factors
in development- private initiatives and market led growth by the developed countries and
adopted by LDC’s. They must move away from demand stimulation (interest rate manipulation),
import substitution, state intervention and centralized planning. The gradual industrialization
with ‘trickle down’ of benefits will reached all social classes, thus growth and development will
be reached in the process.

Popular Development- what is it? It is a development process that avoids ‘grand

theories’ and emphasizes solutions viewed in context of development which is part of
historical process. Context of development is constantly changing in scale and time as
developed countries change especially Europe and the US as they are the benchmark of
growth and development. Popular Development theory accommodates geographical and
historical diversity yet it has of little use to practitioners of development. It stresses local
diversity, human creativity, process of social change through pragmatism, flexibility and
context, not extent of state intervention but comparative advantages of public and private
sectors and their complementarity.

Features of Popular Development and Environment

a. Recognizes high “opportunity costs” associated with irreversible environmental damage

b. Dealing with environmental problems requires solutions sensitive to local social and
ecological conditions
c. Society and nature relations are affected by variations in class, gender and ethnicity
d. “Reproductive squeeze” forces peasants to intensify production in fragile environments

Appropriateness of PDE

a. Bottom up approaches (as opposed to top-down) to peoples’ participation are important

in this view
b. How are various social groups and classes affected by rural-urban, core-periphery and
other spatial interactions?
c. Growing importance of “decentralization” of decision-making and authority from center
to periphery

PDE and its Impact

a. How does the power structure affect development?

b. Examine sources of empowerment, inequality and discrimination
c. Need to devise more people centered approaches which stress empowerment and
participation
d. Empowerment as participatory development seeks to engender self-help and self-
reliance but also effective collective decision-making

The new economic view of development leads to in wellbeing, more broadly

understood. Amartya’s “Capability” Approach refers to functionings as an achievement,
capabilities as freedoms enjoyed in terms of functionings. It is development and happiness –
being well and having freedoms of choice or “Beings and Doings”. For instance, being to live
long and being health is an important factor of capability approach, one cannot help in
development and growth if the populace is unhealthy and malnourished instead it requires
policy that will answer the problem and should be recognized as factor for development.
Functionings is what people do or can do with the commodities of given characteristics that
they come to possess or control, while Capabilities means the freedoms that people have,
given their personal features and their command over commodities.

Economic growth cannot be sensibly treated as an end, and development must be more
concerned with enhancing the lives we lead and freedoms we enjoy. What a person is, can be,
and can does or can do are matters fundamental than things a person has or feel. It goes
beyond the Utility approach - availability of commodities and consider uses to address
“functioning’s” - what a person does (or can do) with commodities of given characteristics they
come to possess or control but rather valued functioning’s range from very basic - being
adequately nourished to very complex - e.g. being able to take part in community life. Leaders
in developing nations hope that their societies can gain the benefits of development without
losing traditional strengths such as moral values and trust in others—sometimes called social
capital.

On Armatya Sen’s detailed Capability Approach the details of disparities between

income and disadvantages are to the following:
▪ personal heterogeneities;
▪ environmental diversities;
▪ variations in social climate;
▪ intra-household distribution; and
▪ differences in relational perspectives such as minimal social expectations

The 3 Core Values of Development

Sustenance. The ability to meet basic needs. The basic goods and services, such as
food, clothing, and shelter, that are necessary to sustain an average human being at the bare
mini-mum level of living. When any of this is absent or in critically short supply, a condition of
“absolute underdevelopment” exists. One has to “have enough to be more”, thus the lessening
income inequalities constitute the necessary but not the sufficient conditions for development.

Self-Esteem. To be a person. The feeling of worthiness that a society enjoys when its
social, political, and economic systems and institutions promote human values such as
respect, dignity, integrity, and self-determination. It may vary society to society and from
culture to culture. “Modernizing values” of developed nations leads to serious cultural
confusion, worthiness and esteem are increasingly conferred nowadays only on countries that
possess economic wealth and technological power—those that have “developed.”

Freedom from Servitude: To be able to choose. A situation in which a society has at its
disposal a variety of alternatives from which to satisfy its wants and individuals enjoy real
choices according to their preferences. Freedom here is to be understood in the sense of
emancipation from alienating material conditions of life and from social servitude to nature,
other people, misery, oppressive institutions, and dogmatic beliefs, especially that poverty is
predestination. Freedom involves an expanded range of choices for societies and their
members together with a minimization of external constraints in the pursuit of some social
goal we call development. According to W. Arthur Lewis, “the advantage of economic growth is
not that wealth increases happiness, but that it increases the range of human choice. Studies
do reveal that some countries that have achieved high economic growth rates or high incomes,
such as China, Malaysia, Saudi Arabia, and Singapore, have not achieved as much on human
freedom criteria.

The Central Role of Women. Development scholars generally view women as playing
the central role in the development drama. To make the biggest impact on development,
society must empower and invest in its women. A depth discussion will be in Chapters 5
through 9 and 15 of Todaro and Smith (12th Ed).
 The Three Objectives of Development

We may conclude that development is both a physical reality and a state of mind in
which society has, through some combination of social, economic, and institutional processes,
secured the means for obtaining a better life. Whatever the specific components of this better
life, development in all societies must have at least the following three objectives:

1. To increase the availability and widen the distribution of basic life-sustaining goods such as
food, shelter, health, and protection
2. To raise levels of living including, in addition to higher incomes, the provision of more jobs,
better education, and greater attention to cultural and humanistic values, all of which will
serve not only to enhance material well-being but also to generate greater individual and
national self-esteem.
3. 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.

Models of Development and Underdevelopment

The Four Growth Paradigms

The Neoclassical Growth Model (Solow-Swan Growth Model). The MIT economist
Robert Solow won a Nobel Prize for his formulation of the neoclassical theory of growth,
which stressed the importance of savings and capital formation for economic development,
and for empirical measures of sources of growth. Solow allowed changes in wage and interest
rates, substitutions of labor and capital for each other, variable factor proportions, and flexible
factor prices. He showed that growth need not be unstable, because, as the labor force
outgrew capital, wages would fall relative to the interest rate, or if capital outgrew labor,
wages would rise.

General Principle: Because aggregate growth refers to increases in total production,

we can visualize growth factors if we examine the factors contributing to production. We do
this in a production function stating the relationship between capacity output and the volume of
various inputs. Solow used Cobb–Douglas production function (1920s) by the mathematician
Charles Cobb and the economist Paul Douglas, to distinguish among the sources of growth –
labor quantity and quality, capital, and technology.

The equation is
𝑌 = 𝑇𝐾 𝛼 𝐿𝛽
where Y is output or income, T the level of technology, K capital, and L labor. T is
neutral in that it raises output from a given combination of capital and labor without affecting
their relative marginal products. The parameter and exponent α is (Y/Y)/(K/K), the elasticity
(responsiveness) of output with respect to capital (holding labor constant). (The symbol means
increment in, so that, for example, Y/Y is the rate of growth of output and K/K the rate of
growth of capital.) The parameter β is (Y/Y)/(L/L), the elasticity of output with respect to
labor. This model the benchmark for growth analysis is, paradoxically, its implication that, in
the long run, economic growth does not depend on economic conditions. In particular,
economic policy cannot affect a country’s long-run growth rate.

Criticism: The following points are summary list of the limitations or inadequacy based
on different point of view of economic scholars.
1. It is narrow in scope
2. Economic Development is not continuous process
3. Unrealistic assumption
 4. No importance to the role of government
5. Study of developed countries only
The AK Model

Learning by doing formed the basis of the first model of endogenous growth theory,
which is known as the AK model. The AK model assumes that when people accumulate capital,
learning by doing generates technological progress that tends to raise the marginal product of
capital, thus offsetting the tendency for the marginal product to diminish when technology is
unchanged. The model results in a production function of the form Y = AK, in which the
marginal product of capital is equal to the constant A.
The AK model predicts that a country’s long-run growth rate will depend on eco-nomic factors
such as thrift and the efficiency of resource allocation. In subsequent chapters we will develop
alternative models of endogenous growth that emphasize not thrift and efficiency but creativity
and innovation, which we see as the main driving forces behind economic growth. The most
commonly used is the,

Harrod-Domar Model. Aggregate production function has fixed technological

coefficients:

𝑌 = 𝐹 (𝐾. 𝐿 ) = 𝑚𝑖𝑛{𝐴𝐾, 𝐵𝐿 }
where A and B are the fixed coefficients. Under this technology, producing a unit of
output requires 1/A units of capital and 1/B units of labor; if either input falls short of this
minimum requirement, there is no way to compensate by substituting the other input. With a
fixed-coefficient technology, there will either be surplus capital or surplus labor in the
economy, depending on whether the historically given supply of capital is more or less than
(B/A) times the exogenous supply of labor. Where AK < BL, which is the case that Harrod and
Domar emphasize, capital is the limiting factor. Firms will produce the amount with the given
formula,

𝑌 = 𝐴𝐾
The problem with the Harrod-Domar model is that it cannot account for the sustained
growth in output per person that has taken place in the world economy since the industrial
revolution.

Other Ak Model are Rowtow’s Stages of Growth Theory Model. Rostow’s economic
model has five stages; its central historical stage is the take-off, a decisive period of increased
investment, rapid growth in leading sectors, and institutional change during which the major
blocks to steady growth are finally overcome. Balance Growth or the Big Push. Balanced
growth advocates argue that a big push is needed to begin economic development because of
indivisibilities in demand and infrastructure. Critics indicate that most LDCs do not have the
resources essential for launching such a big push. In Kremer’s O-ring theory of development,
it emphasizes that production consists of many tasks, all of which must be successfully
completed for the product to have full value and to prevent coordination failure.

For Lewis, economic growth takes place as a result of growth in the size of the
industrial sector, which saves, relative to the subsistence agricultural sector, which saves
nothing. In the Lewis model, an unlimited supply of surplus farm labor migrates to urban areas
for wages in excess of rural, subsistence wages. This supply of cheap labor to the industrial
sector is the basis for profits and capital accumulation. Fei and Ranis, too, believe that the
capitalist wage will increase before surplus labor is absorbed, unless agriculture and industry
can achieve balanced growth. However, contrary to the Lewis–Fei–Ranis model, Japan raised
its capitalist wage rate before all surplus rural labor was absorbed. For Baran, the coalition of
the bourgeoisie and landed classes, helped by foreign capitalist governments, is incapable of
undertaking the capital formation and political reform required for rapid economic growth and
alleviation of mass poverty.

Critic: AK theory presents a “one-size-fits-all” view of the growth process. It applies

equally to advanced countries that have already accumulated capital and to countries that are
far behind. Like the neoclassical model, it postulates a growth process that is independent of
developments in the rest of the world, except insofar as international trade changes the
conditions for capital accumulation. Yet it is a useful tool for many purposes when the
distinction between innovation and accumulation is of secondary importance.

The Product-Variety Model

General Principle: The second wave of endogenous growth theory consists of

“innovation-based” growth models, which themselves belong to two parallel branches. One
branch is the product-variety model of Romer (1990), in which innovation causes productivity
growth by creating new, but not necessarily improved, varieties of products. This paradigm
grew out of the new theory of international trade and emphasizes the role of technology
spillovers. According to this function, the degree of product variety N t is the economy’s
aggregate productivity parameter, and its growth rate is the economy’s long-run growth rate
of per capita output.

Criticism: Product variety raises the economy’s production potential but when spread
over a number of larger uses exhibit a diminishing return. The model predicts no important
role for exit and turnover; indeed, increased exit can do nothing but reduce the economy’s GDP,
by reducing the variety variable Nt that uniquely determines aggregate productivity. Thus, there
is no role for “creative destruction,” the driving force in the Schumpeterian growth paradigm.

The Schumpeterian Model

General Principle: This paradigm grew out of modern industrial organization theory and
is commonly referred to as Schumpeterian growth theory because it focuses on quality-
improving innovations that render old products obsolete and hence involves the force that
Schumpeter called creative destruction. There are two main inputs to innovation, namely, the
private expenditures made by the prospective innovator and the stock of innovations that have
already been made by past innovators. The latter input constitutes the publicly available stock
of knowledge to which current innovators are hoping to add. The theory is flexible in modeling
the contribution of past innovations. It encompasses the case of an innovation that leapfrogs
the best technology available before the innovation. Schumpeterian theory provides a
framework in which the growth effects of various policies are highly context-dependent. In
particular, the Schumpeterian apparatus is well suited to analyze how a country’s growth
performance will vary with its proximity to the technological frontier at, to what extent the
country will tend to converge to that frontier, and what kinds of policy changes are needed to
sustain convergence as the country approaches the frontier.

Criticism: We could take as given the critical innovation, that determine a country’s
growth path as given, just as neoclassical theory often takes the critical saving rate s as given.
However, Schumpeterian theory derives these innovation frequencies endogenously from the
profit-maximization problem facing a prospective innovator, just as the Ramsey model
endogenizes s by deriving it from household utility maximization. This maximization problem
and its solution will typically depend upon institutional characteristics of the economy such as
property right protection, the financial system, . . . and also, upon government policy;
moreover, the equilibrium intensity and mix of innovation will often depend upon institutions
and policies in a way that varies with the country’s distance to the technological frontier.

The Three Objectives of Development

➢ Increase availability of life-sustaining goods

➢ Raise levels of living
 ➢ Expand range of economic and social choices

What causes underdevelopment?

One can say that it is very easy to focus on characteristics of development but the truth it is
complex and needs a consideration of all the factors that affect its web-like progression. For
example, we know that underdevelopment is usually characterized by: low per capita incomes,
low literacy and educational attainment, lack of basic services- water and power. But how do
we EXPLAIN underdevelopment? Old view that absence of development caused by certain
physical environments, particular cultural traditions and value systems-environmental and
cultural determinism. Lack of natural resources certainly impediment to development but not
impossible- example of Japan. Reasons attributed to Japanese success and becomes a model
for development are:
a. Strong cooperation between government and business
b. Able to adapt to spatial-physical situation and acquire a maritime prowess
c. Early development (Meiji restoration) of transport and banking systems
d. Highly literate population
e. Niche development- technology driven

The need to view development in historical perspective as sequence of dynamic events-

explore roots. Historical records identify other common reasons of underdevelopment without
exception to develop countries such as:
a. instability and other adverse internal situations- political factors (European hegemony
and Roman Empire)
b. Some truth to these as extended periods of turbulence are not conducive to
development- central African nations with tribal rivalries and ethnic cleansing
(Armerindians during the Rise of US from European migration in re-creating the Old-
World in the New World)
c. Poor physical environment- lack of rainfall, poor soils also may pose barriers to
development (Africa, Middle East and China)

Another Common Explanation of UD

1. Colonialism as Scapegoat

Colonialism plays a big part of countries growth and development. Studies in economic
history shows that indigenous population was exploited – the case of Philippines, India,
Canada, Australia, Malaysia, Africa and even the US. It affects its colonial countries in many
different ways but not limited to such as traditional way of life and self-sufficient mode of
production have been destroyed; Forced to pay taxes and conscripted labor practices; Social
differentiation increased- disintegrating force; Fatal effects on secondary (manufacturing) and
tertiary (service) sectors- import of cheap goods forced indigenous artisans out of work;
Discouraged modern industrialization. Decolonization opened up independence during the
years 1950, it shows rapid growth and development like the countries of India, Canada and
Australia. It resulted to increase of GDP and sprouting metropolitan capital and better quality
of life. In light of economic transformation of so many former colonies it creates the conditions
for the majority of the world’s population to become the dominant player. But the downside of
this situation is the development of the ideological remnants of colonialism to individualism
adopted from the great -ism of the European dominance long time ago – mercantilism,
capitalism and communism.

Colonialism viewed as the cause of disintegration and decline- how? Because of the
manipulation of the principal/colonizer what occurred in these situations was dependent not
autonomous development. Colonial powers extracted wealth for home country-Netherlands,
France, Great Britain. International division of labor (IDL) and western dominated trading
structure was created to take advantage of colonial authority. IDL refers to the allocation of
tasks among laborers such that each one engages in tasks that he performs most efficiently
and this promotes worker specialization and productivity.
 2. Vicious Circles- Gunnar Myrdal

Attacking vicious circle proponents-do not explain how these magic circles come into
existence. The vicious circle theory indicates that poverty perpetuates itself in mutually
reinforcing vicious circles on both the supply and demand sides. It is a complex web of
interlocking vicious circles each of which constitutes a chain of cause and effect relationships
where one unfavorable circumstance leads to another and produces downward spiral.

The vicious circle theory indicates that poverty perpetuates itself in mutually
reinforcing vicious circles on both the supply and demand sides.

Supply Side

Because incomes are low, consumption cannot be diverted to saving for capital
formation. Lack of capital results in low productivity per person, which perpetuates low levels
of income. Thus, the circle is complete. A country is poor because it was previously too poor to
save and invest. As countries grow richer, they save more, creating a virtuous circle where
high savings rates lead to faster growth.

Demand Side

Furthermore, because incomes are low, market size (for consumer goods, such as
shoes, electric bulbs, and textiles) is too small to encourage potential investors. Lack of
investment means low productivity and continued low income. A country is poor because it
was previously too poor to provide the market to spur investment.

Insufficient Saving: A Critique

The vicious circle theory seems plausible to those Westerners who imagine that the
entire population of the third world is poor and hungry.

Small Markets: A Critique

Everett E. Hagen contends that the market is ample for using modern production
methods effectively for products commonly consumed by low-income people-sugar, milled
rice, milled flour, soap, sandals, textiles, clothing, cigarettes, matches, and candies. He argues
that even a fairly small improvement in productivity for any of these commodities would
capture a sizable market.

Scenario: High Birth Rate> Large Families>Low PCI> Poverty> Low Output Per Worker> Low
PCI> Low Productivity> Poor Health>Inadequate Housing

Intervention: Remedy > Downward spiral not reversible without massive aid (Economic
Endowment)

Panacea for Vicious Circle

Aid or endowment should be free from vested interest of the principal, instead it would
stimulate growth in modern sector and reduce size of ‘informal’ or traditional sector. Thus,
eliminate dualism and the major causes of unequal distribution of wealth. Foreign aid would
allow countries to increase low levels of productivity.

3. Balanced versus Unbalanced Growth

A major development debate from the 1940s through the 1960s concerned balanced
growth versus unbalanced growth.
 Balanced Growth

The synchronized application of capital (Big Push Theory/Thesis) to a wide range of

different industries is called balanced growth by its advocates. Ragnar Nurkse considers this
strategy the only way of escaping from the vicious circle of poverty. He does not consider the
expansion of exports promising, since the price elasticity of demand for the LDCs'
predominantly primary exports is less than one, thus reducing export earnings with increased
volume, other things being equal.

The factors that contribute to economic growth, like demand and investment in
infrastructure, do not increase smoothly but are subject to sizable jumps or indivisibilities.
These indivisibilities result from flaws created in the investment market by external
economies, that is, cost advantages rendered free by one producer to another. These benefits
spill over to society as a whole, or to some member of it, rather than to the investor
concerned.

Indivisibility in Infrastructure. A major indivisibility is in infrastructure, such as power,

transport, and communications. This basic social capital reduces costs to other industries.
Indivisibility in Demand. This indivisibility arises from the interdependence of
investment decisions; that is, a prospective investor is uncertain whether the output from his
or her investment project will find a market.

Unbalanced Growth

Albert O. Hirschman (1958) develops the idea of unbalanced investment to complement

existing imbalances. He contends that deliberately unbalancing the economy, in line with a
predesigned strategy, is the best path for economic growth. He argues that the big push thesis
may make interesting reading for economists, but it is gloomy news for the LDCs: They do not
have the skills needed to launch such a massive effort. The major shortage in LDCs is not the
supply of savings, but the decision to invest by entrepreneurs, the risktakers and decision
makers. The ability to invest is dependent on the amount and nature of existing investments.
Hirschman believes poor countries need a development strategy that spurs investment
decisions. In other words, capital goods industries should be preferred over consumer goods
industries.

According to Prof. Hirschman, the series of investment can be classified into two parts:

1. Convergent Series of Investment:

It implies the sequence of creation and appropriation of external economies. Therefore,

investment made on the projects which appropriate more economies than they create is called
convergent series of investment. Influenced by profit motive and undertaken by the private
entrepreneurs. Convergent series of investment are made directly productive activities.
Directly productive activities include manufacturing.

2. Divergent Series of Investment:

It refers to those projects which appropriate less economies then they create.
Influenced by objective of social desirability. Such investments are taken up by Public
agencies, divergent series of Investment have greater social desirability in social overhead
capital (SOC). SOC implies all those basic services without which primary, secondary and
tertiary productive activities cannot function. It includes investment in education, public health,
public utilities, infrastructure development.

Underdevelopment as a Coordination Failure

 This understanding arose following the failure of neo-classical theories to explain why
optimal outcomes were often not achieved in developing economies. These theories rest on the
idea of complementarity, or positive feedback loops that arise when the actions of one agent
encourage other agents to take similar action. However, economic actors must coordinate
their actions in order to take advantage of complementarities. The resulting outcome is sub-
optimal if agents do not coordinate their actions, a situation known as coordination failure.

Coordination failure can arise for several reasons, as illustrated by the where-to-meet
and prisoner's dilemmas. In the where-to-meet dilemma, agents will all be better off if they
coordinate their actions, and there is no incentive to cheat once they do. In the prisoner's
dilemma, agents will also be better off coordinating their actions, however, cheating will lead
to a better personal outcome once coordination is achieved if all other members stick to the
agreement. The result is that this form of coordination will tend to break down over time.

Multiple Equilibria

As opposed to standard Marshallian analysis where actions are not influenced by

complementarities, this approach takes into account the effect of positive feedback on
decisions. Thus, privately rational decisions are a function of the decisions which other agents
are expected to make. This results in a 45° line that is intersected by an s-shaped curve with
the following characteristics:

a) A positive y-intercept : due to the fact that a limited number of actors will invest
regardless of whether they expect other to or not.

b) A small slope initially : because there are a limited number of actors who have invested
at this point, they are likely isolated, and so have little impact on the expectations of others.

c) Exponentially increasing slope : as more and more invest, their concentration increases,
thus increasing the effect that their investment has on the expectations of others.

d) Gradually decreasing slope : eventually, most of the gains to be had due to

complementarities have been achieved, and so further investments have little impact on
expectations.
 This type of graph shows three equilibrium points. These occur where the investment
made by rational individuals is equal to the investment which is expected from all other
investors. When the s-curve intercepts from above, then the equilibrium is a steady one. If it
intercepts from below, the equilibrium is unsteady. If the economy moves to a new equilibrium
where at least some actors are made better off without hurting anyone, then the change is said
to be a pareto improvement.

Big Push Model

This model has been formalized, but we don't go into the details. The main idea is that
firms don't fully benefit from the profits that accrue to other firms in the economy thanks to
their investments. This is a market failure, which discourages any firm from being the first to
enter the market, as this would put it into a highly vulnerable position vis-a-vis firms that
would take advantage of its investments to subsequently enter the market. Thus, in order to
begin modernizing an economy, a critical mass of investment by a number of firms at once
must be garnered. By doing this, a network of firms that benefit from each other's investments
is created, and further investments are stimulated.

The force which is called upon to bring about such a critical mass of investment is
generally the government. Large infrastructure projects, training of workers etc. have
spillover effects that lower initial costs for many firms at once, thereby encouraging them to
enter to market, and stimulating economy growth.

More Multiple Equilibria Inefficiencies

1. Incumbent Advantage

Increasing returns to scale in modern industries mean that an established firm with large
production using an outdated technology can often undercut a competitor who is trying to
enter the market using a more advanced production technique. In order to sustain initial losses
associated with building its consumer base, the firm using newer technology requires
functioning capital markets. These are generally missing from developing economies, resulting
in a sub-optimal equilibrium.

2. Behaviors and Norms

A number of behaviors which may have been advantageous at one point in history have
become ingrained in our societies, and have proven hard to undo. One of the reasons for this is
that if only a few members change their behavior, they end up losing. Thus, the concept of
multiple equilibria can be applied in this setting, especially considering that these norms can
have a major impact on economic growth.

3. Linkages

Certain industries tend to have lower profitability, yet are depended upon by a large number of
other industries (linkages). Because of their low profitability, entrepreneurs tend to shy away
from these industries, thus resulting in major inefficiency. A case can be made for government
to intervene here and invest in these industries in order to favor the expansion of linked
industries via externalities associated with expanded output in the less profitable industry.

4. Inequality and growth

Traditionally, a certain degree of inequality was assumed good for growth because this was
thought to allow for resources to concentrate and be invested. This notion has come under
attack because the poor have been found to save much more than was originally supposed.
Furthermore, individuals cannot borrow in order to invest in a business or their children etc
when they lack collateral. This can lead to a situation where families fall into poverty traps, ie a
sub-optimal equilibrium. Since the 1980s, considerable evidence has shown a negative
correlation between inequality and economic growth.
Challenges in the Application of Development Theory

There is no “One Size Fits All” to solve problems related to growth and development as
claimed by some advocates in economic theories or as modeled by developed countries. It
needs understanding of the intricacies of the country’s history, people and resources.
Developing and implementing development program one should consider that:
a. Several theories have been advanced and have been criticized and some also
discredited—to be replaced by other theories
b. Third World is very heterogeneous-dissimilar in terms of population, resources,
climates, culture, economic structure and location
c. Unlikely that one theory will be powerful enough to explain underdevelopment
everywhere
d. Multitude of obstacles to development vary with place and time
e. Underdevelopment must be seen as a product of an array of complex and continuously
changing interactions between: Past and Present; Natural and Human Environments;
External and Internal Conditions
f. Lastly, critical to remember that the above theoretical ideas aid us in asking pertinent
questions

Updates on the World Economic Development: What is going on, and how we will look at the
future?

The Millennium Development Goals and The 2015-2030 Sustainable Development Goals
Millennium Development goals (MDGs): Eight goals adopted by the United Nations in 2000, a
blueprint for the next 15 years (to 2015)

• Eradicate extreme poverty and hunger

• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDS, malaria, and other diseases
• Ensure environmental sustainability
• Develop a global partnership for development

Millennium Development Goals (MDGs), adopted by the United Nations in 2000, with Some
Targets that were set for 2015

(see Table on the next page)

Table 1.1 Millennium Development Goals and Targets for 2015

MDG Retrospective: Glass Half Full Or half empty

• Shorthand: “Halving Poverty” (and Halving Hunger)
• Income poverty target reached – by official definition of fraction living under $1 a day
equivalent (now adjusted to $1.90)
• Progress on hunger (fraction hungry fell from about 23% to 14%) but not halved – and
nearly 900 million still hungry
• Under-5 Mortality dropped about 41%: progress; but not halved, let alone cut by two-
thirds
• Maternal deaths about halved – but not cut by three-quarters
• Clean drinking water target met, and slum target met; but the sanitation goal not met
• Great progress on several diseases including TB and malaria
• Progress on enrollments, but universal goal not met - 57 million children still not in
primary school – generally the poorest
• Development assistance is now about flat, and probably falling in real terms
Some Criticisms that have been raised concerning the Original MDGs Framework
• Not ambitious enough, it merely projects past rates of improvement
• Goals not prioritized; stove-piped: overlooks goal complementarity
• Setting a specific end date could discourage aid if targets not met
• The $1 a day poverty measure misses’ intensity of poverty
• $1.25 (or $1.90 as purchasing-power adjusted) per day is too low a bar
• Lack of goals on reducing rich country agricultural subsidies, which harm low income
farmers in developing countries
• Nothing on improving legal and human rights of the poor
• No goals for slowing climate change harming developing countries
• Nothing on expanding gender equity outside of / beyond education
• 15 years was too long to prod early action and accountability of leaders
• No goal on global social safety net guaranteeing minimums of life
• Did not seem to apply to developed countries except as aid donors
• Question for discussion: To what extent addressed in the new (2015-2030) Sustainable
Development Goals (SDGs)?

Update: Sustainable Development Goals

Our country’s Domestic and International policy is working toward a harmonious

implementation and transition from LDC to DC dubbed as the “Golden Age of Industrialization”
with the realization of the following:
• Sustainable Development Goals (SDGs) – “Ambisyon Natin 2040”
• Adopted by the UN on 26 Sept. 2015
• To be achieved by 2030
• Features 17 goals, with 169 targets
• https://sustainabledevelopment.un.org/sdgs
• New Underlying Principles:
• Universality principle: Applies to every nation (with action encouraged from every
sector)
• Integration principle: Must achieve all goals; to do so account for their
interrelationships;
• Transformation principle: Not “piecemeal” steps

The 17 Sustainable Development Goals 2015-2030

1. End poverty in all its forms everywhere

2. End hunger, achieve food security and improved nutrition and promote sustainable
agriculture
3. Ensure healthy lives and promote well-being for all at all ages
4. Ensure inclusive & equitable quality education & promote lifelong learning opportunities
for all
5. Achieve gender equality and empower all women and girls
6. Ensure availability and sustainable management of water and sanitation for all
7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Promote sustained, inclusive and sustainable economic growth, full and productive
employment and decent work for all
9. Build resilient infrastructure, promote inclusive and sustainable industrialization, foster
innovation
10. Reduce inequality within and among countries
11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Ensure sustainable consumption and production patterns
13. Take urgent action to combat climate change and its impacts
14. Conserve and sustainably use oceans, seas, marine resources for sustainable
development
15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably
manage forests, combat desertification, and halt and reverse land degradation and halt
biodiversity loss
 16. Promote peaceful and inclusive societies for sustainable development, provide access
to justice for all and build effective, accountable and inclusive institutions at all levels
17. Strengthen means of implementation and revitalize global partnership for sustainable
development.

Discussion Topic: The SDGs

• What are some key similarities and differences between the SDGs and the earlier
MDGs?
• To what extent do the same criticisms apply to SDGs as were raised in the past
concerning the MDGs?
• If you think one or more criticisms are addressed – at least in part please explain
• Example: How significant is adopting the “Universality” principle?
• If you think a new criticism is relevant – specific to SDGs, or that applies also to MDGs
but not listed above – please specify; explain
• Regardless of your specific views about the SDGs: do you think it is better to have these
goals (or perhaps even any goals) than not to specify international development goals?
How, or why not?
• Do you have a proposal for how to remedy a problem that you specify or that has been
raised?

Concluding Observations

1. The importance of Development Economics

2. Inclusion of non-economic dimensions in designing development strategies
3. Increasing capabilities to function as a central concept of development – Development
as FREEDOM
4. Achieving the Millennium Development Goals (MDGs) and beyond to the prospective
Sustainable Development Goals (SDGs)
5. “One FUTURE or none at ALL”

The Benefit and Cost of Economic Growth and Development

What distinguishes people from animals is people’s greater control over their
environment and greater freedom of choice, not that they are happier. Control over one’s
environment is arguably as important a goal as happiness, and in order to achieve it, economic
growth is greatly to be desired. Growth decreases famine, starvation, infant mortality, and
death; gives us greater leisure; can enhance art, music, and philosophy; and gives us the
resources to be humanitarian. Economic growth may be especially beneficial to societies in
which political aspirations exceed resources, because it may forest all what might otherwise
prove to be unbearable social tension. Without growth, the desires of one group can be met
only at the expense of others. Finally, economic growth can assist newly independent
countries in mobilizing resources to increase national power.

Growth has its price. One cost may be the acquisitiveness, materialism, and dis-
satisfaction with one’s present state associated with a society’s economic struggles. Second,
the mobility, impersonality, and emphasis on self-reliance associated with economic growth
may destabilize the extended family system, indeed the prevailing social structure. Third,
economic growth, with its dependence on rationalism and the scientific method for innovation
and technical change, is frequently a threat to religious and social authority. Fourth, economic
growth usually requires greater job specialization, which may be accompanied by greater
impersonality, more drab and monotonous tasks, more discipline, and a loss of craftsmanship.
Fifth, in an advanced industrial society, all institutions and individuals, including artists, tend to
be shaped to the needs of economic growth. Additionally, the larger organizational units
concomitant with economic growth are more likely to lead to bureaucratization, impersonality,
communication problems, and the use of force to keep people in line. Thus, even if a population
is seriously committed to economic growth, its attainment is not likely to be pursued at all
costs.
 In the face of increasing expectations, few societies can choose stagnation or
retardation. Increasingly, the LDC poor are aware of the opulent lifestyle of rich countries and
the elite. They have noticed the automobiles, houses, and dinner parties of the affluent; they
have seen the way the elite escape the drudgery of backbreaking work and the uncertain
existence of a life of poverty; they have been exposed to new ideas and values; and they are
restless to attain a part of the wealth they observe. So most LDC populations want economic
growth, despite the costs. And LDCs also want better measures of growth and development.
The central focus of our discussion is how LDCs can achieve and assess their development
goals.

Guide to Readings

It is expected students have already taken principles of economics, basic Micro and Macro
Economics for them to understand economic development. The economics of developing Asia,
Africa, Latin America, and Central and Eastern Europe, whose peoples include impoverished
peasants and slum dwellers, factory workers, small farmers, landlords, business people,
managers, technicians, government officials, and political elites and its role in economic
systems are well discussed in Chapters 1-4 in the book of Todaro & Smith, 12th Ed, and in
Chapters 1-5 by Nafziger. The economics of development also includes lessons from the past
economic growth of today’s industrialized countries and middle-income economies. Thus, it is
suggested by the Faculty / Author to read the first part of the text book or Chapters 1-5 by
Nafziger to fully understand the Principles and Concept of Economic Development.

Concepts for Review

Absolute Poverty Gross domestic product More developed countries
Attitudes Gross national income (MDCs)
Capabilities (GNI) Political economy
Developing countries Income per capita Self-esteem
Development Institutions Social system
Development economics Less developed countries Subsistence economy
Freedom (LDCs) Sustenance
Functionings Millennium Development Traditional economics
Globalization Goals (MDGs) Values

Questions to Discuss

1. Why is a strictly economic definition of development inadequate? Explain your answer.

2. Is economic growth possible without economic development? Economic development
without economic growth?
3. From the models of development that has been discussed, which model do you think
provides the best explanation of the situation in most developing nations? Why?
4. Why is the government sometimes a part of the problem of coordination failure rather than
the solution? Does this make the problem hopeless? What could be done in this case?
5. What is meant by absolute poverty? What measures of income poverty are favored by
development economists?
6. In our country the Philippines, why are women the most vulnerable in the society? Are they
not equal to their male counterparts in our society? Give an example of an empowered
women in our society.
7. Improved consumption levels in an economy is not a sign of economic development. True
or False? Justify your answer.
8. LDC’s have common characteristics most especially inefficient economy and political
dependence, True or False? Explain your answer
9. Rent seeking is common not just in LDC’s but more relatively in developed countries like the
US. True or False? Explain
 Introspection

We can dream, can we? Our Country, our dream

A LONG TERM

FOR
THE PHILIPPINES
About AmBisyon Natin 2040
AmBisyon Natin 2040 represents the collective
long-term vision and aspirations of the Filipino
people for themselves and for the country in the
next 25 years. It describes the kind of life that
people want to live, and how the country will be
by 2040. As such, it is an anchor for
development planning across at least four
administrations.
AmBisyon Natin 2040 is a picture of the future,
a set of life goals and goals for the country. It is
different from a plan, which defines the
strategies to achieve the goals. It is like a
destination that answers the question “Where
do we want to be?”. A plan describes the way to
get to the destination; AmBisyon Natin 2040 is
the vision that guides the future and is the
anchor of the country’s plans.
AmBisyon Natin 2040 is the result of a long-
term visioning process that began in 2015. More
than 300 citizens participated in focus group
Filipinos are strongly rooted: matatag. Filipino
families live together; there is work-life balance
so that there is time to spend with family even
for members who work. On weekends, families
and friends enjoy time together in parks and
recreational centers. It is a high-trust society
with a strong sense of community. There are
volunteer opportunities, and Filipinos spend
time to serve the community, help others who
are in need, and contribute to various causes.
Filipinos are comfortable: maginhawa. No one is
poor, no one is ever hungry. Filipino families
live in comfortable homes with the desired
amenities and secure tenure. Families and
friends are within reach because transport is
convenient and affordable, and they can take a
vacation together within the country and
discussions and close to 10,000 answered the
national survey. Technical studies were
prepared to identify strategic options for
realizing the vision articulated by citizens. The
exercise benefitted from the guidance of an
Advisory Committee composed of government,
private sector, academe, and civil society.
The life of all Filipinos in 2040:
Matatag, Maginhawa at Panatag na Buhay
By 2040, Filipinos enjoy a strongly rooted,
comfortable, and secure life.
In 2040, we will all enjoy a stable and
comfortable lifestyle, secure in the knowledge
that we have enough for our daily needs and
unexpected expenses, that we can plan and
prepare for our own and our children’s future.
Our family lives together in a place of our own,
and we have the freedom to go where we
desire, protected and enabled by a clean,
efficient, and fair government.
abroad. Children receive quality education so
that they realize their full potentials and
become productive members of society. Decent
jobs that bring sustainable income are
available, including opportunities for
entrepreneurship.
Filipinos are secure: panatag. Filipinos feel
secure over their entire lifetime. They expect to
live long and enjoy a comfortable life upon
retirement. There are resources to cover
unexpected expenses, and there are savings.
They feel safe in all places in the country.
Filipinos trust their government because it is
free of corruption and provides service to all its
citizens equally.
 Matatag Maginhawa Panatag

Family is together. Free from hunger and Enough resources for

Time with friends.
Work-life balance.
Volunteering.
poverty. day-to-day needs,
Secure home ownership. unexpected expenses and
Good transport facilities. savings.
Travel and vacation. Peace and security.
Long and healthy life.
Comfortable retirement.

Realizing the AmBisyon

All sectors of society, whether public or private, should
direct their efforts towards creating opportunities for
Filipinos to enjoy a matatag, maginhawa at panatag na
buhay. Government, in particular, must use its tools of
fiscal, monetary and regulatory policies to steer the
development path towards enabling Filipinos to attain their
AmBisyon. This pertains to all dimensions of development:
economic, human and physical capital, institutional, social
and cultural.

By 2040, the Philippines is a prosperous middle class

society where no one is poor. People live long and healthy
lives and are smart and innovative. The country is a
high-trust society where families thrive in vibrant, culturally diverse, and resilient
communities.

Filipinos live in a prosperous, predominantly

middle class society where no one is poor.

Economic growth must be relevant, inclusive and

sustainable. Over the next 25 years (until 2040), per
capita income must increase by at least three-fold.
More than the increase in income, economic growth
must progressively improve the quality of life of
the majority of Filipinos.
AmBisyon can be partly achieved by having competitive enterprises that offer quality
goods and services at affordable prices. Government must encourage investments in
these sectors by improving market linkages, simplifying government procedures, and
facilitating access to finance. These should be complemented by appropriate human
capital development, science, technology and innovation. Following are the priority
sectors that have direct impact on AmBisyon:
Housing and Urban Manufacturing Connectivity
Development Food processing, housing Roads and bridges,
Construction, related, construction-related, port, airports, vehicles,
construction-related other manufacturing. transport
manufacturing, house systems, and
development-related communication.
manufacturing, and utilities
(electricity, gas, and water).

Education Services Tourism and Allied Services Agriculture

Formal education Resort, rest-recreation Food production,
and hotels, commercial
re-tooling services. accommodation, travel and and industrial crop,
tour cultural shows, agricultural
heritage sites, etc biotechnology, etc.

Health and Wellness Services Financial Services

Primary, secondary, and Consumer financing,
tertiary care, enterprise financing,
pharmaceuticals, wellness and insurance
facilities, sports savings mobilization.
and fitness facilities, etc.

Government must also ensure that economic growth is broad-based across sectors and regions; it must
result in a more equal income distribution. Moreover, there should be aggressive interventions to
increase opportunities for the poor to participate in the growth process even as they are protected
against the negative impact of economic and political instabilities, natural and man-made calamities.
Poverty must be eradicated by 2040, if not earlier.

It must also be recognized that certain individuals cannot immediately participate in the growth process.
For infants and children, there is the requisite care, guidance, health and education services until they
become mature enough. It is important that parents and families are able to provide these, although
government should stand ready to fill the gap. A major intervention, therefore, is for parents to
adequately prepare for having a family.
Filipinos live a long and healthy life.
A long and healthy life allows people to realize their full potential and to enjoy the
attainment of their AmBisyon for many years. This is borne out of healthy lifestyle
choices. New products and processes that are safer and cleaner, and certainly
products that promote good health, are needed as well.

Policies that promote work-life balance

can reduce the strain on people’s health.
Filipinos must also be given more
affordable, clean and safe options for
rest and recreation, like open spaces,
nature parks and public sports and
fitness facilities. In case of illness,
Filipinos must have access to affordable
and good quality healthcare.

Ensuring the quality of health care and

health-related products and the safety of
other products is the responsibility of
government as well.

Filipinos are smart and innovative.

Well-educated, innovative Filipinos will continuously improve the quality of life in the Philippines. If
education is the process of facilitating the “acquisition of knowledge, skills, values, beliefs and habits”1 ,
formal education is the structured method of facilitating the acquisition of a select set of such
knowledge, skills, values, beliefs and habits. Government, therefore, must be proactive in setting the
agenda for education. It is, after all, about molding the future Filipino and creating the future Philippine
society.

More than ensuring that Filipino students acquire the foundational literacies (reading, numeracy,
scientific literacy, ICT literacy, economic and financial literacy, cultural and civic literacy), the formal
education system must also ensure that students obtain competencies (critical thinking, problem-
solving, creativity, communication, collaboration) and develop character qualities (curiosity, initiative,
persistence and grit, adaptability, leadership, social and cultural awareness). This may require a revision
of the curriculum content, but more importantly, the mode of delivery. At the same time, there must be
access to lifelong learning opportunities so that competencies are continuously upgraded and updated.
Filipinos live in a high-trust society.
A high-trust society allows Filipinos to enjoy a panatag na buhay together with their families. Extending
to the bigger community, a high trust society equals a matatag na pamayanan.

A high-trust society allows people to see to their economic pursuits, secure in the knowledge that they
will be able to enjoy the fruits of their labor. However, societal ties must be strengthened where every
Filipino cares for the plight of his fellow Filipino. Every Filipino must feel upset if another Filipino is
found hungry and poor, or unable to recover from unfortunate events.

A caring society does not evolve overnight; it must be cultivated. Venues and opportunities for
interpersonal interaction must be provided. But usually, it takes root from building trust in established
institutions like government. Government must therefore begin the process of confidence-building by
being clean, fair and citizen-centered. After all, a high-trust society is the most durable bedrock for
vibrant, culturally diverse, and resilient communities of the Philippines by 2040-- hopefully, sooner.

Critical Insights.
1. How can the Philippines achieve its ambitious vision of becoming a country free of poverty?
2. What are the constraints? How will you address it?
3. While it is possible for the Philippines to sustain high economic growth and reduce poverty to
ultimately achieve a prosperous society free of poverty by 2040, what are major reforms that should
be implemented?
4. How can we achieve a progressive realization for the next administration? Is it possible given the fact
that we have a damage culture of political system and governance?
5. What do we mean by “simple and comfortable life” in the Ambisyon Natin 2040 vision? Is it not too low
for the Filipinos?
PART II. Problems and Policies: Domestic and International
Treaties
The aspect of Philippine Development is peculiar that it has the slowest pace of poverty
reduction in recent decades and with the turn of the present century it recorded the highest
incidence of absolute poverty. The country had comparatively low levels of absolute poverty
based on Asian standards, including other dimension of human underdevelopment such as
illiteracy and infant mortality. Ours is more favorable compared to Thailand and
Indonesia (Balisacan, 2003). The slow pace of poverty reduction and the persistently high level
of economic inequality leads us to ask “What has gone wrong in our development planning and
implementation? We will examine the nature, pattern, characteristics, and causes of poverty
and inequality in the Philippines over the last quarter-century, including factors explaining the
provincial differences in the evolution of the welfare of the poor.

To stabilize the domestic issue of growing population and poverty reduction that
resulted to disparity in income adopted the independent monetary policy. Though we are
considered as small open economy, in the early 1980’s despite of difficulties triggered by Asian
financial crisis our economic team find ways to secure efficient financial intermediation in an
environment that is increasingly one of integration with international financial markets. The
government began to implement a package of economic policy reforms aimed at greater
integration with the world economy. These reforms included import liberalization and
reductions in tariffs, accompanied by liberalization of foreign direct investment and of the
financial and foreign exchange markets. As a result of these policy adjustments the
Philippine economy undoubtedly became more integrated with the rest of the world, not only
in the area of trade in commodities but also in trade in securities and national currencies.

Poverty, Inequality, and Development

(Read Chapter 10 Book of Balisacan and Hall) to understand the Philippine economic
system, policy decisions and development, problems, issues and suggested strategies to
address the roadblock for economic development.

Measuring Inequality and Poverty

Seven very critical questions about economic growth
- How relative is inequality, and how is this related to the level of poverty?
- Who is poor?
- Who benefits from economic growth?
- Will rapid growth certainly lead to greater income inequality?
- What are the benefits of poor growth?
- Is the level of inequality always bad?
- What policies can reduce poverty?

Multi-Dimensional Poverty Index (MDI)

This is new measure developed by the UNDP, and employs the Dual Cut-off Method. The
first is concerned with whether family units meet the cutoffs for proxies whose purpose it is to
estimate Standard of living, Health and Education. The second cut-off measures the number of
simultaneous proxies for which a family unit is deficient. This defines multi-dimensional
poverty.

The idea behind the MDI is that being deficient in several ways greatly disadvantages
families, because when they suffer deficiencies in only a few areas, they can at least partially
mitigate negative effects through other means. It has the advantage of sourcing direct
household-level deprivation data in order to construct an index, rather than relying on pre-
aggregated data (income).

However, the MDI relies on house-hold level data, thus missing out on inequalities in intra-
household distribution. It includes questions such as "has a child ever died in your household",
thus blurring the line between past and present conditions. It also suffers from the imperfect
nature of measuring welfare via proxies.

How to measure inequality

Following are some indicators that are often used by researchers to measure inequality in
a country or region.

1. Size distributions (quintiles, deciles)

This measure directly calculates the amount of income received by each individual
or household. How to get income is not a problem. Therefore, economists tend to rank
all individuals based on the income they receive, then divide the total population into
several groups or sizes. Usually the population is divided into 5 groups or quantiles and
10 groups or deciles.

2. Lorenz curves
The Gini index is often displayed along with the Lorenz curve, which illustrates the
relationship between the cumulative share of income and population. G is a gini index
derived from the Lorenz curve by dividing the area bounded by the diagonal line and the
Lorenz curve with the total area on the lower triangle

3. Gini coefficients and aggregate measures of inequality

Of all the measures of inequality, the Gini index is the one most often used as an
indicator of inequality. One of the highlights of the Gini index is that its very direct
approach to the measure of inequality, contains the difference between each pair of
income, which is by far the most popular measure of economic inequality. In fact, the
observed pairs used in the Gini Index calculation are used to produce the Lorenz
Curve. This is done by plotting the share (cumulative) income and population pairs in a
box.

The value of the Gini index ranges from 0 to 1. The value of 0 indicates that all income is
divided equally among all units of society (perfect equality), while value 1 means that all
income is only owned by one person or one unit in the overall distribution (perfect
inequality). Low inequality has a Gini index value of 0.4 or below. High inequality if it has a
Gini index above 0.4 in its distribution.

4. Functional distributions
This measure focuses on the share of national income received by each factor of
production. The relevance of functional theory is less sharp, because it does not take
into account the role and influence of forces outside the market.

Absolute Poverty

Absolute poverty is a material shortage experienced by someone who has not yet been
able to fulfill basic needs (clothing, food, shelter, etc.)
Most projections state that the number of people living in poverty will increase over the past
decade before declining for the rest of the century, with the hope that it will disappear forever
with the succession of centuries. This result depends very much on two factors: first, the rate
of economic growth — provided that this is sustainable — and second, the amount of resources
allocated to poverty alleviation programs and the quality of those programs. Fast and
continuous growth, as well as well-designed and timely poverty alleviation can actually reduce
absolute poverty more quickly; but without these two factors, the goal will not be achieved at
all.

The Philippine Statistics Authority (PSA) reported in 2017 based on the country’s official
poverty statistics for the basic sectors for 2015 that one in every five Filipinos experiences
absolute poverty. PSA report provides the estimates of poverty incidence for 9 of the 14 basic
sectors identified in Republic Act 8425 or the Social Reform and Poverty Alleviation Act using
the income and sectoral data from the merged Family Income and Expenditure Survey (FIES)
and Labor Force Survey (LFS).

Among the nine basic sectors, farmers, fishermen and children belonging to families
with income below the official poverty threshold or poor families posted the highest poverty
incidences in 2015 at 34.3%, 34.0% and 31.4%, respectively. These sectors consistently
registered as the three sectors with the highest poverty incidence in 2006, 2009 and
2012. Also, 5 of the 9 basic sectors consisting of farmers, fishermen, children, self-employed
and unpaid family workers, and women, belonging to poor families, had higher poverty
incidence than the general population estimated at 21.6% in 2015.

Figure 1. Headcount Index. Poverty Incidence

Food and Poverty Thresholds

Food threshold is the minimum income required to meet basic food needs and satisfy
the nutritional requirements set by the Food and Nutrition Research Institute (FNRI) to ensure
that one remains economically and socially productive. It is used to measure extreme or
subsistence poverty. Poverty threshold is a similar concept, expanded to include basic non-
food needs such as clothing, housing, transportation, health, and education expenses.

During the first semester of 2015, a family of five needed at least PhP 6,365 on the
average every month to meet the family’s basic food needs and at least PhP 9,140 on the
average every month to meet both basic food and non-food needs. These amounts represent
the monthly food threshold and monthly poverty threshold, respectively. They indicate
increases of about 17 percent in food threshold and poverty thresholds from the first semester
of 2012 to the first semester of 2015.

Poverty among Filipino families

PSA also releases statistics on poverty among families – a crucial social indicator that
guides policy makers in their efforts to alleviate poverty. The poverty incidence among Filipino
families based on the first visit of 2015 FIES was estimated at 21.1percent during the first
semester of 2015. In the first semester of 2012, the poverty incidence among Filipino families
was estimated at 22.3 percent.
 The subsistence incidence among Filipino families, or the proportion of Filipino families
in extreme poverty, was estimated at 9.2 percent during the first semester of 2015. In the same
period in 2012, the proportion of families in extreme poverty was recorded at 10.0 percent. In
addition to the thresholds and incidences, the PSA also releases other poverty-related
statistics in the report such as the income gap, poverty gap and severity of poverty. The income
gap measures the average income required by the poor in order to get out of poverty,
expressed relative to the poverty threshold. The poverty gap refers to the income shortfall
(expressed in proportion to the poverty threshold) of families with income below the poverty
threshold, divided by the total number of families.

The severity of poverty is the total of the squared income shortfall (expressed in
proportion to the poverty threshold) of families with income below the poverty threshold,
divided by the total number of families. This is a poverty measure that is sensitive to income
distribution among the poor. In addition to the thresholds and incidences, the PSA also
releases other poverty-related statistics in the report such as the income gap, poverty gap and
severity of poverty. The income gap measures the average income required by the poor in
order to get out of poverty, expressed relative to the poverty threshold. The poverty gap refers
to the income shortfall (expressed in proportion to the poverty threshold) of families with
income below the poverty threshold, divided by the total number of families The severity of
poverty is the total of the squared income shortfall (expressed in proportion to the
poverty threshold) of families with income below the poverty threshold, divided by the total
number of families. This is a poverty measure that is sensitive to income distribution among
the poor.

Below is the Infographics Report of the PSA.

International Comparisons: The $1.25 a Day Poverty Line

The World Bank has developed a common standard to separate the poor from the non-
poor, a defined poverty line, which reflects a continued average level of living for countries.
ADB has updated the indicators on poverty incidence for Southeast Asian countries based on
the $1 a day threshold, now $1.25 at 2005 prices (Figure 2). The Philippines was able to reduce
poverty incidence from 29.7% in 1990 to 22.6% in 2005, but the number of poor people increased
from 18.2 million to 19.1 million.

In its 2009 report for the Philippines, almost 75% of the poor were found in the rural
areas, where the poverty incidence was 37.84% compared with 14.3% in urban areas While
most poor households are in rural areas, the urban poor are concentrated in major urban
areas in the country such as Metro Cebu, Metro Davao, and Metro Manila. According to the data
from Family Income and Expenditure Survey (FIES) 2006, there were 1.22 million poor
households in urban areas around the country. These figures can be understood as household
surveys cannot catch urban poor without adequate addresses (informal settlers). Households
also frequently oppose household surveys in non-informal settlements because they believe
that they could be used to justify demolitions and relocation. The prospects of abundant
employment and educational opportunities are the main attractions of mega cities such as
Metro Manila, which is the most densely populated urban center, with a population of
approximately 13 million. However, the rapid growth exerts tremendous pressure on the
infrastructure and ability of these cities to provide basic services to their growing populations.
This has led to increasing problems of informal settlements, particularly in Metro Manila.

Figure 2. Poverty Incidence in Southeast Asia

Figure 3. Measuring the Total Poverty Gap (TPG)

Subsistence economy. An economy in which production is mainly for personal

consumption and the standard of living yields little more than basic necessities of life—food,
shelter, and clothing.
 Philippine Poverty Situation:

Source: World Bank, Development Research Group. Data are based on primary household survey data obtained from
government statistical agencies and World Bank country departments. Data for high-income economies are from the
Luxembourg Income Study database.

Philippines - Poverty gap

Poverty gap (PG) the total income/ expenditure shortfall (expressed in proportion to the
poverty threshold) of families/ individuals with income/ expenditure below the poverty
threshold, divided by the total number of families/ individuals. The formula is presented below.

Poverty gap at $1.90 a day (2011 PPP) (%)

Poverty gap at $1.90 a day (2011 PPP) (%) in Philippines was 1.20 as of 2015. Its highest
value over the past 15 years was 3.40 in 2006, while its lowest value was 1.20 in 2015. Total
number of poor at $1.9 a day for Philippines was 7.9 million persons. Though Philippines
number of poor at $1.9 a day fluctuated substantially in recent years, it tended to decrease
through 1988 - 2015 period ending at 7.9 million persons in 2015.

What is number of poor at $1.9 a day?

Number of people, in millions, living on less than $1.90 a day at 2011 PPP is calculated
by multiplying the poverty rate and the population. As a result of revisions in PPP exchange
rates, poverty rates for individual countries cannot be compared with poverty rates reported in
previous years.

Poverty gap at $3.20 a day (2011 PPP) (%)

The value for Poverty gap at $3.20 a day (2011 PPP) (%) in Philippines was 7.10 as of
2015. The total number of poor at $3.2 a day for Philippines was 33.2 million persons. Though
Philippines number of poor at $3.2 a day fluctuated substantially in recent years, it tended to
increase through 1988 - 2015 period ending at 33.2 million persons in 2015.
 Number of people living on less than $3.20 a day at 2011 international prices. Data are
based on primary household survey data obtained from government statistical agencies and
World Bank country departments. Poverty gap at $3.20 a day (2011 PPP) is the mean shortfall
in income or consumption from the poverty line $3.20 a day (counting the nonpoor as having
zero shortfall), expressed as a percentage of the poverty line. This measure reflects the depth
of poverty as well as its incidence.

Poverty gap at $5.50 a day (2011 PPP) (%)

The value for Poverty gap at $5.50 a day (2011 PPP) (%) in Philippines was 21.60 as of
2015. The number of poor at $5.5 a day for Philippines was 64.3 million persons. Number of
poor at $5.5 a day of Philippines increased from 47.1 million persons in 1988 to 64.3 million
persons in 2015 growing at an average annual rate of 3.60%.

Number of people living on less than $5.50 a day at 2011 international prices. Data are
based on primary household survey data obtained from government. Poverty gap at $5.50 a
day (2011 PPP) is the mean shortfall in income or consumption from the poverty line $5.50 a
day (counting the nonpoor as having zero shortfall), expressed as a percentage of the poverty
line. This measure reflects the depth of poverty as well as its incidence.

Poverty Incidence Formula:

𝑸
𝑷 = ( ) ∗ 𝟏𝟎𝟎
𝒏
Where:
Q = number of families/individuals with per capita annual income/ expenditure less
than the per capita poverty threshold
n = total number of families/ individuals

Poverty Threshold Formula:

𝑭𝑬
𝑷𝑻 = 𝑭𝑻/( )
𝑻𝑩𝑬
Where:
FE = actual food expenditure of families within the +/-ten percentile of the food
threshold
TBE = total basic expenditure of families within the +/- ten percentile of the food
threshold
FT = (cost per capita of the one-day food menu ) x (30.4 days/month) x 12 months

For further reading related to poverty report of the country and other related
information, visit https://psa.gov.ph/content/poverty.

Common formula used in Measuring Absolute Poverty

Average poverty gap (APG):

𝑇𝑃𝐺
𝐴𝑃𝐺 =
𝑁

Where:
N is number of persons in the economy
TPG is total poverty gap
Note: normalized poverty gap, NPG = APG/Yp
 Average income shortfall (AIS):

𝑇𝑃𝐺
𝐴𝑃𝐺 =
𝐻

Where:
H is number of poor persons
TPG is total poverty gap
Note: Normalized income shortfall, NIS = AIS/Yp

The Foster-Greer-Thorbecke (FGT) index:


1 H  Yp − Yi 
P =
N
 
i =1  Yp


Where:
N is the number of persons, H is the number of poor persons, and α ≥0 is a
parameter
When α=0, we get the headcount index measure
When α=2, we get the “P2” measure

The Lorenz Curve

The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of
Inequality
 The Human Poverty Index (HPI) or Human Poverty Index

With the belief that human poverty must be measured in units of three key deprivations,
namely: life (more than 30% of the population of less developed countries cannot live more
than 40 years), basic education (as measured by the percentage of adult population illiteracy,
with an emphasis on the loss of women's educational rights), as well as overall economic
provisions (measured by the percentage of people who do not have access to health services
and clean water plus the percentage of children under 5 years who are underweight).

Poverty, Inequality, and Social Welfare

We assume that social welfare depends positively on the level of per capita income but
negatively at the poverty level, as these terms have just been determined. Why should
inequality be our concern relatively? Why should we consider the problem of inequality above
the poverty line? There are three main answers that can answer that question.

First is extreme income inequality that causes economic inefficiencies. A major

problem with being poor, is lacking collateral. This fact very often prevents the poor from
taking loans, and thus prevents them from investing in such things as education for their
children, expansion of a micro-business, or in developing a new business. Thus, the poor are
not producing at their optimal level.

At the same time, much of the economy's resources are concentrated in the hands of a
few very high-income individuals. These people are much more prone than the lower and
middle classes to spending on imported luxury items, and investing outside of the country.

Another macro-economic consideration is that unless tax system is highly progressive,

high income inequality results in low income tax revenues. Also, it has been argued that
progressive tax systems lead to economic inefficiencies.

The second is political considerations which is the imbalance above the poverty line is
that extreme income differences weaken social stability and solidarity. When high inequality
prevails in an economy, this is often a catalyst for social unrest. This can have positive effects
in the long-run, but has been often associated with decreased investment, expenditure on
unproductive goods such as personal security, and thus a steadily worsening economic
situation. Furthermore, the result of major social upheaval has been very negative for many
countries, including loss of lives, and extended periods of economic stagnation.

When wealth becomes overly concentrated in a few hands, this has also been shown to
lead to policies which favor only a small percentage of the population. This often comes at a
cost for overall social welfare, only making things worse.

And finally, a function to describe social welfare - extreme inequality is generally seen
as unfair. If everyone has the same income, there will be little incentive to work hard, skill or
be innovative. With the above reasons we can write welfare, W, as

𝑊 = 𝑊 (𝑌, 𝐼, 𝑃)
where Y is income per capita and enters our welfare function positively, I is inequality and
enters negatively, and P is absolute poverty and also enters negatively. These three
components have distinct significance, and we need to consider all three elements to achieve
an overall assessment of welfare in developing countries.

Dualistic Development and Shifting Lorenz Curves Some Stylized Typologies

Gary Fields uses the Lorenz curve to analyze 3 cases of dualistic development:
1. Typology of modern-sector growth enlargement, where two economic sectors develop by
increasing the size of the modern sector and keeping wages constant in both sectors.
2. The typology of modern-sector growth enrichment, where the economy is growing but the
growth that is limited to a fixed number of people in the modern sector, with both the
number of workers and the wages they remain constant in sectors traditionally.
3. Traditional-sector enrichment growth typology, where all benefits from growth are shared
between traditional sector workers, with little or no growth occurring in the modern
sector. Using three special cases and Lorenz curves, the fields show the validity of the
following proportions.

Using the Lorenz Curve in three special case offer validity of the proposition:

1. Improved Income Distribution under Traditional-sector growth enlargement. Results of

higher income growth among, equal share of relative income, and less poverty.

2. Worsened Income Distribution under Modern-sector enrichment growth, growth is the

result of revenue higher, the distribution is relatively less equal income, and no change in
poverty.

3. Convergence of Modern-sector and Traditional-sector enrichment growth typologies,

absolute income increases and absolute poverty decreases, but the Lorenz curve will
always cross, indicating that we cannot make a clear statement about the relative change
in inequality: it may increase or worsen.

Traditional-sector typologies offer predictions differ about what will happen inequality in
the process of economic growth. With the enrichment of the modern sector, inequality will
continue to increase, while under traditional sector enrichment, inequality will continue
to fall. Under magnification modern sector, inequality will spruce up and down if this process
is recognized. In the very style of development that occurs , we will not worry about the
temporary increase in inequality because in addition to temporary, it will reflect a process in
which citizens, one by one, reach income above absolute poverty line.

Kuznets's Inverted-U Hypothesis

Kuznets Curve is a graph that reflects the relationship between per capita state income
and equality of income distribution. Kuznets Curve can be produced by a stable process of
growth in the enlargement of the modern sector as a developing country from the traditional to
the modern the modern economy. Enrichment of traditional and modern sectors will tend to
attract inequality in opposing directions, so that changes are clean ambiguous inequality, and
the validity of the Kuznets curve is an empirical question.

Evidence on the Inverted-U Hypothesis

Income per capita is not necessarily related to inequality. the poorest countries, such as
Ethiopia, may have low inequality simply because there is so little income. but even very poor
countries like Mozambique and Zambia have very high inequalities according to international
standards. High- income countries tend to be somewhat more equal than middle -income
countries, but again, there is wide variation in the level of inequality.

In fact, for many countries, there is no special tendency for inequality to change in the
process of economic development. inequality seems to be a rather stable part of a country's
socio-economic makeup, changed significantly only as a result of major upheavals or
systematic policies. Inequality can be gradually reduced through well-implemented policies to
encourage pro-poor growth from time to time.

Growth and Inequality

The character of economic growth is the distributive implications of economic growth as

reflected in factors such as participation in the process of growth and ownership of assets. No
need for inequality to rise to a higher growth to be maintained.

Traditionally, diverting resources towards alleviating a country's poverty was thought to

negatively impact on economic growth. This notion can however be challenged.

a) The poor have a higher propensity to spend their income on locally-produced goods.
b) The rich tend to spend their income on imported luxuries, and invest outside of the
country.
c) The social unrest encouraged by high inequality tends to have negative long-term
effects on economic growth.
d) Low levels of health and education have been shown to negatively impact on worker
productivity.
e) Since they lack collateral, the poor have alot of trouble starting businesses, and
educating their children. This tends to decrease economic efficiency by encouraging
inefficient economic outcomes and high birth rates.

Absolute Poverty: Extent and Magnitude

Based on research, approximately 1/3 of the poor are residents who are chronically
always poor. Andrew McKay and Bob Baulch estimate that around 300 to 420 million poor
people are chronically poor who live on 1 dollar a day at the end of 1990.

While 2/3 of the other poor people are vulnerable to poverty and can become very poor
over time. This population can be divided into families who usually live poor but sometimes get
enough income to cross the poverty line and families who are not used to living poor but
sometimes experience temporary problems can result in them living below the poverty line.

Based on income, the definition of ultra-poverty is someone who lives with half a dollar
every day or 54 cents per day in the 1993 dollar. Ultra-poverty can be distinguished from
conventional poverty in terms of:

1. level of deficiency
2. duration of time
3. the vast number of dimensions, such as illiteracy and malnutrition.

Ultra-poverty is a difficult problem to overcome than conventional poverty, where

conventional poverty can be overcome by microfinance and business training. Fazel Hasan, the
founder of the NGO BRAC (Bangladesh Rural Advancement Committee), concluded that the
usual conventional programs implemented did not reach the ultra-poor.

The prospect of ending poverty depends on two factors:

1. the level of economic growth carried out jointly and sustainably

2. the level of resources earmarked for poverty programs so that the quality of the
program increases.

Wealthier countries have a strong tendency to have a low absolute poverty rate.
Availability of jobs, opportunities for greater entrepreneurship and NGOs that help make
people living in rich countries able to escape poverty. In developing countries, there is
evidence that countries with high per capita income growth among them in the lowest five
income distributions, although the proportion varies. Although we cannot rely on our own
growth to end absolute poverty, it is sustainable by itself to end absolute poverty, end poverty
and be facilitated through wise services and sharing of various sources of resources provided
by economic growth. Poverty would reach unimaginable dimensions, since rural incomes
would become almost negligible relative to the cost of physical goods and services. Many
economists are frustrated at the limited impact economic growth has had in reducing third-
world poverty. Ending poverty can be greatly facilitated through wise and shared stewardship
of the various resources provided by growth. Certainly, the relationship between economic
growth and progress among the poor does not by itself indicate causality. Some of the effect
probably runs from improved incomes, education, and health among the poor to faster overall
growth (as suggested by some of the arguments listed previously). Moreover, as we have
noted, poverty reduction is possible without rapid growth. But whatever the causality, it is
clear that growth and poverty reduction are entirely compatible objectives.

Economic Characteristics of High Poverty Groups

a. Rural Poverty

Most poor people usually live in rural areas that usually work in the agricultural sector
and related sectors. About 2/3 of the very poor population has a livelihood from the
agricultural sector such as small farmers and smallholders with small wages. Others live in
cities with livelihoods as unskilled laborers and street vendors. In Asia and Africa, around 80%
of absolute poverty is found in rural areas, where most of the poor are engaged in subsistence
farming or related activities. In South America, this number is around 50%. However, in many
developing nations, most investment and relief has been delivered to urban centers.

Despite a declining poverty rate in recent years, 21.6 percent of the country’s population
still live below the national poverty line. Rural areas in the Philippines show a poverty rate of
36 percent in comparison with the 13 percent of urban areas. However, urban poverty has also
shown a steady increase in recent years, possibly due to the unemployed and low-income
migrants who are unable to afford housing (PSA, 2019).

b. Women and poverty

The majority of the poor in the world are women. The prevalence of women as head of
the household, the low ability to earn income, the stereotype that women are no better than
men and lack access to education, social security, and government employment programs
make the financial position of poor women more unstable than men. In the long term, the low
status of women tends to reduce the rate of economic growth because the achievement of
educators and financial status in the future of children is far more likely to reflect the spirit of
the child. Unfortunately, poverty-relief assistance has traditionally been targeted towards
males.

Thus, the benefits of investment today human resources are more likely to be passed
onto future generations if women are successfully integrated in the process of economic
growth. Remember that human resources may be the most important prerequisite for growth,
education and economic status for women is very important to fulfill long-term development.

c. Ethnic Minorities, Indigenous Populations, and Poverty

Indigenous people usually face economic and political problems and discrimination.
Domestic conflicts and even wars between citizens were ignited from several ethnic groups
and indigenous people who assumed that they felt rival in obtaining resources and
employment. Ethnic minorities and indigenous populations are very often more likely to live in
poverty, and lack access to education, medical services and employment. This is often a result
of economic, social and political discrimination. A factor here is also statistical discrimination,
or a propensity to discriminate because the majority of encounters with a given ethnicity have
been deemed negative overall.

d. Poor Countries

Negative relations between poverty and per capita income indicate that if higher income
can be achieved, poverty will decrease, if only the resources are more widely available to
overcome poverty problems and increase the voluntary sector. The negative relationship
between poverty and per capita income suggests that if higher incomes can be achieved,
poverty will be reduced, if only because of the greater resources that countries will have
available to tackle poverty problems and the growth of civil society and the voluntary sector.
 We can conclude that higher national income will reduce poverty more easily, while at
the same time, poverty still needs to be addressed directly.

Policy framework for government facing inability of income and poverty.

From the study of Balisacan and Hill, Oxford University Press, 2003 recommends to
consider first and foremost that fiscal resources are scarce. Generous budgets for direct
poverty reduction programs may come at the expense of funding for other development needs,
especially ones that will enhance the capacity of the economy to grow on a sustained basis.
Clearly, the national government has to focus its limited resources on areas where they will
make the biggest dent on poverty. What areas should the national government spend more
on, and what areas should it spend less on?

Lessons from recent experience, both in the Philippines and in numerous other
developing countries, suggest that the following areas should be afforded high spending
priority: rural infra- structure, especially transport, power, and communications;
irrigation, especially small-scale systems; primary education, especially quality
enhancement; technical education and skills development; basic health care and family
planning services, especially in rural areas; targeted supplementary feeding
programs; R&D for agriculture and for small and medium-scale enterprises; and
capability building for local government units (LGUs) and microfinance providers.
The same lessons suggest that the national government should spend less in the
following areas: tertiary education (by implementing cost recovery); general food price and
credit subsidies; livelihood and public-works equipment programs, except for short-term
disaster relief; post-harvest facilities; and export-processing zones. Spending in these
areas is a blunt instrument for achieving poverty reduction goals.

The development of a country is aimed at reducing poverty, unemployment and

overcoming the income gap. To get the results, the government must know what steps will be
taken by the government, in response to these economic problems. The types of actions or
policy measures for encouraging inclusive economic growth should be considered as well as
the need for a “package” of complementary and supportive policies and not for one or two
isolated policies.

1. Altering Functional distribution (Altering relative factor prices)

Developing economies often suffer from high unemployment, while firms continue to
invest in capital-intensive forms of production. This is counter-intuitive because high
unemployment would suggest that labor prices should be able to compete with capital prices.
The explanation is that a number of factors contribute to artificially inflate labor prices, while
others artificially decrease the price of capital. It is therefore assumed that by removing these
price distortions, firms will increase labor-employment.

A policy or set of policies designed to correct factor price distortions (underpricing

capital or overpricing modern-sector skilled wages) so as to ensure that market or
institutionally established prices provide accurate signals and incentives to both producers
and resource suppliers. Correcting distorted prices should contribute to greater productive
efficiency, more employment, and less poverty. The promotion of indigenous technological
research and development of efficient, labor-intensive methods of production may also be
valuable.

2. Mitigating the size Distribution (Asset ownership)

A root cause of income inequality is inequality in asset ownership (including such things
as education). Various programs, such as land ownership reform, can be implemented to
counter this effect. The net result should be an increased ability to earn sufficient income.

A policy or set of policies designed to bring about far-reaching structural changes in the
distribution of assets, power, and access to education and associated income-earning
(employment) opportunities. Such policies go beyond the realm of markets and touch on the
whole social, institutional, cultural, and political fabric of the developing world. But such
fundamental structural changes and substantive asset redistributions, whether immediately
achieved (e.g., through public-sector interventions) or gradually introduced over time (through
redistribution from growth), will increase the chances of improving significantly the living
conditions of the masses of rural and urban poor.

3. Reducing the size distribution at the upper levels (Progressive taxation)

Taxation that increases with income is generally considered to be an effective way of

financing programs which can benefit the poor. Note that although progressive on paper, these
policies can be regressive in reality because the rich tend to receive much of their income via
asset ownership rather than directly in the form of wages.

A policy or set of policies designed to modify the size distribution of in-come at the
upper levels through the enforcement of legislated progressive taxation on incomes and
wealth; and at the same time, providing the poor with direct transfer payments and the
expanded provision of publicly provided consumption goods and services, including workfare
programs. The net effect is to create a social “safety net” for people who may be bypassed by
the development process.

4. Moderating (increasing) the size of distribution at the lower levels (Direct transfers)

This has been used in many contexts, but runs the risk of being abused both by those in
need, and those not in need. A good way of getting around these problems is through workfare
programs, which reward the poor for work that they do at such low wages that only the most
desperate would have enough incentive to take advantage of the program.

A set of targeted policies to directly improve the well-being of the poor and their
communities, which goes beyond safety net schemes, to offer programs that build capabilities
and human and social capital of the poor, such as microfinance, health, education, agricultural
development, environmental sustainability, and community development and empowerment
programs, as described throughout this text. These can be carried out either by government or
by nongovernmental organizations through local and international support.

The poor often have low bargaining power in their communities, and while it is difficult
politically to increase this power, well-designed programs can accomplish this indirectly by
providing improved “outside options” such as guaranteed public employment programs when
they are needed. Appropriate agricultural development policies as well as strategies for
agricultural development represent a crucial approach for attacking poverty because such a
high fraction of the poor are located in rural areas and engaged in agricultural pursuits. In
addition, the poor in urban as well as rural areas suffer from degraded environmental
conditions, which lower opportunities for economic growth and also worsen the health of the
poor.

Another set of viable policies involve targeted poverty programs to increase the
capabilities and human and social capital of the poor. An important example centers on helping
the poor develop their microenterprises, on which a large fraction of the nonagricultural poor
depends for their survival. It has been found that credit is the binding constraint for many of
these tiny firms. By building up the working capital and other assets of microenterprises, the
poor can improve their productivity and incomes. In addition, relatively new approaches to
attacking poverty focus on an integrated approach to achieving higher incomes together with
improved education, health, and nutrition among the poor, notably, conditional cash transfer
(CCT) programs that transfer incomes to poor families conditional on behaviors such as
keeping their children in school.

While providing a focus on ending extreme poverty and mitigating harmful inequality,
such policies can be designed to encourage and accelerate inclusive economic growth
targeted at the poor, while keeping in mind the inherently multidimensional nature of poverty.
Key examples include growth-supporting investments in education, nutrition, health, and
infrastructure that raise the incomes of those in the bottom deciles of the income distribution.
Chapters 2 through 4 of the book by Todaro & Smith (12thEd) considered the sources of
economic growth and basic policies to identify constraints and maintain growth that benefit
people living in poverty. Additional supporting trade, macro, and financial policies are
examined in more detail in Chapters 13 through 15. But when it is not inclusive, growth by itself
is insufficient to eliminate extreme poverty, at least in any time frame that a nation—let alone
people living in poverty—will find acceptable. So, encouragement of inclusive growth goes
hand in hand with active policies and programs to reduce poverty and to prevent nonpoor
people from falling into poverty. Though the task of ending extreme poverty will be difficult, it
is possible, if we can only muster the will. As noted by James Speth, the executive director of
the United Nations Development Programme, “Poverty is no longer inevitable. The world has
the material and natural resources, the know-how and the people to make a poverty-free
world a reality in less than a generation. This is not woolly idealism but a practical and
achievable goal.

3C’s of Population Growth and Economic Development

The discussion examines how the population situation in many developing countries
affects their chances of becoming more economically developed, and conversely, how
economic development affects population growth. The 3C’s refers to causes, consequences
and controversies of population growth.

The first part of the lesson explores historical and recent population trends and the
changing geographic distribution of the world's people. Interesting statistics include world
population data, distribution by region, and fertility and mortality rates. Key concepts of
population growth include dependency burden or the population structure, hidden momentum
of population growth and demographic transition.

Population Structure

The structure of world’s population is very unevenly distributed by geographic region,

by fertility and mortality levels, and by age structures.

Geographic region. More than three-quarters of the world’s people live in developing
countries; fewer than one person in four lives in an economically developed nation.

The world's human population now exceeds 7.5 billion as of mid-2019 about
59.64 percent of the global population was living in Asia, but all those people are not
distributed evenly over the available land. It is considered as the small circle in Asia
contains more than half the world's population. More people live inside a circle
comprising 21 nations — including China, India and Southeast Asian countries — than
those who live outside it. Not only does the circle account for just a sixth of the world's
landmass including Mongolia, one of the most sparsely populated countries in the
world, but it is also mostly covered in water. Fewer humans live in deserts than along
coastlines, and more people live in cities than in rural areas. Now you get the ideas.

Global population

Due to medical advances, better living conditions and the increase of

agricultural productivity, the world population is expected to grow. Mortality rates are
decreasing and the median age of the world population increased over the last few
years from 24 years in 1995 to 29.6 years in 2015.

According to the United Nations Department of Economic and Social Affairs, 7.38
billion people were counted in 2015. The number of people is estimated to grow steadily
and in 2100, the global population is estimated to be approximately at 10.87 billion
people.
 The countries with the highest population growth rate in 2017 were mostly
African countries. Compared to the previous year, the South Sudan's population grew
by about 3.83 percent in 2017. While, Asia is the most populous continent on earth.
China was the country with the largest population. In mid-2018, about 1.39 billion people
lived in China.

Fertility and mortality levels. The rate of population increase is quantitatively measured
as the percentage yearly net relative increase (or decrease, in which case it is
negative) in population size due to natural increase and net international migration.
Natural increase simply measures the excess of births over deaths or, in more
technical terms, the difference between fertility and mortality. Fertility Rate is the
average number of children a hypothetical cohort of women would have at the end of
their reproductive period if they were subject during their whole lives to the fertility
rates of a given period and if they were not subject to mortality. Net international
migration is the excess of persons migrating into a country over those who emigrate
from that country. Crude birth rate is the number of children born alive each
year per 1,000 population (often shortened to birth rate). Death rate refers to the
number of deaths each year per 1,000 population, while Total fertility rate (TFR) is the
average number of children that would be born alive to a woman (or group of women)
during her lifetime if she were to pass through her childbearing years conforming to
the age specific fertility rates of a given time period.

Age Structure and Dependency Burdens . Population is relatively youthful in the

developing world. As of 2011, children under the age of 15 constitute more than 40% of
the total population of the low-income countries, 32% of the lower-middle income
countries, but just 17% of high-income countries. In countries with such an age
structure, the youth dependency ratio—the proportion of youths (under age 15) to
economically active adults (ages 15 to 64)—is very high. Thus, the workforce in
developing countries must support almost twice as many children as it does in the
wealthier countries. In general, the more rapid the population growth rate is, the
greater the proportion of dependent children in the total population and the more
difficult it is for people who are working to support those who are not. This
phenomenon of youth dependency also leads to an important concept, the hidden
momentum of population growth.

Dependency Ratio
There are three types of age dependency ratio: Youth, Elderly, and Total. All three ratios
are commonly multiplied by 100.

Youth Dependency Ratio

Definition: population ages 0-15 divided by the population ages 16-64.
Formula: ([Population ages 0-15] ÷ [Population ages 16-64]) × 100

Elderly dependency ratio

Definition: population ages 65-plus divided by the population ages 16-64.
Formula: ([Population ages 65-plus] ÷ [Population ages 16-64]) × 100

Total dependency ratio

Definition: sum of the youth and old-age ratios.
Formula: (([Population ages 0-15] + [Population ages 65-plus]) ÷ [Population ages 16-
64]) × 100

NOTE: Dependency Ratio does not take into account labor force participation rates by
age group. Some portion of the population counted as "working age" may actually be
unemployed or not in the labor force whereas some portion of the "dependent"
population may be employed and not necessarily economically dependent.
 The trends of growth in a nation are partially defined by the age distribution of its
population. Different age classes have specific effects on both the climate and the
demands of facilities. The population age structure is also useful for assessing the
allocation of resources and for formulating specific strategy and planning priorities
with regard to infrastructure and growth. The first graph is the Asian population
structure and the other graphical presentation are the based on PSA data related to
population structure and dependency burden of the country.

Asian Population Pyramid as of 2019

Based on the population pyramid above, Asia is a relatively young place for now. The
current population in Asia is 4, 601, 371, 266 and is equivalent to 59.765 of the total world
population. Asian countries have the fastest rise in old-age dependency ratio. India, the
Philippines, Malaysia and Indonesia have a low dependency ratio that will not change much
over the next 20 years. Among the big Asian economies, only Japan has an old-age
dependency ratio above the G7 average. But that's changing fast. Although a growing
population of working and fairly low dependent youths and elderly people would be expected in
many ASEAN countries over the next two to three decades, whether or not the nation will turn
this dividend into true GDP growth is primarily a matter for public policy. The health, education
and social welfare systems may face major demographic growth challenges without the
appropriate policy framework and that lead in unemployment and inequality. The rapid pace of
ageing makes it necessary for politicians to tackle the problems, but some administrations are
doing more than others.

Implications of Higher Dependency Ratio

Lower Tax Revenues. Retired people pay lower income tax. Therefore, the working age
population has a greater responsibility to pay tax.
 Higher Government Spending. The government is committed to paying a state pension
and related benefits such as a minimum income guarantee. There are also greater demands
for indirect spending on retired people. People over 65 are more likely to require treatment by
the NHS. Therefore, there are greater demands placed on government spending by a rise in the
dependency ratio.

Potential higher taxes. The pressures on government finances could lead to higher tax
rates on a declining working population, which could create disincentives to work and reduce
disposable income. The government may be forced to use collect more revenue from indirect
taxes or wealth taxes.
Lower Pension Funds. Because of the rising % of retired people, pension funds are
having to stretch further than before. Many pension funds haven’t planned for the rapid rise in
the dependency ratio. Combined with the credit crisis and low interest rates, the average
income retired people can expect has fallen.

Pressure to raise the retirement age. Because of the increased cost of pensions, there
is pressure to raise the retirement age in both the private sector and public sector. Tesco’s
recently announced it will be the first private firm in the UK to raise its pension age to 67. This
is an attempt to reign in the costs and meet the pension shortfall they currently have. Raising
the state pension age means people will have to work longer than before.

Inequality. Raising the state pension age will have different effects. Some people with a
substantial private pension will not be really affected. They can still choose to retire when they
want. However, others with no or minimal state pension will have to work longer.

Competitiveness. If an economy experiences a faster rise in dependency ratio that

global average, it could affect its international competitiveness. With a smaller pool of workers
and greater tax burden, productivity may be lower and this will lead to a decline in
competitiveness.

Labor Market Implications

A higher dependency ratio could lead to labor shortages as firms struggle to recruit
sufficient numbers of workers. Firms may have to respond by encouraging older workers to
stay in work for longer. There may be an increase in ‘semi-retirement’ – where older workers
stay in work part-time to supplement smaller pensions.

The impact of an ageing population may be offset by the growth of automation – which
increases net productivity.

Economic Implications

A higher dependency ratio is likely to reduce productivity growth. A growth in

the non-productive population will diminish productive capacity and could lead to a
lower long-run trend rate of economic growth. If the government fails to tackle issues
relating to a higher dependency ratio, there could be increased pressures placed on
government finances, leading to higher borrowing or higher taxes which also reduce
economic growth.

Since 2008, UK productivity has stagnated – falling well behind its previous
trend rate. There are many other factors at work, but changes in demographics could
be one factor.

Social Implications

A greater portion of the population will be unemployed. They should be more

politically engaged, too. This may take different perceptions as to how we think about
people, for example should somebody's house pay for their health services? What do
we think? Is it the government's duty to look after the elderly or does private charity
and family play a bigger part?

Philippine Population Pyramid

As we can see, the population pyramid of the Philippines is expanding.

Population pyramid is a graphic depiction of the age structure of the population, with
age cohorts plotted on the vertical axis and either population shares or numbers of
males and females in each cohort on the horizontal axis. Such a pyramid is common in
high birth and death rates in developing countries. A population age distribution model
is also defined as relatively short life expectancy, as well as low level of education and
poor health care. Information is included by sex and age group as follows: 0-14 years
(children), 15-24 years (early working age), 25-54 years (prime working age), 55-64
years (mature working age), 65 years and over (elderly). Age structure: 0-14 years:
32.42% (male 18,060,976 / female 17,331,781) ; 15-24 years: 19.16% (male 10,680,325 /
female 10,243,047) ; 25-54 years: 37.37% (male 20,777,741 / female 20,027,153) ; 55-64
years: 6.18% (male 3,116,485 / female 3,633,301) ; 65 years and over: 4.86% (male
2,155,840 / female 3,154,166). Around half the country’s population are living in the urban
particularly; 13.923 million living MANILA the country capital followed by 1.825Mn living
in Davao, Cebu city has 980k population while Zamboanga has 917k, on the other hand
Antipolo has a total population of 881k and Cagayan de Oro City 753k overall
population. Sex ratio is 102 males for every 100 females. Sex ratio entry includes the
number of males for each female in five age groups - at birth, under 15 years, 15-64
years, 65 years and over, and for the total population. Sex ratio at birth has recently
emerged as an indicator of certain kinds of sex discrimination in some countries. For
instance, high sex ratios at birth in some Asian countries are now attributed to sex-
selective abortion and infanticide due to a strong preference for sons. This will affect
future marriage patterns and fertility patterns. Eventually, it could cause unrest among
young adult males who are unable to find partners.

The age structure of a population affects a nation's key socioeconomic issues.

Countries with young populations (high percentage under age 15) need to invest more in
schools, while countries with older populations (high percentage ages 65 and over)
need to invest more in the health sector. The age structure can also be used to help
predict potential political issues. For example, the rapid growth of a young adult
population unable to find employment can lead to unrest.
 As the same socioeconomic and demographic factors resulting in population
ageing pose a potential economic danger, that numbers of elderly people will put a
heavy burden on the country's resources. Population aging is not a bad thing; it means
that the Philippines have been able to overcome problems such as employment, health,
and education. As a result of the demographic shift, the problems and opportunities
are in government policy making and decisions that have a direct impact on income tax,
health insurance premium and pension contributions.

That in effect will impact the sustainability of publicly funded facilities by means
of increased subsidies to medical expenses for older people. In fact, the elderly
continues to suffer more severe medical problems on average. Aging, on the other
hand, and increasing life expectancy can lead to higher economies and investments and
to faster economic growth and a better standard of living. These improvements can
occur in the material welfare measures, which are known as demographic dividends.
Such potential growth are not inevitable and it is still important for people to work to
achieve them that sensitive and efficient policies must be introduced to open up such
opportunities. The demographic dividends produced by the population shift brought
about by a decrease in fertility rates emphasize the importance of supporting families
in achieving their desired level of fertility. Nevertheless, an unequal decrease in fertility
levels in various populations may worsen inequality.

In 2018, the Philippine labor market is in a steady state managing to keep the
unemployment rate at 5.3%, which significantly decreased from the 5.7% recorded over
the same period last year, and is still within the target of the Philippine Development
Plan set at 4.7%-5.3%. The 2018 Labor Force Survey annual estimates shows that the
country’s total labor force improved to 43.461 million from 42.775 million over the same
period. However, a decrease in the labor force participation rate from 61.2% in 2017 to
60.9% in 2018 was observed. This ¬is may be attributed to the lower labor force of youth
and women. Decent gains were also observed. Unemployment rate decreased by 0.4
percentage points (-140,000) from 5.7% in 2017 to 5.3% in 2018. Moreover, the youth
unemployment continues to improve as it decreased by 1.0 percentage point year-on-
year (from 13.4% in 2017 to 14.4% in 2018). On the other hand, underemployment rate
slightly increased to 16.4% compared to 16.1% underemployment rate recorded in the
previous year.

The country’s situation on Population Growth according to PSA

For many years, the Philippine population has grown steadily. It is the 13th most
populous country in the world, from Mexico to Ethiopia, and between 2010 and 2015 it
grew by 1.72 percent. According to the latest UN projections, the population for 2020 is
109.58 million. For the country’s Development Plan through NEDA, the national target
for the fertility rate is 2.1 children per woman. The current fertility rate of the country
was 2.53 children per woman. Fertility rate of Philippines was declining at a
moderating rate to shrink from 6.26 children per woman in 1970 over the last 50 years.

The population growth in the Philippines has been moderated for more than two
decades and is expected to increase by 1.52 per cent in the last half of the decade. This
is slower than the 1.73 per cent increase between 2010 and 2015 citing the Philippine
Statistics Authority (PSA).

The Philippine Statistics Authority (PSA) projects the population in July 2020 to
be 108.7 million Filipinos, which is lower than its earlier estimate of 109.9 million, or a
difference of 1.2 million while the expected increase in population between 2019 and
2020 is about 1,483,828, or an annual increase of 1.38%. The younger population is
declining and the net population growth of the country has been mitigated. The
proportion of Philippines aged 0 to 4 is expected to drop by 10,12% this year, down from
11% a decade ago, while the age group 0-14 will drop by 4% from 34% to 30,14%. The
Filipinos are predicted to hit 70.3 million in their working age—15-64 years— or more
than two-thirds of the population, out of 62 percent by 2010. It is estimated at 9.69
million this year, or 8.8% of the population, for the Filipinos aged 60 years and over a
growth rate of more than 4% between 2015 and 2020 and are growing at a faster rate
than other age groups. It was also reported (PSA) that at the beginning of the new
decade almost two out of five Philippines-or 38.7 percent, with almost half of the
population growth between 2019 and 2020, will reside in the mega region of the central
Luzon, the national capital area and the Calabarzon. On the other hand, most of the
Visayas and Mindanao towns are projected to rise below the average of 1.52%.

Reported deaths in 2017 reached 579,237, a decrease of 0.5 percent than the
previous year’s 582,183 deaths. This is equivalent to a crude death rate (CDR) of 5.5, or
about six (6) persons per thousand population. In 2017, an average of 1,587 persons died
daily. This translates to 66 deaths per hour or one (1) per minute. The number of deaths
from 2008 to 2016 showed an increasing trend but slightly declined in 2017. The increase
during the ten-year period is about a quarter, or 25.5 percent, from 461,581 in 2008 to
579,237 in 2017. The top three regions in terms of number of deaths by usual residence
were found in Luzon: CALABARZON with 84,971 or 14.7 percent, followed by NCR with
75,187 or 13.0 percent then Central Luzon with 67,980 or 11.7 percent. The combined
share of these three regions was 39.4 percent of the total deaths. On the other hand,
the three regions which had the least number of deaths were ARMM (3,036 or 0.5%),
CAR (8,176 or 1.4%) and Caraga (14,928 or 2.6%). These numbers accounted for only 4.5
percent of the total deaths in the country. In 2017, the number of deaths in males
(332,517) was higher than deaths in females (246,720). This translates to a sex ratio of
135, which means that there are 135 male deaths for every 100 female deaths. It reflects
an inverted pyramid, with fewer deaths at the younger ages, except for children under
one, and progressively increasing as people age. As in most parts of the world, males
are more likely to die before females at all ages. In the Philippines, it is clearly shown
that males died at a higher rate than females before reaching the age of 80 years, with
the greatest difference observed at ages 60 to 64 years (15,362 deaths). Higher
proportions of female deaths were observed in the older age groups, which is indicative
of higher survival rate of females than males. In addition, most death are not attended
by a medical doctor or any other allied health care provider who provided medical
attendance to the deceased.

While infant deaths are deaths that occurred before reaching age 1. At the
national level, 20,311 infant deaths were registered in 2017. Six out of ten deaths were
males (11,760 or 57.9%). The top three regions that registered high infant deaths were
CALABARZON with 3,546 (17.5%), NCR with 3,357 (16.5%) and Central Luzon with 2,314.
Moreover, maternal death is the death of a woman while pregnant or within 42 days of
termination of pregnancy, irrespective of the duration and site of the pregnancy, from
any cause related to or aggravated by the pregnancy or its management but not from
accidental or incidental causes. In 2017, there were 1,484 registered maternal deaths in
the country. Among all regions, CALABARZON recorded the biggest number of maternal
deaths with 222 or 15.0 percent of the total, followed by NCR with 195 or 13.1 percent,
and Central Visayas with 164 or 11.1 percent. On the other hand, CAR recorded the least
number of maternal deaths with only 13 or 0.9 percent of the total.

Most leading causes of deaths are ischaemic heart diseases with 84,120 or 14.5
percent. Second were neoplasms which are commonly known as “cancer” with 64,125
or 11.1 percent, followed by cerebrovascular diseases with 59,774 or 10.3 percent.
Among males, ischaemic heart diseases were also the leading causes of death with
50,503 or 15.2 percent followed by cerebrovascular diseases (33,610 or 10.1%) and
neoplasms (30,800 or 9.3%). It was also observed that assault was included in the 10
leading causes of death with 10,866 or 3.3 percent of the total deaths in males. On the
other hand, similar to males, the top cause of death among females was also ischaemic
heart disease (33,617 or 13.6%), followed by neoplasm with 33,325 or 13.5 percent and
pneumonia with 28,835 or 11.7 percent of the total deaths in females.

The total fertility rate (TFR), a demographic indicator that estimates the average
number of live children that a woman would have over her childbearing years of age
15-49 based on current birth trends. The United Nations estimates of 7,42 live births
per woman per TFR in the period 1950-1955, more than the South Eastern Asian
average of 5,93 live births per woman in the Philippines. Although in the 2010-2015
period the Philippines managed to reduce TFRs by 58,9 percent to 3,05 live births per
woman, this is also more than the global average of 2,35 per woman, because other
countries witnessed more rapid decelerations in their TFRs in those decades.
Assuming a normal boy-girl sex ratio and low levels of mortality, the Philippines TFR
has also surpassed the 2.1 birth rate per woman replacement, i.e. the rate at which
female births give birth to babies sufficient to sustain population growth.

We should note that the Community of Southeast Asian Nations still has one of
our country's highest population growth rates. The country should not be complacent
for unabating issues remain, including scarce resources along with climate change, the
migration of citizens from provinces to urban areas and the increasing population of
adolescent and teen pregnancies around the country.

The hidden momentum of population growth.

Hidden population growth is the phenomenon whereby population continues to

increase even after a fall in birth rates because the existing large youthful population
expands the population base of potential parent. We can observe that in the previous
presentation of the country’s population pyramid above. The basic reason is that
population growth cannot be curbed by the use of overnight measures to control and
explain why the youth population exists as a population base of potential parents. It is
important in the Malthusian model as it reduces economic growth, increases poverty
and inequality, reduces education for young people because of their parents' lower
incomes. Low population health and food, degradation of the environment as a result of
housing demand, agriculture, soil erosion, decline in animal stocks, international
migration for work and education are problems to be studied from the Malthusian point
of view.

Population momentum is the tendency for changes in population growth rates to

lag behind changes in childbearing behavior and mortality conditions. Momentum
operates through the population age distribution. A population that has been growing
rapidly for a long time, for example, acquires a young age distribution that will result in
positive population growth rates for many decades even if childbearing behavior and
mortality conditions imply zero population growth in the very long run. Population
momentum is important because of the magnitude and duration of its effects.
 Some decline in numbers in these age groups might be advantageous, but such
extreme declines would be problematic. Any sustained fertility decline will yield an age
distribution with a larger proportion of old persons relative to those at working ages,
but the momentum effect–although ultimately transient–will greatly accentuate this
dependency burden for a period of many decades.
Reasons for hidden momentum:
1. the tendency of population to grow after the decline in death rates; caused by
many reasons;
2. birth rates don't change overnight
3. Rapid population growth leads to lots of young people who tend procreate
4. Population generally takes a couple of generations to stabilize

Implications:
-overpopulation, leading to spreading of resources thin, more unemployment,
more disease, worse living conditions

The demographic transition.

The phasing-out process of population growth rates from a virtually stagnant

growth stage, characterized by high birth rates and death rates through a rapid-growth
stage with high birth rates and low death rates to a stable, low-growth stage in which
both birth and death rates are low.

The demographic transition attempts to explain why all contemporary developed

nations have more or less passed through the same three stages of modern population
history.

Stage 1. Before their economic modernization, these countries for centuries had
stable or very slow- growing populations as a result of a combination of high birth
rates and almost equally high death rates.

Stage 2. It began when modernization, associated with better public health

methods, healthier diets, higher incomes, and other improvements led to a marked
reduction in mortality that gradually raised life expectancy from under 40 years to over
60 years. However, the decline in death rates was not immediately accompanied by a
decline in fertility. As a result, the growing divergence between high birth rates and
falling death rates led to sharp increases in population growth compared to past
centuries. Thus, marks the beginning of the demographic transition (the transition from
stable or slow-growing populations first to rapidly increasing numbers and then to
declining rates).
 Stage 3. Finally, was entered when the forces and influences of modernization
and development caused the beginning of a decline in fertility; eventually, falling birth
rates converged with lower death rates, leaving little or no population growth.

This process implies movement from a relatively high number of births per
woman to a population replacement fertility level that can be calculated to reach about
2.05 to 2.1 births per woman when nearly all women survive to the mean age of
childbearing, as they do in developed countries. In developing countries with much
lower survival rates, replacement fertility can be well over 3 births per woman. While
our country is targeting 2 birth rate per woman with the implementation of
Reproductive Health (RH) Law.

A demographic transition as a change from a situation of high fertility and high

mortality rates to one of low fertility and low mortality was defined by United Nations (UN). A
country undergoing a demographic transition experiences sizeable changes in the age
distribution of its population. Such developments, along with suitable policies, have a impact on
economic development. The “demographic sweet spot,” according to the transition model, is the
point at which the birth rate begins to decline and the rate of population growth begins to slow,
while the majority of the population is of working age.

Cause: The Philippine UNFPA study noted that the country's population growth rate,
although fertility levels have gradually declined, has so far struggled to achieve a demographic
change comparable to those in most neighboring countries in South-East and East Asia. At a
fertility rate of 3 in 2013, the Philippines tied Laos with the Association of South-East Asian
Nations and South Korea for the highest fertility rate. The lowest fertility rate was 1.2 in
Singapore and South Korea. Because of this slow decline, the Philippines will be unable to
make full use of the demographic dividend and the demographic potential for this country is
rapidly decreasing. According to Socioeconomic Planning Secretary Ernesto Pernia, the
conclusion of the report contradicted claims, most notably by the banking giant HSBC, that the
Philippines is expected to move towards the 16th largest economy in the world by 2050. That is
an erroneous projection or misconception of what demographic sweet spot is. (Source: the
manila times, business, PH to miss demographic ‘sweet spot’ – study, July 08, 2016).
Businessmen are talking about the 'demographic sweet spot' we already have, therefore we
should not be worried about a fast-growing, young, dependent people, because this would lead
to faster economic growth that would overcome Thailand and be closely comparable to Russia
by 2050. It was assumed that's about three years after the HSBC projection citing its
economist forecasts for the Philippine economy in 2012, and again in 2014 as the “demographic
sweet spot” or demographic opportunity window.

Controversy: Teenage pregnancy

In the study, the high rate of teen pregnancy is one particular obstacle for the
Philippines, reflecting data that has given birth to girls aged 15 to 19 years, approximately 1 in
10. In all countries with available data, excluding the Philippines, adolescent levels of fertility
as shown in a separate UNFPA studies in the Asia-Pacific region have declined. Other data
also reveals that one of three Filipino youth has engaged in early sex and 78 percent of first
sexual engagement was unprotected against the risk of pregnancy and sexually transmitted
infections.

Nonetheless, ensuring access to quality education and health services for teenagers to
prepare them for their entry into work is a priority to achieve a demographic dividend, the
report suggests that the Philippines can still benefit from its large population of young people.
Adolescent girls currently make up 10 percent of the Philippines’ 100 million population. They
hold enormous opportunity to transform the future of the Philippines, but this can only happen
if they have the right information and skills, are healthy, and empowered to make informed
decisions in life, said Klaus Beck, country representative of UNFPA.

The study also emphasized that full implementation of the Responsible Parenthood and
Reproductive Health Law would play a critical role by helping Filipinos realize their wish for
smaller families, which is needed if a demographic dividend is to be realized. With the right
policies and investments in human capital, countries can empower young people to drive
economic and social development and boost per-capita incomes.

Constraint: Investment on Youth

The critical youth investment necessary to reap a population dividend includes the
protection of rights including reproduction rights, improving health, including sexual and
reproductive health and building young people's capabilities and agencies by providing skills
and knowledge. Such changes can also intensify fertility declines, thereby speeding up
demographic transition. These require the appropriate government policies, particularly in the
labor market. The transition from school to the labor force has important consequences for the
human well- economic growth. As our experience in the country, the first to enter the labor
market - the young adults - experience challenges associated with high unemployment and
low average income. The highest demographic dividend can be achieved only when the
employment opportunities for young adults improved from the current situation.
The country situation underscored the importance of implementing the Responsible
Parenthood and Reproductive Health Law to advance the demographic transition. The RPRH
law is essentially a voluntary policy of informed choice about which specific contraceptive to
use, or how many children to have. the law has limitations because of the temporary
restraining orders issued by the Supreme Court addressed to the Department of Health and
Food and Drug Administration (FDA), which restrained them from “(1) granting any and all
pending applications for registration and/or recertification for reproductive products and
supplies including contraceptive drugs and devices; and (2) procuring, selling, distributing,
dispensing or administering, advertising and promoting the hormonal contraceptive ”Implanon”
and “Implanon NXT. In terms of investment, Pernia said the government should invest in the
quality of basic education, like sexuality education. The problem with sexuality education is it’s
a turn off for religious societies, like the Philippines, but I believe there is nothing ungodly
about it. In fact, it’s very godly, because I think God does not want couples to have more
children than they can afford.

What Is Demographic Dividend?

Demographic dividend refers to the growth in an economy that is the result of a change
in the age structure of a country’s population. The change in age structure is typically brought
on by a decline in fertility and mortality rates.

Understanding Demographic Dividend

While most countries have seen an improvement in child survival rates, birth rates
remain high in many of them, particularly in lesser developed countries. These countries,
therefore, rarely enjoy an economic benefit known as the demographic dividend.

There are four main areas/types where a country can find demographic dividends:
1. Savings—During the demographic period, personal savings grow and can be used to
stimulate the economy.
2. Labor supply—More workers are added to the labor force, including more women.
3. Human capital—With fewer births, parents are able to allocate more resources per
child, leading to better educational and health outcomes.
4. Economic growth—GDP per capita is increased due to a decrease in the dependency
ratio.

The causes of high fertility in LDCs are explained using the Malthusian and Household
models.
• The Malthusian Population Trap model suggests the population will be forced to live at
the subsistence level of income as population growth outstrips growth in the supply of
food. The solution is to implement birth control measures. Criticisms are offered and
include the failure to take technological progress into account and the failure to
account for the microeconomics of family-size decision making.
 • The Microeconomic Theory of Fertility attempts to explain the falling birthrates
associated with stage III of the demographic transition. It is suggested that people
choose how many children to "consume" as part of their utility maximization problem.
Budget constraint indifference curve analysis is presented. Children in LDCs can be
thought of as investment goods. Reasons are offered for why families in LDCs are
having more children, such as the lower opportunity cost of time and a lack of job and
education opportunities for women.

The debate over whether rapid population growth is a genuine problem or constraint in
achieving economic development is discussed.
• Arguments for why population growth is not a problem include identifying population
growth as merely a symptom of widespread poverty and a lack of alternatives for
women, identifying population distribution as the real issue, and identifying benefits that
come with having a larger population such as a larger domestic market for consumer
goods.
• Arguments for why population growth is a problem include reduced family savings
rates, government difficulties in providing basic services to a growing population, and
the need for more rapid growth in GDP to keep up with population growth and maintain
living standards. Population growth as a cause and consequence of underdevelopment
is discussed. Empirical evidence suggests seven negative consequences of population
growth.
• Recent consensus between the two sides is discussed in terms of agreement that
population growth is not the primary cause of low levels of living, agreement that rapid
population growth makes development more difficult to achieve and sustain, and
agreement that many problems can be attributed to population density.

Policy approaches include eliminating absolute poverty, reducing income inequality,

expanding education opportunities for women, providing more job opportunities, and improving
access to health care and clean water. Family planning programs for some developing
countries are presented. It is suggested that the developed countries try to simplify lifestyles
and consumption habits to conserve world resources.

KEY ISSUES: POPULATION GROWTH AND LIFE QUALITY

The world population in 2009 is estimated at 6.8 billion people. The UN projects the
population will reach more than 9.2 billion by 2050.

The world's population is increasing by more than 75 million people each year. Almost all
of this net population increase is -97% - occurs in developing countries.

The really important question regarding population growth is as follows:

• How can the contemporary population situation in many developing countries support
or otherwise hinder their opportunities to realize development goals, not only for the
present generation but also for future generations?
• What is the impact of development on population growth?

Some of the major issues relating to the basic questions are as follows:

• Will developing countries be able to improve the standard of living of their population
with their current population growth rates and projections for the future?
• How can developing countries cope with the rapid increase in the number of workers in
the coming decades? Will there be many employment opportunities or will the
unemployment rate soar?
• What are the implications of a higher level of growth for the opportunities of the world's
poor to overcome the suffering they experience in absolute poverty? Will world food
supply and distribution not only meet the needs of the population that is expected to
increase more in the coming decade but also improve the level of nutrient intake
according to the level needed by humans?
 • Will developing countries be able to expand the scope and improve the quality of their
health and education service systems so that everyone can have access to health and
basic education services?
• Is there a relationship between poverty and the number of family members?
• Are persistent efforts to increase prosperity among the rich have damaged the global
environment more and hurt the living standards of the poor compared to the absolute
increase in the number of poor people?

POPULATION GROWTH: IN THE PAST, THE TIME AND THE FUTURE

HISTORY OF THE WORLD POPULATION GROWTH

The current population of the world is almost 7 billion people. In the past, there were
not many people. When people first cultivated land to grow crops around 12,000 years ago,
the estimated population of the world was no more than 5 million people.

For almost the entire period of existence of mankind on earth until about 300 years ago,
population growth per year was not far from zero (0.02% or 20 people per million). Of course,
this overall growth rate is unstable; a lot of increases and decreases due to natural disasters
and various levels of growth in various regions.

Now, the rate of growth of the world population still shows a high increase in the
course of history, which is 1.1% even though the pace is slowing down.

Now it only takes about 58 years or 2 generations to double the world population.
Moreover, if in the period from the first year of the year to the onset of the world industrial
revolution it took 1,750 years to increase the world population by 480 million people, now the
same additional number of people only takes less than 7 years.

Sudden changes in the overall trend of population growth caused by the ups and downs
of the population are strongly influenced by a combination of kelaperan events, diseases, lack
of nutrition, epidemics, etc. (which results in high and fluctuating mortality rates). In the 20th
century, these conditions could be controlled by technology and economics so that human
morality now reached its lowest point in the history of human existence.

WORLD POPULATION STRUCTURE

Year World Population Yearly Net Density Urban Urban

Change Change (P/Km²) Pop Pop %
2020 7,794,798,739 1.05 % 81,330,639 52 4,378,993,944 56 %
2019 7,713,468,100 1.08 % 82,377,060 52 4,299,438,618 56 %
2018 7,631,091,040 1.10 % 83,232,115 51 4,219,817,318 55 %
2017 7,547,858,925 1.12 % 83,836,876 51 4,140,188,594 55 %
2016 7,464,022,049 1.14 % 84,224,910 50 4,060,652,683 54 %
2015 7,379,797,139 1.16 % 84,506,374 50 3,981,497,663 54 %
2014 7,295,290,765 1.17 % 84,708,789 49 3,902,831,934 53 %
2013 7,210,581,976 1.19 % 84,753,917 48 3,824,990,329 53 %
2012 7,125,828,059 1.20 % 84,633,758 48 3,747,842,586 53 %
2011 7,041,194,301 1.21 % 84,370,698 47 3,671,423,872 52 %
2010 6,956,823,603 1.22 % 84,056,510 47 3,594,868,146 52 %
2009 6,872,767,093 1.23 % 83,678,407 46 3,516,830,263 51 %
2008 6,789,088,686 1.24 % 83,142,076 46 3,439,719,128 51 %
2007 6,705,946,610 1.24 % 82,428,777 45 3,363,609,560 50 %
 The distribution of the world's population is very uneven according to geographical
area, fertility and mortality, and age structure.

FERTILITY AND MORTALITY TRENDS

Quantitatively, the rate of population increase is measured as the percentage increase

(reduction) relative to the net population per year due to natural increase and net national
migration.

Population growth in developing countries depends almost entirely on the difference

between crude birth rates and mortality rates.
➢ Natural increase: the difference between the birth rate and the death rate in a given
time
➢ Net International Migration: Difference between people who immigrate into a
country and people who immigrate from a particular country
➢ Rough birth rate: The number of children born alive each year per 1000 inhabitants
➢ Death rate: The number of deaths per year per 1000 inhabitants

Demographic Transition of the world

The demographic transition is a gradual process of decreasing the rate of population

growth. The demographic transition tries to explain why all developed countries now go
through the three stages of the history of modern population which are more or less the
same. From the first stage, the growth stage is almost stagnant, which is characterized by high
birth and death rates. Then it continues in the second stage, where population growth is rapid
with high birth rates and low mortality rates due to better public health services, healthier
food, higher income and other improvements. In the second stage this marks the beginning of
the demographic transition (the transition from stable or slow population to rapid population
growth, then decreased). Finally, entering the third stage where the State enters a stage of low
and stable growth where birth and death rates are low.
 Patterns of Population Growth in LDCs

Birth rates in developing countries generally tend to be high when compared to

developed countries. This is because women in developing countries tend to marry at a young
age. As a result, more families have a longer fertile age. In the 1950s and 1960s, the second
stage of the demographic transition has occurred in almost all developing countries. The
application of technology and the development of public health contribute to a decrease in the
mortality rate. The second stage is characterized by a population growth rate of more than 2%
per year in most developing countries.

The 2 patterns of demographic transition in developing countries could be illustrated in

this way; In the case of A (referring to a countries population growth experience), the
application of technology and health services to modern society together with an increase in
standard of living is rapid and evenly distributed, resulting in a decrease in the death rate to
only 10 per 1,000 population and the birth rate also decreases. Some of the countries in case A
are examples of Taiwan, Costa Rica, Cuba, Chile and Sri Lanka.

However, in some developing countries there are those who experience case B. After
experiencing a period of rapid mortality, the death rate cannot go down any further. Most occur
because the country continues to experience absolute poverty, low living standards and
consequences of AIDS. Countries in this case cover many countries in sub-Saharan Africa and
the Middle East, still in stage 2 of their demographic transition. Even though fertility tends to
decline, birth rates still remain very high in these countries.

Therefore, the question arises. When and under what conditions are developing
countries more likely to experience a slower decline in birth rates and population growth?

To answer this question, we will refer to the Malthusian Population Trap model and the
temporary and highly influential neoclassical microeconomic model, namely the theory of
household fertility.

CAUSES OF HIGH FERTILITY IN DEVELOPING COUNTRIES: MALTHUS AND HOUSEHOLD MODELS

Malthus's population trap is the anticipated threshold level by Thomas Malthus (1766 -
1834) where population growth will stop on its own when life support resources (which are
calculated according to a countdown) will not be sufficient to meet human needs whose
numbers increase according to the geometry. Malthus stated that a population explosion would
lead to a subsystem. The basic model that summarizes Malthus's ideas can be obtained by
comparing the shape and position of the curves, each of which represents the rate of
population growth and the growth rate of aggregate income and these two curves are related
to the level of income per capita.

According to supporters of the neo Malthus school of thought, poor nations will never
succeed in achieving a higher level of per capita income than the subsystem level unless they
declare preventive checks (birth control) to reduce their population growth rate. If this is not
done immediately then the model Malthus's positive balance of hunger, disease outbreaks,
war, natural disasters that will appear as the main factors inhibiting population growth.
Countries or regions that feel in the trap of population can actually also come out through
efforts to achieve technological progress that can increase per capita income. In addition, the
country or region can also make changes in economic and cultural institutions ("social
progress") which can reduce population growth rates.

Criticism of the Malthus Model

The model of the Malthus population trap is a simple and interesting theory regarding
the relationship between population growth and economic development. Unfortunately, the
model is based on a number of assumptions that are apparently exceeded simplistic
(oversimplifying the problem) and the hypothesis proposed is also not proven empirically. We
can criticize this model on the following reason that;
 1. Malthus’s Theory does not take into account the role and important effects of
technological process.
2. The theory is based on a hypothesis regarding macro relations (large scale)
between the level of population growth and the level of income per capita which
apparently cannot be proven empirically.

3. The theory is too dependent on economic variables which turned out to be wrong,
namely the level of income per capita, as the main determinant of population
growth. a far more valid approach in order to answer questions about population
and development efforts prioritizing macroeconomic aspects

Microeconomic Theory of Household Fertility

This theory adopts the theory of conventional consumer behavior. Children are
considered as consumer goods (not profitable). Demand for children is a rational economic
choice for consumers. The choice sacrifices other options. The desire to have children is
influenced by income, child prices (living costs) and the desire to consume other goods
(substitution effects and income).

1. Demand for children is positively related to income

2. Demand for children is negatively related to the relative price (maintenance costs) of
children and preferences for other items.

Mathematically, this relationship can be expressed by a formula

Cd = f (Y, P c , P x , t x ), x = 1, ..., n
Where :
C d = request for child
Y = RT income
that is, the higher the income, the demand for children increases
P c = net price of child
that is to say, the higher the cost of buying and maintaining children, the
demand for children decreases
P x = price of other goods
that is, the higher the price of other goods, the demand for children
increases
t x is the preference for other items
that is, the higher the preference for other items, the demand for children
decreases

There are two things that are taken into account in having children:

1. Opportunity costs are in the form of rationing of time spent on nurturing the child so
that time is wasted on productive things.
2. Child education costs. If the child is a little likely to be schooled high.

With the better level of education of women, they have the potential to make greater
contributions to the family so that the time spent raising children is limited so the desire to
have children is reduced. Importance of Birth rates among the poor will decrease if:
1. Women's education level increases.
2. Employment opportunities for women in non-agricultural areas increase.
3. Income increases (job opportunities create income redistribution).
4. Health services and provision of nutrition are increasing.
5. Guarantee system and old age benefits.
6. Expanding opportunities to get education

Implications for Development and fertility

 All that has been discussed so far can be summarized by arguing that the influence of
social and economic progress in reducing fertility in developing countries will be very
large when the majority of the population and especially the very poor are equally
benefited. economy. In particular the following socio-economic changes can be realized will
reduce birth rates in very poor circles:

 Improving women's education and changes in their roles and status

 Increased employment opportunities outside the agricultural sector for women. Karna
emphasizes the opportunity to take care of children.
 Increase the level of family income
 Reduction in child mortality.
 Development of a system of benefits like the elderly and other social security systems
outside the extended family network to reduce the economic dependence of parents,
especially women, on their children.
 Expanded school opportunities

In short, the program to expand employment, education and health opportunities for the
poor, in general and women in particular, will not only contribute to their economic and
psychological well-being (i.e. to improve their lives) but will also provide a greater impetus to
have smaller family

CONSEQUENCES OF HIGH FERTILITY: SOME DIFFERENT OPINIONS

Economic scholars and policy makers slow economic growth is attributed to population
issues where there are several conflicting perspectives. The following are some of the main
arguments that support and oppose the idea that the consequences of rapid population growth
can lead to serious development problems.

First argument: This is not a real problem

We can identify three general arguments from people who claim that population growth
is not a problem:
• The problem is not population growth but other problems.
• Population growth is a false problem deliberately created by international agencies and
institutions dominated by rich countries so that developing countries remain in a state
of dependency
For many developing countries and developing regions, population growth is desirable.
many observers from both rich and poor countries argue that the real problem is not
population growth, but one or all of the following four.

1. Underdevelopment
2. Depletion of natural resources and environmental damage.
3. Distribution of population
4. Placement of women's position at a lower place.

Second argument: This is a deliberately engineered issue.

The second argument denies the importance of population growth as the main
problem of development closely related to the theory of neo-colonial dependence. Basically,
arguing that overconcern in countries rich in population growth from poor countries is truly an
attempt by rich countries to hold back the growth of poor countries in order to maintain the
international status quo that is beneficial for rich countries 'private interests'. The radical
version of neo marxist suppression of the population by rich countries is an attempt at racism
and genocide to reduce the number of relative or absolute poor people, some of whom are
non-white world citizens who are considered to threaten the welfare of the wealthy people
who are generally white.

Third argument: This is a Desired Phenomenon

 The third argument believes that population growth is an important ingredient in
promoting economic development. Larger populations will produce economies of scale
production, lower production costs, and a lower supply of labor costs. They also argue that
free markets and human ingenuity will solve every and all problems that arise from population
growth. On the agricultural side, a larger population can cultivate a wider area than if only a
few people. In many countries only a small amount of all potential land is planted, and low
rural population density is seen as a serious weakness to increase agricultural output. Military
and political power also need many people to protect the country.

Fourth argument: Population growth is indeed the real problem.

The fourth argument supports the need to control population growth because of its
negative consequences. generally based on the following three arguments.

Hardline argument: global population and crisis: extreme opinion views population as a
problem, too large population growth is seen as the cause of almost all world economic and
social problems.

Theoretical argumentation: the population cycle of poverty and the need for family
planning programs: the population poverty cycle is the main argument of economists who view
that population growth that is too fast will have negative consequences for the economy, so
developing countries must really pay attention. Basically, it is a simplification of the standard
solow type neoclassical growth equation by using the standard production function
"adalah" output is a function of capital, labor, resources, and technology. With the basis of a
fixed resource base we can get the results with the following formula. with y: the growth rate
of GNI, l: the rate of growth of the capital stock, α: the output elasticity (usually found constant),
t: the effect of technological change (solow residue in empirical studies of sources of economic
growth.

Another empirical argument: seven negative consequences of population growth: seven

potential consequences of population growth are:

1. Economic growth: population growth can lower per capita income in almost all
developing countries.
2. Poverty and inequality: the negative consequences of rapid population growth have
befallen almost all poor people because the mecca made does not survive.
3. Education: the higher population growth, the costs for education issued by the
government will be depleted and will reduce quality for the quantity of education.
4. Health: high fertility will harm the health of mothers and children because the
close distance of pregnancy and high fertility increases the health risks for
mothers and children during pregnancy
5. Food: produce lots of population, the greater the need for food, if it is not balanced
with production and fulfillment of food needs, food shortages can occur.
6. Environment: the environment will also be threatened because of the expansion of
settlements and also the disposal of wastes that can endanger the environment.
7. International migration: this is considered to be possible both legal and illegal
because of the need for work or other things that result in migration from
developing countries to developed countries.

Towards a Consensus

3 conflicting arguments which are important components of consensus:

1. Population growth is not the main cause of low living conditions, extreme inequality
2. Population problems are not only one number but involve quality of life and material
well-being
3. Rapid population growth does not function to intensify the problem of
underdevelopment and make the development prospects far more remote.

SOME POLICY APPROACHES

 3 policy areas that can have important influences both directly and indirectly for the
world population now and later:

1. General and specific policies of developing country governments to be able to initiate,

influence and possibly even control the growth and distribution of occupations.
2. General and special policies of developed country governments to be able to reduce
consumption that is not their proportional world resources are limited and promote a
more equitable distribution of the benefits of global economic progress.
3. General and specific policies that developed country governments and international aid
agencies can begin to help developing countries achieve their population goals

What Developing Countries Can Do

1. Give persuasion to have smaller families through the media and the educational process,
both formal (school system) and informal (adult education).
2. Improve family planning programs to provide health and contraceptive services to
encourage desired behavior. Like publicly sponsored or officially supported programs
now in most developing countries.
3. Manipulate economic incentives and disincentives to have children - for example, through
the elimination or reduction of maternity subsidies, reduction or elimination of financial
incentives, or the imposition of fines for having children exceeding a certain amount.
4. Try to force people to have smaller families through the power of state laws and fines.

What Can Advanced Countries Do

Developed countries can simplify their lifestyles and consumption habits, others
are positive (if possible), internal policies that rich countries can adopt to reduce world
population problems today will liberalize legal conditions for poor international immigration,
unskilled workers and families they are from Africa, Asia and Latin America to North America,
Europe, Japan and Australia.

How Developed Countries Can Help Developing Countries to Populate Problem Solving
Programs

Two activities that can directly alleviate fertility problems that can be assisted by
developed countries, international donor agencies, and non-governmental organizations:

1. The first is through research on fertility control technology, contraceptive pills, modern
uterine contraception (IUD), voluntary sterilization procedures, and, especially in the age of
AIDS, effective barrier contraception. Research has been going on in this area for several
years, almost all of which is funded by international donors, private foundations, and aid
agencies from developed countries. Further efforts to improve the effectiveness of
contraceptive technology and minimize health risks must be encouraged.
2. The second region includes financial assistance from developed countries for family
planning, public education and national population policy research activities in developing
countries

Urbanization and Rural-Urban Migration: Theory and Policy

The chapter discusses the related problems of urbanization and migration. Key topics include:
• Urbanization trends and projections
• The role of cities and of the informal sector of the economy
• Urban unemployment
• Todaro’s migration model
• Policy options for limiting rural-urban migration

The urbanization problem is described using data on urban population growth over the past
50 years. Urban population growth is generally far more rapid than total population growth,
with about half the urban growth accounted for by migrants from the rural areas. Developing
country cities are growing far more rapidly than those in the developed countries.
Shantytowns and similar makeshift settlements represent over one-third of developing
country urban residents.

The chapter explores the consequences of public policies favoring large cities at the
expense of small towns and villages. In addition, it explores the dualistic pattern of urban
development, where a modern formal sector exists alongside a large urban informal sector.
About half of the urban labor force works in the informal sector, often with low wages and no
fringe benefits. Characteristics of urban informal sector jobs include:
• low skill
• low productivity
• self-employment
• lack of complementary inputs
• jobs in petty sales and services
• recent migrants facing social and economic adjustments

Given constraints on modern sector growth, the text argues that this sector should be
promoted as a major source of employment and income for the urban labor force. This sector
already generates up to a third of urban income, generates demand for unskilled labor, and
adopts appropriate technology. An improvement in the infrastructure and credit available to
this sector could generate large benefits in terms of increases in income and jobs for the poor.
On the downside, promoting this sector runs the risk of encouraging more migration unless
more resources are devoted to the rural sector at the same time.

The pros and cons of rural-urban migration are reviewed. Migration is viewed as both a
symptom and contributor to underdevelopment, much as population growth is. Todaro’s
migration model helps explain why it is rational for rural residents moving to crowded cities,
where unemployment is high and the probability of finding jobs is low. The model is based on
differences in expected income between the urban and rural sectors. High urban
unemployment is inevitable given the large expected income differentials between the rural
and urban sectors which exist in many LDCs. A diagrammatic presentation of the model is
included.
Highlights of Todaro’s migration model include:
• The need to reduce the urban bias of development strategies and encourage integrated
rural development. This will reduce the wage differential between the urban and rural
area.
• Creating urban jobs is an insufficient solution to the urban unemployment problem
because more migration is induced
• Expanding education opportunities often results in more urban migration
• Urban wage subsidies are counterproductive as they encourage more migration by
increasing the probability of finding a job

Policy options for reducing migration and increasing employment follow from Todaro’s
migration model conclusions. They include creating an appropriate rural-urban economic
balance, expanding small scale labor intensive industries, eliminating factor price distortions,
and reducing population growth.

The Migration and Urbanization Dilemma

One of the most complex and sensitive development process dilemmas is migration
and urbanization, yes, it is a symptom of the movement of large numbers of people from rural
areas to cities that are increasingly popping up in Africa, Asia and Australia and Latin America
that has never happened before in history. The world population in 2050 is expected to reach
more than 9 billion, and the most dramatic population growth will occur more in various cities
in developing countries.

Urbanization: Trends and Projections

 The positive relationship between urbanization and per capita income is the clearest
and most prominent "special fact" of the development process. Generally, the more developed
a country is based on per capita income, the greater the number of inhabitants who inhabit
urban areas. Although urbanization is closely related to economic growth, the fact is that
urbanization is happening in all countries. It doesn't matter whether the country has a high or
low income and whether the growth is positive or negative. In short, urbanization is taking
place in all countries in the world at different rates.

Why do more people choose to settle in urban areas? This is what is called an urban
bias. An idea that almost all developing country governments implement development policies
that are more in favor of the urban sector, resulting in a large gap between the urban economy
and the rural economy.

The important question regarding urban agglomeration that has never happened before
is: how will all these cities manage such a large concentration of the population economically,
environmentally, and politically. Its size is so large that the city's economy will shrink due to
the cost of managing overcrowding. The rapid population growth that causes the accumulation
of people will far exceed the growth of the human and physical infrastructure needed to simply
live a fairly efficient economic life and orderly social and political relations, let alone comfort
for its inhabitants.
Although population growth and increasing rural urban migration are the main cause of the
explosion in urban slums and slums, the government is also responsible for the situation. With
widespread dissatisfaction caused by the experience of rapid urban growth in developing
countries, an important issue that needs to be addressed is the extent to which developing
country governments can formulate development policies that can truly have a definite impact
on trends and character of urban growth.

Role of the City

The urban area has played a very constructive role in the economies of developed
countries today, and this region still has large and untouched potential to produce similar
things in developing countries. What explains the relationship between economic growth and
urbanization? In general, cities are formed because they provide advantages or cost efficiency
advantages for producers and consumers through what is called an agglomeration economy.

The agglomeration economy is the advantage or cost efficiency obtained by producers

to consumers from locations in large or medium cities, which are tangible urbanization and
localization economies. The urbanization economy is the result of agglomeration related to the
general growth of concentrated geographic areas. While the localization economy is the result
of agglomeration obtained by economic sectors, such as financing and motor vehicles, when
the sector grows and develops in an area.

Industrial District

The economic definition of a city is "an area with relatively high population density, and
has a number of closely related activities." Companies generally also prefer to be in a location
that allows them to learn from other companies doing similar work. This knowledge impact is
the economic benefit of agglomeration, part of the benefits of localization which is referred to
as: industrial district. Where exactly the location of the industry is not a problem.

Industrial groups are common in developing countries. From those at various stages of
industrial development, from home industries to technologically advanced manufacturing
industries. However, the dynamics of these groups differ because they tend to specialize in a
field. In some cases, traditional specialization has developed into more advanced business
groups.
This business group resembles a district in a developed country, but requires adequate
financing to invest in core companies that use capital goods on a large scale.
 In a study of six representative business groups in Africa, Dorothy McCormick
concluded that, "basic business groups prepare roads; the industrialization group initiated the
process of specialization, differentiation, and technological development; and sophisticated
industry groups produce competitive products in the wider market. In some cases, evidence
shows that coordination failure is not addressed, so the government can play an active role in
setting policies to encourage the improvement of business groups. In other cases, it is
precisely the government that causes the stagnation of business groups because it
implements rigid and irrational regulations, the consequences of which are far more damaging
than indifference to business groups in the informal sector.

Efficient Urban Scale

Efficient urban scale can be achieved for a number of closely related industrial cities,
such as industries that have strong links from upstream to downstream. One notable
exception is the possibility of the effects of technological progress. However, there are also
important congestion costs such as the higher the urban area, the higher the cost of real
estate.

In a competitive market mechanism, if workers in a large city with higher wages but
with a high cost of living will not be materially more fortunate than workers with equal
education, experience, abilities, and health who live in a small city with lower wages and lower
living costs.

Problems caused by giant cities

The main transportation routes in developing countries are generally a legacy of the
colonial era. Drainage routes made in the colonial era emphasized the ease of drainage of
natural resources in the colonies. Usually, the capital city is located close to the exit of this
system, which is the waterfront. This transportation system is referred to as a "hub-and-
spoke" system.

The differentiated flat area approach emphasizes the impact of historical heritage that
still exists today. This approach is able to explain the way we find cities that are too large in
developing countries and suggest urban decentralization policies that can be applied to help
find solutions to the problem.

Sometimes an urban core becomes too large, so it can no longer maintain the cost of
industries located in that place at the minimum level. In developing countries, governments
tend to be less involved in spreading economic activities with more manageable measures or if
they are indeed involved, often less effective. For example, the government wants to spread
the industry without considering the nature of agglomeration; by providing incentives but no
attempt to group a number of related industries.

Main City Bias

The main city bias (first-city bias) is a form of urban bias that often causes
considerable disruption. The largest city of a country will receive a share of private investment
in a proportion greater than that given to the second largest city and other smaller cities. The
effect, the main city has a large population and economic activity.

The cause of the emergence of a giant city

Overall, the larger cities are a result of a combination of hub-and-spoke transportation

systems and the location of political capital in the largest cities. This is further strengthened by
the political culture of rent-seeking and the failure of the capital market which makes the
development of new urban centers unable to be done by the market. Paul Krugman stressed
the effect of industrialization on import substitution with tight protection, as well as population
and economic activities that have incentives to concentrate in one city, mostly to reduce
transportation costs. Political economic factors that cause the growing size of the national
capital are companies that will benefit more from being in locations where they have easy
access to government officials to operate.

Urban Informal Sector

The informal sector is part of the economies of developing countries characterized by

the existence of individual or family competitive small businesses, grocery trade and trivial
services, labor-intensive, without any barriers to entry, as well as with factor-determined
product and product prices.

The existence of an informal sector that is not terrorized, not regulated, and all legal
although not registered was recognized in the 1970s based on observations in several
developing countries, which shows that the growing number of urban workers is apparently
not apparent in the unemployment statistics of the modern formal sector.

Policies for the Urban Informal Sector

In relation to other sectors, the informal sector is related to the rural sector in the
sense that this sector allows excess labor to escape extreme poverty and underemployment in
the village, despite having to live their lives and working conditions and income that is often
not far away better. The income of informal sector workers is still higher than that of workers
in the poorest rural areas, despite the continuing migration from rural to urban areas.

The important role played by the informal sector in providing income opportunities for
the poor is clear. However, there is a question about whether the informal sector is just a
foundation to the formal sector and if so is a transitional stage that must be made as
comfortable as possible without perpetuating its existence until finally absorbed by the formal
sector, or whether this sector will continue to exist and should instead be increased as a
source of employment and main income for urban labor.

Arguments that can support efforts to improve the informal sector are:

1. Scattered evidence shows that the informal sector produces surpluses even in a hostile
policy environment that prevents this sector from obtaining benefits provided to the formal
sector.
2. Low capital intensity and only a small part of the capital required by the formal sector to
employ a worker in the informal sector, means that there will be substantial savings for
developing countries that are often disrupted by capital shortages.
3. Training and apprenticeship with relatively much smaller costs
4. Generate a demand for semi-skilled and unskilled labor whose supply is increasing.

Women in the Informal Sector

In some regions of the world, women dominate migrants from rural to urban areas and
may even make up the majority of the urban population. This change in the composition of
migration flows has important economic and demographic implications for urban areas in
developing countries.

Because these female-headed household members generally work in the informal

sector whose productivity is low and have a higher dependency burden, they tend to be poorer
and less malnourished, less likely to have formal education and often unreachable by
government services.

Even though the track record of women was amazing in the context of paying off credit,
their chances of getting credit remained limited. Most financial institutions extend credit to the
formal sector so that women generally cannot get loans, even if the loans are very small. To
get rid of women and their children from the pitiful poverty, it is necessary to have an effort to
integrate women into the mainstream of the economy. In order for women to benefit from
development programs, the policy plan to be implemented must take into account the special
conditions faced by women.

Migration and Development

As stated earlier, rural-urban migration has taken place dramatically, and urban
development has played an important role in economic development. The impact of migration
on the development process is actually far broader than the impact on the increasingly severe
open and veiled unemployment in urban areas.

We must realize that the imbalance between the large number of people who migrate
and limited employment is a symptom of underdevelopment and also contributes to that
underdevelopment. One simple but important step to emphasize the phenomenon of migration
is to realize that every economic and social policy that influences the migration process
directly or indirectly.

The most important type of migration from a long-term development perspective is

rural-urban migration. Rural-urban migration is the most important migration with the
potential benefits of development from the economic activities of large cities due to economic
agglomeration and a number of other factors.

Apart from differences in wages, age and education - migration is also partly due to
marriage; follow the family who emigrated; distance and relocation costs; famine, disease,
violence and other disasters; and the relative position or status in the community of origin,
where those with lower social status are more likely to migrate.

Economic Theory of Rural-Urban Migration

Theories that explain the paradoxical relationship between accelerating rural-urban

migration in the context of increasing unemployment in cities are known as the Todaro
migration model and its equilibrium form as the Harris Todaro model.

The Todaro migration model is a theory that explains rural-urban migration is a rational
economic process, apart from high unemployment in urban areas. Migrants calculate (in
present value) the expected income from working in the city (or its equivalent) and migrate if
the expected income by working in the city exceeds the average income in the countryside.

The Harris Todaro model is an equilibrium version based on the Todaro migration
model, which predicts that the expected income is the result of a comparison between the
rural and urban sectors when taking into account informal sector activities and open
unemployment.

Rural-urban migration is not a process that takes into account the ratio between wage
rates in the city and in the village as expressed by the competitive model, but rather calculates
the ratio between the expected income in rural and urban areas. Expected income in urban
areas is indeed so high that migration will continue despite high unemployment in cities.

The Todaro migration model has 4 basic characteristics, this are:

1. Migration is driven by rational economic considerations but also considers psychological

aspects.
2. The decision to migrate depends on the difference / difference between rural and urban
wages.
3. Employment in cities is inversely related to the level of rural disturbance
4. The high unemployment rate in urban areas is a result of unbalanced economic areas in
villages and urban areas that are correct.

5 Policy Implications
1. The imbalance of urban rural employment opportunities is caused by development
strategies that have an urban bias.
2. Procurement of employment in urban areas is not an adequate solution
3. The expansion of education that is done haphazardly only adds to unemployment
4. Wage subsidies and traditional pricing of rare factors can be counter-productive.
5. Integrated rural development programs must be encouraged

Comprehensive Strategy on migration and employment

1. Creating a balance between the rural economy and the urban economy
2. Expanding labor-intensive small-scale industries
3. Eliminating factor price distortion
4. Choose the appropriate labor-intensive production technology
5. Modifying the relationship between education and employment
6. Reducing the rate of population growth
7. Decentralize authority to the cities and surrounding areas

Human Capital: Education and Health

The Significance of Education and Health

Education and health are two basic things of development goals. Human resources are
an original inherent capital in humans, unlike external capital, so education and health can be
seen as vital components of growth and development, because it involves matters that are
inherent in human beings themselves.
In developing countries, the distribution of education and health is as important as the
distribution of income. For some people who are lucky, they will get health and education that
is quite high, while the poor do not get access to these two things.

Education and Health as a Joint Investment for Development

The greater the health capital, the greater the return on investment in education.
Because, the more healthy people are, the higher the presence of education will be, so that it
will increase investment in a growing field due to high participation in education.

The greater educational capital can increase the return on investment in health.
Because education is synonymous with increasing expertise, so the higher investment in
education will cause workers to have more abilities, so that it will improve the level of health
that can increase investment in health.

Health and Education Improvement: Why Increasing Income alone Is Not Enough

The high income logically will be able to increase the level of education and health in a
person. But, there is a lot of evidence that proves that the increase in income is not
accompanied by improving the level of health or education, this is because a lot of additional
income is used for consumption other than nutritious food and education. Therefore, education
and health must be the main focus of development.

Next, health and education also have a close relationship. The higher the education of a
mother, the health of her child will be more guaranteed. Due to the high level of education will
cause a mother to get the latest information about nutrition and health of her child.

After knowing the importance of the relationship between health, education, and
income, the government is also the main responsibility of the government. Because income is
not the most important thing, but health and education are also very important, considering
that not all people have access to both facilities.

Invest in Education and Health: The Human Capital Approach

 Human capital includes education, health, and other human capacities which, if
increased, can increase productivity. An increase in these factors will make human capital
attached to him will be even higher. However, this increase does not necessarily mean that it
is profitable, but it can also bring trade-offs or human problems themselves.

In general, studying at a higher level will definitely sacrifice time. Though this time can
be used to make money directly. But, with increasing levels of education, it will increase
income levels as well, so people in this case have to choose, will use their time to directly
make money, or sacrifice their time to go to a higher level which will increase future income.
But in general, being patient to study higher will bring higher total profits. Formally, the income
gains obtained by someone can be written as follows:

Et = income with additional education

N = Income without additional education
t = year
i = discount rate

So it can be concluded that in general improving education at the expense of time that
can be used to get money, on average will be more profitable than directly working.

Child Labor

Child labor is a widespread problem throughout developing countries. If a child under 15

years of age works, their school will be disrupted or not even go to school at all, their health
will be disrupted, and their physical growth will be hampered. The International Labor Office,
which is a UN body that plays an important role in the issue of child labor, said that in 2008
there were 306 million children in the age range 5 to 17 years doing certain types of work and
215 million of them were classified as child laborers because they were still are underage but
doing work that can threaten their health, safety or morals.

In the child labor model, we make two important assumptions. First, households with a
high income are not likely to get their children to work. Second, child workers and adult
workers substitute one another. In fact, children are not as productive as adults, and adults
can do whatever work children can do. The above statement is not an assumption, but findings
in many studies in various countries regarding the productivity of child labor.

So, what are effective ways to reduce the number of child workers? In this context,
there are dominant approaches taken in international policy. The four main approaches in the
formulation of development policies are:

➢ Recognizing that child labor is a reflection of poverty, thus recommending a focus

on poverty reduction efforts.
➢ Promote the application of strategies that can attract children to schools that
include expanding the procurement of new school units, and conditional cash
transfers so parents are encouraged to send their children to school.
➢ Sees that child labor is unavoidable, at least in the short term, and puts forward
ways to alleviate it, such as through arrangements that can prevent bullying and
providing support services for working children.
➢ Supports the prohibition of child labor, but if it cannot be done due to plural
equilibrium problems, this approach will be softened by only banning the worst
child labor activities. (most often associated with ILO).

Gender Gaps: Discrimination in Education and Health

Gender disparities in education often occur in many developing countries, because

young women receive less education than young men. Most people who are illiterate are
women. Very large gender disparities in education occur in the least developed countries in
Africa and also relatively large in India.
 Efforts are made to reduce this gap, through increasing education for women because
it will increase productivity levels, result in greater labor force participation, postponement of
marriage, reduction in fertility rates, and improvement of health in child intake.

Gender disparities in health often occur in developing countries, such as discrimination

in care for women. A number of studies states that bringing a boy to the hospital will be easier
than bringing a girl.

Education and Development System

The relationship between job opportunities and demand for education

➢ The level of education that someone will receive even though many are influenced by
many factors, but in rice lines is almost the same as the demand and supply in the
commodity and service markets.

The demand for education is derived demand (derived demand), namely the individual's
desire to obtain a higher income by receiving the highest education possible.

In terms of demand there are two principles that influence:

➢ Expectations for students who are educated to have jobs with high incomes and benefit
individually for students and their families (private benefits of education).
·
➢ Education costs that must be borne, both direct and indirect costs.

In terms of supply:
➢ The supply quantity of education is often influenced by political interests that have
nothing to do with education. In the end the level of supply of education is strongly
influenced by the ability of the government to provide facilities for education because of
the budgetary constraints the government has for education.

Four variables that influence the demand for education

➢ Difference or differentiation of wages and / or income between urban and rural

communities
➢ The probability or possibility of getting a job with educational facilities
➢ Direct costs borne by the individual or family
➢ Indirect costs or opportunity costs of education

Current conditions in developing countries make us assume that demand for tertiary
education will increase. This happens because workers with higher quality education will be
more sought after than those with less education. The demand for higher education will
continue to increase because employment opportunities with lower education will be shifted by
individuals with higher education.

Developing countries continue to expand education facilities to the extreme without

considering financial and social aspects. The existence of education certification or diploma
priority that makes it difficult for the poor to get a good education.

Social Benefits and Costs versus Individual Benefits and Costs

Social costs of education are costs that must be borne by the community as a whole as
a result of meeting the demand for education expansion and increasing along with the high
level of education. Individual education costs are costs that must be borne by individuals or
their families to obtain education and these costs will increase slowly or even decrease.

Individual benefits and costs

 Always increasing along with the increasingly high level of education. So, even though
the costs incurred by individuals are getting higher due to the high level of education that is
followed, it will still get greater benefits than the costs incurred.

Social benefits and costs

In the beginning (basic education) provided great social benefits because the process
taught basic skills such as reading, writing, counting, and other basic abilities.

The social cost curve will surpass its benefits when entering secondary and tertiary
education. The social cost curve will increase significantly due to the high costs incurred for
secondary and tertiary education. However, the condition that occurs is that the community
continues to be encouraged to receive the highest education possible without considering the
possibility of unemployment or scarce employment despite having a high education degree.
This is also supported by policies that are not appropriate by the government.

The expansion of education also affects the economy in the aggregate;

1. The creation of a productive workforce because of having good knowledge and skills.
2. Availability of employment opportunities for services and other commodities that
support the implementation of education
3. The creation of educated groups who have good knowledge to fill existing vacancies,
whether governmental, public, or private.
4. The availability of training and education programs that will encourage development
and modernization in every level of society.

Distribution of Education

Like the Lorenz curve, we can also model the Lorenz curve for the distribution of
education. Inequality in education tends to decrease when the average time to get an education
increases. The quality of education in countries with greater income tends to be better
compared to low-income countries. Research by Jere Behrman and Nancy Birdsall shows that
what determines productivity and income differences is the quality of education (facilities,
curriculum, and teaching staff) not just the quantity.

Education, Income Inequality, and Poverty.

Studies show that the education system in various developing countries sometimes
does not reduce inequality, but instead worsens inequality. Individual costs for basic education
for residents with low incomes are relatively more expensive compared to residents with
relatively higher incomes. Individual benefits for poor families are smaller than the costs to be
borne. With the opportunity cost, they will choose to employ their children rather than send
them to school. By utilizing their child labor, the family might get more income and reduce the
cost of sending their child to school. Higher education is filled by individuals with high incomes.
Though higher education is subsidized by the government more. So, people with low incomes
do not enjoy the subsidies that should be enjoyed.

Education, Internal Migration, and Intellectual Drainage.

Education is one of the factors driving internal migration. The study states that there is
a positive correlation between the attainment of the educational level of the individual and the
magnitude of the tendency of people to migrate.

Migration is carried out is expected to improve welfare to seek wages or higher in the
city by offering education that has been carried out previously. However, what often happens is
that rural residents without education capital continue to try their luck in the hope of getting a
high salary or wage. while rivals already have higher education degrees, this will certainly
increase unemployment in urban areas and expand urban slums. Professional individuals such
as academics, technicians, scientists, and others who have pursued higher education actually
migrated abroad in the hope of finding a better job. Though it should be able to build their own
regions that may still be far from prosperous. This is usually called intellectual exhaustion.
Triggers from this intellectual drainage usually occur because of poor facilities in their own
country.

Health and Development System

Understanding health according to the World Health Organization (WHO) is a condition

of physical, mental, and social well-being, and not merely disease-free and physical weakness.

Burden of disease

Developed countries more easily overcome the problem of disease than developing
countries. Developing countries have a greater burden to overcome the problem of disease.
One disease that is actually experienced is poverty. Poverty can make people vulnerable to
disease disorders. There are many diseases that can kill humans. Especially if the disease is
combined with other diseases, it can cause death. There are three major diseases that haunt
developing countries. The three diseases are AIDS, Malaria, and parasitic worms.

AIDS: This disease is also a leading killer. AIDS threatens to stop or even reverse the
progress of economic and human development. In low-income countries the average chance of
survival is under one year.

Malaria causes 1 million deaths every year. Most of those who suffer from malaria are
children from poor African families. One way that can be taken is to use a vaccine. But because
malaria victims tend to be from low-income countries it is very difficult to buy vaccines at high
prices.
Parasitic worms and neglected tropical diseases. Many health challenges in developing
countries. One of them is from parasitic worms. The disease caused by parasitic worms affects
about 2 billion people and 300 million of them suffer severe.

The benefits of expanding support for other health programs besides HIV / AIDS,
including nutrition for children and neglected tropical diseases, are very high. From this high
level of support comes a strong synergy. With a strong synergy, habits will be formed to
improve the quality of life.

Health, Productivity and Policy

Productivity: Healthy people will get higher wages. If someone is healthy then their
level of productivity can be perfect. Higher productivity allows them to get better wages. Health
and nutrition affect employment, productivity and wages.

Health system policies: Health systems are all activities whose main purpose is to
improve, restore and maintain health.

Five performance indicators to measure the health system:

1. Overall level of health of the population

2. Health inequality in population
3. Health system responses
4. Distribution of responses in the population
5. The level of distribution or fairness of the health system costs in the population.

The formal implementation of public health programs has played an important role in
developing countries. However, this policy often applies to rich and well-connected people.
Often also misused for the benefit of certain groups. If the health system policy can run well
and on target, economic development can run well in line with policies that are right on target.

Rural Poverty and Agricultural Transformation

Agricultural Transformation and Rural Development

I. Significance of Agricultural Sector Progress and Rural Development

An economic development strategy that is based on agricultural and employment

priorities requires at least three basic complementary elements, namely:

1. Increasing output growth through a series of technological, institutional, and price

incentives specifically designed to increase the productivity of smallholders;
2. Increased domestic demand for agricultural output resulting from urban
development strategies oriented to labor development efforts; and
3. Diversification of rural development activities that are labor intensive.

Without integrated rural development, industrial growth will not run smoothly and in
turn, all inequality will exacerbate the problem of poverty, income inequality and
unemployment.

II. Agricultural Sector Growth: Past and Present Challenges

The United Nations World Food Organization has repeatedly warned of catastrophic
food shortages. The main cause of the deteriorating performance of agriculture in third world
countries is the neglect of this very important sector in the formulation of development
priorities by the governments of developing countries themselves.

The first step that must be taken in order to better understand the things needed for the
success of agricultural and rural development is an effort to comprehensively understand the
nature or nature of the agricultural system in various regions of the very diverse third world
countries, especially regarding economic aspects that depend in the process of transition from
subsistence farming to commercial farming.

III. Structure of the Agrarian System in Developing Countries

Three Agricultural Systems

The first step to understanding what is needed to promote growth and encourage
development in rural areas is to understand the problems of the agrarian system in various
developing countries and the economic aspects that underlie the shift in patterns from
subsistence agriculture, ie agricultural products only to meet their own needs, to commercial
agriculture. In 2008, agricultural economist from the World Bank named Alain de Janvry and
his colleagues made a World Development Report, one of which states that besides the
advancement of the agrarian system in developing countries, there are three different
situations behind it.

First, agriculture is still a major factor contributing to economic growth in agrarian

countries. This is indicated by the large influence of the agricultural sector on Gross Domestic
Income (GDP). The World Bank estimates that agriculture contributes 32% to GDP growth on
average in agrarian countries, where around 417 million inhabitants live. More than two-thirds
of the population lives in villages, such as the sub-desert population of the Sahara, Africa,
Laos and Senegal.

Second, most of the world's rural population - around 2.2 billion - live in a country that
is transforming, with an indicator of the percentage of poor people in rural areas being very
high (around 80%) but the agricultural sector only plays a small role in GDP growth (around
7%) . This happened to countries in Southeast Asia, North Africa, and the Middle East, and
Guatemala. Third, urban countries, where rural-urban migration has reached a point where
poor populations can be found in cities, and the agricultural sector contributes a smaller
contribution to output growth. This has happened in Latin American and Caribbean countries,
as well as in Eastern Europe and Central Asia with a rural population of around 225 million.

In addition, regional differences within a country also play an equally important role.
For example in India there are regions that have different backgrounds, for example modern
Punjab and Bihar which are still semi-feudal. Or in Indonesia, for example the Java region
which is very modern with strong agriculture and Kalimantan which is still not very advanced.

Farmer-style farming in Latin America, Asia and Africa

In most developing countries, historical factors play an important role in land tenure for
both small and large farmers. This is true in Latin America and some countries in Asia. In
Africa, historical factors and the availability of unused land produce different patterns and
structures of agriculture. Although farmers have struggled to defend their lives and the
behavior of poor farmers in Asia and Latin America, the agrarian system in the country
remains different from one another.

Agriculture patterns in Latin America: Progress and Challenges against Poverty

In Latin America, as in Asia and Africa, agrarian structures are not only part of the
production system but also the basis of economic, social and political organization in rural life
as a whole. Agrarian structures have existed in Latin America since the colonial period and are
still developing in some regions with a system of agricultural dualism called latifundio and
minifundio. Latifundios is a large area of agricultural land ownership, and can provide
employment for more than 12 people, although some units a business can accommodate
employees up to thousands of workers. Minifundios is the smallest agricultural business unit
that can only accommodate one family (2 workers), with income patterns, market access, and
technology levels and certain amounts of capital that differ according to each country or
region.

Areas with poor agricultural land conditions, with a high number of minorities, tend to
have high levels of poverty. Extreme inequality in rural areas also occurs. This is caused by the
difficulty of accessing credit for the poor and the power of the elite is very strong so that
facilities the state can be controlled only for them. Moreover, the urbanization of the educated
is still high, so that the population in the villages that still exist are only those who are old,
androgynous, and only the natives. These factors are still a problem in middle income
countries in Latin America and require treatment from the community and local government.

Fragmentation and Subdivision of Farmers' Lands in Asia

The main problem in agriculture in Asia is the large number of people working on very
narrow land. As the 20th century progressed, rural conditions in the Asian region worsened.
Prof. Gunnar Myrdal identifies three interrelated elements and forms traditional land
ownership patterns, which are divided into:

1. European oppression.
2. Introduction of economic transactions that use money on a large scale as well as
increasing the power of money owners who act as loan sharks.
3. Asia's population growth rate is very fast.

Subsistence Agriculture and Aquaculture in Africa

As is the case in Asia and Latin America the pattern of subsistence farming on a
narrow plot of land is the daily way of life of most farming families in Africa. However, the
structure and organization of the economic system is very different. Most farmers in the
tropical regions of Africa still direct their agricultural products to subsistence life, except in
ex-colonial plantation areas. Because the main input variables in African agriculture are rural
families and labor, the agricultural system in Africa is dominated by three main
characteristics:

1. The importance of subsistence farming is still very important for rural communities.
2. The existence or availability of a piece of land whose area exceeds enough to meet
basic needs that still allow the continuation of shifting farming patterns and to make
land not an instrument of economic and political power for the owner.
3. There is a right for every family to use the land and water in and around the area of
their hometown, and absolutely cannot be touched by other families even though
they come from one tribe.

Subsistence farming is a traditional African culture and has low productivity, this is the
result of a combination of historical factors that prevent output growth:

1. Although there is a lot of potential land that has not been touched, only a small and
certain area can be managed by a farming family using only traditional tools. The use
of animals as agricultural aids is also not possible due to interference from natural
factors, such as dry weather and infectious diseases, as well as human factors that
have not been able to manage these animals.

2. With a small agricultural management area and using traditional tools, this area
tends to be cultivated intensively. As a result, there is a diminishing return on the
increase in labor. Soil fertility will also run out along with the use of the land. Here,
farmers in Africa only use animal manure to restore their soil fertility and then the
land is planted again.

3. Labor is a scarce input during the busy season of planting and harvest. At the same
time, most of these workers do not have sufficient skills. Because in Africa rain rarely
occurs, demand for labor during the rainy season will grow very high, exceeding all
available labor supply.

IV. The Important Role of Women

The main problem that occurs at this time, especially in Asia and Africa, is the role of
women in the agricultural sector. In some cases, women perform around 70 percent of
agricultural work, and in one case even almost 80 percent of all work. In general, what is done
is manual labor using equipment that is too simple or even primitive and requires a lot of time,
just to meet the subsistence needs of the family, such as pulling weeds, planting seeds, and
harvesting crops for immediate consumption. men or husbands trying to find odd jobs on
plantations or in cities. During this time women have made a large and important contribution
to the agricultural economy, especially in the food crop sector which is fast making money.

In various regions in developing countries, women's efforts for hours every day in
producing commercial plant products still do not get rewards or wages. While the source of
income from commercial agricultural production increases, women's control over economic
resources is precisely This is due to the fact that most household resources, such as land and
other inputs are diverted from the cultivation of garden crops to commercial agricultural
production.

Development programs carried out by developing country governments have so far

only focused on men, so that inequality in access to various economic resources between men
and women is increasingly greater. Therefore, women's contribution to family income has
naturally declined.

Government-sponsored programs have not given adequate attention to women. In

many developing countries, a woman can only make a contract or economic transaction if
accompanied by the husband's signature. Very few women are involved in training and
education programs organized by the government. Various cultural and social constraints still
hamper women's integration into agricultural development programs in many developing
countries. In general, women's involvement in various development projects and welfare
improvement programs are still very limited; so it is not surprising that many of the projects or
programs themselves fail to achieve their goals. It is no less important that all kinds of
women's businesses are still deemed unnecessary in return or reward, even though men's
sweat drops are rewarded.

The importance of the economic roles and functions of women is evidenced by the very
impressive success of development programs that involve their full participation. In connection
with the importance of the role of women in increasing the prosperity of agricultural
communities, any development program or project must involve them so that women also
receive benefits and opportunities equal to those received by men.

V. Microeconomics of Farmer Behavior and Agricultural Development

 Transition of Farmer's Own Livelihood to a Specialized Commercial Farmer

There are three general stages in the evolution of agricultural production. The first
stage is pure, low-productivity, most farmers who support themselves (subsistence), this is
still commonly done in Africa. The second stage is called diverse or mixed family agriculture
where a small portion of production is used as self-consumption and some is sold to the
commercial sector. The third stage represents modern farmers, who are exclusively involved
in the high-productivity of agricultural specialization in the commercial market.

 Subsistence Agriculture: Risk Reluctance, Uncertainty, and Survival

In classical subsistence agriculture, most output is produced for family consumption

purposes. Output and productivity are low, and use simple farming tools. Capital used for
minimal investment; land and labor are the main factors of production. Underemployed labor is
most of the year and only works during the harvest season.

The traditional theory of two neoclassical factors provides some insight into the
agricultural subsistence economy, where land is fixed in number, labor is the only input
variable, and maximizes profit. But unfortunately, this theory does not explain why small
farmers often oppose technological innovations that can help in agriculture and the
introduction of new seeds. According to the theory, in general people will tend to use
production methods that increase output with given costs or minimize costs with a certain
level of output, but this theory is based on the assumption that farmers have a "perfect
understanding". Therefore, this theory fails to be applied to the subsistence agricultural
environment. Moreover, if access to information is imperfect, the costs that must be paid to
obtain information will be more expensive.

Subsistence agriculture can then be said to be a business that has a high risk and
uncertainty. In areas where agriculture is very small and harvests are highly dependent on
rainfall, the average output will be low, and in bad years, farmers will be in danger of
starvation. In these circumstances, farmers will think more about survival compared to the
benefits obtained. Thus farmers will be reluctant to leave the traditional technology that they
use and replace it with new ones because even though the benefits obtained may be high, the
risks imposed will be higher as well.

Economy of Revenue Sharing and Interrelated Market Factors

Revenue sharing occurs when farmers use other people's land (landowners) instead of
a portion of the food output. The share of landowners can vary depending on the availability of
local labor and other inputs. Alfred Marshall observes that the production sharing system will
cause inefficiency because when farmers are only paid a portion of their marginal yield,
rationally, the efforts made will decrease. This view was then challenged by Steven Cheung
with his theory called the monitoring approach, which according to Steven Cheung, profit-
maximizing landowners would issue contracts that required adequate effort and determination
of output distribution. If the land owner's work is not comparable with the results obtained,
then he will be replaced with another owner who is willing to work hard.

Screening hypothesis is the view that people with higher ability will tend to prefer pure
rental agreements, because then farmers who have high ability (high-ability farmer) will get
the full value of their marginal products.

However, Radwan Ali Shaban identified farmers who harvest from their own land with
farmers who use the production sharing contract system. He found that farmers with
production sharing contracts would use less input and would produce less output compared to
those who used their own land.

The final approach suggests that revenue sharing is relatively effective. If the landlord
pays the tenant fairly, and it will be efficient if the tenant gives his best effort.

Interrelated market factors are circumstances where the supply function is

interdependent, usually caused by a variety of different inputs provided by the same supplier.

❖ Transition to Diversified Farming

Mixed farming illustrates logically the transition phase from subsistence farming
towards agriculture with specialized production because in small farmers, exclusive
dependence on a particular crop can be more dangerous than pure subsistence, because the
risk of price fluctuations is also entered into natural uncertainty. At this stage, the main crop
yields no longer dominates agricultural output.

The success or failure of the business depends not only on the ability and skills of
farmers in increasing their productivity but also on the social, commercial and institutional
conditions.

❖ From Diversity to Specialization: Modern Commercial Agriculture

Specialized agriculture is the last and most advanced stage of individual ownership in a
mixed market economy. In specialized agriculture, the availability of food for families and
market surpluses is no longer the primary goal, but rather a pure economic benefit. In short,
all production for the market.

VI. Basic Needs of Agricultural Strategy and Village Development

Improving Small Scale Agriculture

• In most developing countries, technology and innovation are prerequisites for
continuous improvement in output and productivity levels.
• Institutional policies and price fixing to create economic incentives
• Adapting to new opportunities and obstacles

Village Development Conditions

There are three conclusions regarding the realization of people-oriented agricultural

and rural development strategies, namely:
• Land renewal
• Supporting policies
• Integrated development objectivity

Natural Resources and Environment for Sustainable Growth

The basic issues

1. The world's population depends on the environment directly.

2. Poverty and a decrease in environmental conditions can result in people ignoring the
environment, using it carelessly. And ends with lack.
3. This has a major impact on developing countries because of the costs of revitalization, high
health and reduced productivity of these resources.
4. The biggest contributor to damage is developed countries with their production activities,
but conversely, a large impact will attack developing countries.
5. Unfortunately, the costs incurred by this environment from the beginning are not calculated
in GNI.

Sustainable Development and Environmental Accounting Needs

1. Sustainability in principle is to meet the needs of the present by not sacrificing the needs of
the future.
2. Natural wealth and other forms of capital can substitute only to a certain extent
(limited). After reaching a certain level, these capitals become complementary to each
other.
3. Growth and quality of life in the future depend on the quality of the environment. Therefore,
the government implements "environmental accounting" in its policies.

Population, Resources and the Environment

1. In many poor countries, increasing population density contributes to the degradation of

resources which in fact is needed by the population to survive.
2. In order to meet the growing needs in developing countries, the destruction of nature must
be stopped and resources that have productivity available are maximized to be more
beneficial for the people of that country.

Poverty and the environment

1. Poor people are the main victims of environmental degradation. They usually live on land
that is no longer habitable (for example polluted places) because it is cheaper and because
they do not have the political power to stop pollution in their homes, the poor cannot escape
the poverty trap they experience.
2. For environmental regulations to be successfully implemented in developing countries, the
policy must primarily focus on issues concerning land unavailability, poverty and difficult
access to institutional resources.

Growth vs. Environment

1. Many believe that as per capita income rises, pollution and other forms of environmental
degradation will first increase, then decrease in the form of the letter U, this opinion is
known as the Environmental Kuznets Curve.
2. According to the opinion above, along with increasing per capita income, people will
increasingly have the awareness and willingness to pay for environmental protection.
3. Many countries implement a " Green Growth" policy that involves the use of low emissions
of gas in production activities in their countries.
Urban Development and the Environment

Research shows that urban environments deteriorate faster than urban population
growth, with marginal cost increases for the New York environment increasing over time.

Global Environment and Economy

1. By using resources more efficiently, some environmental changes can be profitable, and
others can only cost a small amount.
2. Funding efforts to improve the environment should be like budgeting for other social
programs such as education, health facilities and employment, because its implementation
is very important for environmental preservation, both local and global.
3. It is still a matter of global debate how the costs of preservation of this environment should
be divided.

Natural Resources as a Way Out of Poverty

1. More than half of the population in developing countries that are economically active
depends on agriculture, hunting, animal husbandry, fisheries and forestry.
2. In many countries, the poor lose their access to natural resources owned by their countries,
due to privatization or management of corrupt resources.
3. One solution offered is " pro-poor governance", namely empowering the poor and
affirming the rights of the poor.

Village and Environmental Development

1. Economic needs often force small farmers to use resources in ways that can cause them to
meet current needs, but reduce the productivity of resources for the future.
2. Factors in the poverty cycle of rural areas and natural damage are ongoing poverty
and deforestation.
3. Environmental degradation starting at a local scale can quickly spread and become a
regional problem.
4. Natural disasters caused by environmental degradation can greatly impact the agricultural
economy both on a local and regional scale.

Global Warming and Climate Change: Scope, Mitigation, and Adaptation

1. Reach of Problems
a. The Intergovernmental Panel on Climate Change (IPCC) announced that the impact of
environmental change is most felt in poor and developing countries.
b. The consequences obtained are heat waves, heat waves, floods originating from heavy
rain, drought, loss of various types of animals, loss of agriculture and fisheries.
c. Country Coverage:
• Africa à Water shortages by 2020, coral damage.
• Asia à angina Tipon. Melting glaciers and rising sea levels cause flooding in the rainy
season. In the drought season, water drought will occur resulting in a shortage of clean
water and decreased agricultural productivity.
• South America à land degradation and animal and plant diversity.
d. Environmental damage will affect the whole world, but the poorest country because it
depends directly on natural products, especially agriculture.

2. Mitigation

a. Strategies to reduce the impact of environmental destruction have been carried out. One
of them is an effort to reduce carbon gas through using more efficient production
technology and regulation.
b. The disposal of carbon gases results in the greenhouse effect. The greenhouse effect will
be felt by people around the world.
c. Global warming is not a problem of one of the world alone, but all of them. Not only
developing countries, but developed countries as the biggest contributors to emissions
are trying to reduce their emission levels.
d. Various agreements and conferences were held to make these agreements among
various countries.

3. Adaptation

a. Significant environmental changes cannot be stopped anymore, developing countries in

particular are required to adapt the principle of environmentally friendly for profitable
growth.
 b. The UNDP identifies that adaptation is "a process by which strategies to moderate, cope
with and take advantage of the consequences of climatic events are enhanced, developed
and implemented."
c. Adaptation has two things:
• Planned through regulations and policies.
• Autonomy through household, agricultural, and corporate behavior.

Economic Models and Environmental Issues

1. Personal ownership resources

a. Market failure can lead to inefficiency
b. This happens because of the inability of a market economy to function
efficiently due to:
• Failure of competition
• The existence of public goods
• Externalities
• Incomplete information
• Common goods
c. Total Benefit is the total of all net profits of consumers. This will be maximum
if the marginal cost is the same as the marginal benefit.
d. Consumer surplus, producer surplus - the ability to buy and sell both
consumers and producers exceeds prices set in the market.
e. Scarcity Rent: If the number of goods is limited, the owner of the production
factor can allocate the use now and in the future. The income received by
raising the relative price compared to the normal price due to the limited
quantity and sacrifice to delay the consumption of the goods.
f. This can be done because of the existence of property rights, recognition to
use and utilize tangible and intangible objects.
g. Achieved with 4 conditions:
• Universality
• Exclusivity
• Transferability
• Enforceability

2. General ownership resources

a. Public ownership is publicly owned and freely available to all

b. Neoclassical theory suggests that in the absence of scarcity rents,
inefficiencies will arise.
c. An example is the case of agricultural land which is public ownership. The
company, to increase its profit, will hire workers when the marginal product
of the worker is the same as the salary. However, if the number of workers
continues to increase, the land will not be able to provide the same
productivity and even output which tends to decrease.

3. Public goods and Bads

a. Externalities are benefits and costs borne by 3rd parties.
b. Internalization is the process of inserting costs and costs into the parties
involved in the economic process.
c. Public goods problem # 1: Free Rider

Urban Development and Environment

1. Environmental problems and urban slums

a. Characteristics: Families work long hours, income is uncertain, and difficult
trade-offs must be made between expenditures on nutrition, medical care,
and education.
b. Typical urban slum:
i. Air pollution
 ii. Children safety is not guaranteed by playing freely on the road and in
an environment that is not conducive.

2. Industrialization and urban air pollution

a. According to the World Bank, pollution levels for the worst quartile of high-
income cities are better than for the best quartile of low-income
cities. Indeed, at higher incomes, it is easier to afford expensive clean
technologies.
b. This results in social costs to the community, to internalize the tax held.
3. Problems of congestion, clean water and sanitation.

Local and Global Costs Due to Rainforest Destruction

Changes in land use patterns in developing countries currently produce the largest
contribution in the global concentration of greenhouse gases. It is estimated that
deforestation alone contributes to 20% of carbon dioxide emissions worldwide. In addition,
faster extinctions threaten biodiversity, with around 12% of the world’s bird species, 24% of
mammal species, and 30% of the world's fish species in vulnerable or endangered stages,
most of which live in rain forests.

Of the majority of tropical rain forests that have been destroyed, around 60% of the area
is used for agriculture by small farmers. In the past, rainforest settlement programs were
regularly encouraged and funded by governments in several developing countries, often with
assistance from international development banks, which cost a lot of money and caused
natural damage. It is believed that reducing the rate of concentration of greenhouse gases
and protecting biodiversity will benefit everyone. Thus, preservation of the rainforest is a
public good.

Long-term solutions include increasing accessibility of alternative fuels, managing

sustainable logging schemes, and providing economic opportunities for the poor who are now
dependent on encroachment on fragile forest areas. Developing countries can increase the
efficient use of their rainforest economy by managing it and by developing alternative markets
for other rainforest products. Most of the wood that is burned to clear cultivation land can be
harvested for additional income.

The international community must also help with this conservation effort. By reducing
trade barriers to alternative goods that reduce environmental damage, developed countries
reduce developing countries' dependence on unsustainable production methods. Funds for the
preservation and maintenance of tropical forests are needed to ensure the success of
conservation programs that provide global public goods.

Expansion of forest use and deforestation is a strange target for industrial policy, from
a fiscal point of view, this provides a rational economic reason to eliminate subsidies and tax
breaks to do so.

Policy Options for Developed and Developing Countries

What can be done by developing countries?

➢ Appropriate pricing of resources

Government pricing policies, including subsidies, that can worsen resource scarcity or
encourage unsustainable production methods. Often government programs that are actually
designed to reduce the lives of the poorest people have little impact on poverty and actually
exacerbate existing inequality. High-income households are the dominant beneficiaries of
energy, water and agricultural subsidies that are environmentally destructive. Although
eliminating improper subsidies is a relatively cost-effective way to protect the environment,
this effort carries a high political risk when the ruling elite will lose valuable government
transfers.
 ➢ Community involvement

Programs to improve environmental conditions are likely to be very effective when run
together with community networks, ensuring program design is consistent with local and
national goals. The experience of a number of development agencies shows that grassroots
efforts are more cost effective because they usually use low-cost alternatives and provide
jobs for local residents.

➢ Clearer rights and ownership of resources

Investments in household sanitation and water facilities as well as improvements to

agricultural land often represent a lifetime of savings for the poor, where the loss of such
investment can have adverse economic consequences for households. Therefore, lack of
guarantees of ownership of rural or urban property can hamper investment in environmental
improvement. Legalizing ownership can improve living conditions for the poor and increase
agricultural investment.

➢ Programs to improve economic alternatives for the poor

Government programs need to make agricultural credit and inputs that add value to
land accessible to small farmers. By providing rural economic opportunities outside the home,
the government can also create alternative employment opportunities so that those who are
very poor do not need to work on marginal land.

➢ Improvement of women's economic status

Improving educational opportunities for women and increasing their economic

alternative choices will increase the opportunity cost of women's time and may cause a
decrease in the desired family size. Better education also tends to increase women's access to
information about nutrition and children's health.

➢ Industrial emissions reduction policies

A number of policy options are available for developing country governments with the
aim of reducing pollution, including emission taxes, tradable emission permits, quotas, and
standards. The first two policies are more effective, because they tend to provide rewards for
producers who are more efficient, and easier to enforce. But it is precisely the government-
run industry that is the most difficult to regulate.

➢ Take a proactive attitude towards climate change and environmental destruction

Developing countries can implement and continuously improve early warning systems
to anticipate environmental emergencies, encourage reforestation, restore natural barrier
ecosystems, enhance micro insurance programs, and build storm shelters, flood barriers, and
protect roads and bridges.

What can be done by developed countries to help developing countries?

➢ Trade policy

Removing trade barriers to developing country exports by stimulating economic

growth in developing countries, and encouraging rural development in order to significantly
reduce absolute poverty.

➢ Providing debt relief

 Large debt payers have drastically drained the funds available to developing countries'
domestic social programs, including programs designed to alleviate poverty and
reduce environmental damage. Debt relief can be used to achieve sustainable
development. And through a debt swap program for nature, namely the exchange of foreign
debt held by an organization with a larger amount of domestic debt, which is used to finance
the preservation of natural or environmental resources in the debtor country.

➢ Development assistance

Substantial new development is needed in developing countries to achieve sustainable

development. This investment will be used for various poverty alleviation programs, providing
services, and encouraging sustainable production patterns.

What can be done by developed countries for the global environment?

Most of the consumption in developed countries is only a waste. Responsible

consumption by developed countries will not only set a good example, but also ecologically is
a must.

➢ Emission control

By proving their real commitment in creating a cleaner environment. Because they are
still the main polluters of the sea and the air, the developed countries must take the lead in
changing the patterns of global production in the present and the future.

➢ Research and development

Increasing public support for tighter environmental regulations in developed countries

will result in the development of cheaper emission reduction technologies and cleaner
production processes. At present, many clean technologies are still too expensive for
developing country industries. Therefore, it is very unrealistic to expect low-income countries
to reach the applicable standards in high-income countries. Making emissions technologies
cleaner and more affordable for developing countries can help limit the main sources of global
emissions.

➢ Import restrictions

Through imports of products that are often associated with production processes that
are not environmentally friendly, developed countries have created indirect, but enormous
negative impacts on the global environment. It is also important to ensure that the restrictions
imposed by the government or society are not disguised protectionism against developing
countries and to ensure that the poor are given the opportunity to maintain their livelihoods
through environmental wealth in a sustainable and equitable way.

Market, State and Civil Society Roles in Development Policymaking

Questions for balance

National government plays an important role in the success of developing countries in

East Asia. National governments in Africa, Latin America, the Caribbean, and other transition
countries are more likely to hinder rather than assist and restrain than facilitate development
and growth. This chapter will explain the balance of relations between countries and markets
in the development process as well as the rules and limits of planning and development policy
making as a practice by developing countries.

Development Planning: Concepts and rationale

Mystical national planning is widely believed to be an important or even the only

institutional and organizational mechanism for dealing with major development obstacles and
resilience to high levels of economic growth. The development policy framework can play an
important role in accelerating economic growth, reducing poverty, and achieving human
developing goals.

The nature of development planning

- Economic planning: a deliberate and conscious effort by the state to formulate a decision on
how factors of production should be allocated between different uses or industries, thus
determining how many goods and services should be produced in one or more periods

- Economic plan: document a written statement containing government policy decisions on

resources that must be allocated to various uses so as to achieve the targeted level of
economic growth and other objectives over a specified period.

- Comprehensive plan: an economic plan that sets targets to cover all major sectors of the
national economy.

- Partial plan: a plan that only covers a sector in the economy. Example: agriculture.

- Planning process: procedures for describing and implementing economic plans.

Most development plans have been formulated and carried out within the framework of the
mixed economies of the developing world. A mixed economic system has the characteristics
that some resources can be owned and operated privately and partly owned and operated by
the government. The rationale for development planning - market failures, resource allocation
and mobilization, manners and psychological influence, foreign aid.

Development planning process: some basic models

Three stages of planning:

1. Aggregate growth model

An economic model that describes economic growth in one or several sectors uses a
limit number variable. For planning purposes, the Harrod-Domar model has been typically
formulated along the following lines. We start with the assumption that the ratio of total output
to reproducible capital is constant so that

𝑲 ( 𝒕 ) = 𝒄𝒀 ( 𝒕 )

K (t): capital stock at time t

Y (t): total output (GDP) at time t
c : the average and marginal capital-output ratio

We assume next that a constant share (s) of output (Y) is always saved (S) so that:

𝑰 ( 𝒕 ) = 𝑲 ( 𝒕 = 𝟏 ) − 𝑲 ( 𝒕 ) + 𝜹𝑲 ( 𝒕 ) = 𝒔𝒀 = 𝑺 ( 𝒕 )

I (t): investment at time t

s: the savings rate
S : national savings
δ: the depreciation rate

If g is the targeted rate of output growth, then:

𝒀 ( 𝒕+𝟏 ) − 𝒀 ( 𝒕 ) ∆𝒀 ( 𝒕 )
𝒈= =
𝒀(𝒕) 𝒀(𝒕)
 then capital must be growing at the same rate because from first equation we know
that:

∆𝑲 𝒄∆𝒀 ( 𝑲⁄𝒀 ) ∆𝒀 ∆𝒀
= = =
𝑲 𝑲 𝑲 𝒀

Using second equation above, we therefore arrive once again at the basic Harrod-
Domar
growth formula (with the capital depreciation parameter):

𝒔𝒀− 𝜹𝑲 𝒔
𝒈= = − 𝜹
𝑲 𝒄

Finally, because output growth can also be expressed as the sum of labor force
growth (n) and the rate of growth of labor productivity (p), the previous equation can be
rewritten
for planning purposes as:
𝒔
𝒏+𝒑= − 𝜹
𝒄

n: the labor force growth rate

p: the growth rate of labor productivity

Development policymaking does not take productivity as exogenous but is actively

focused on raising it. Thus, expected rate of labor force and productivity growth (labor force
growth can be calculated from readily available demographic information, and productivity
growth estimates are usually based either on extrapolations of past trends or on an assumed
constant rate of increase), the above equation can then be used to estimate whether domestic
savings will be sufficient to provide an adequate number of new employment opportunities to a
growing labor force. One way of doing this is
to disaggregate the overall savings function (S = sY) into at least two component sources of
saving, normally, the propensity to save out of wage income, W, and profit income, π. Thus, we
define
𝑾+ 𝝅=𝒀

Where W and are wage and profit incomes.

𝒔𝝅 𝝅 + 𝒔𝒘 𝑾 = 𝑰

Where s sand sW are the marginal proportions to save from wage income and profit.
We arrive at a modified Harrod-Domar growth equation

𝝅
𝒄 ( 𝒈 + 𝜹 ) = ( 𝒔𝝅 − 𝒔𝒘 ) ( 𝒀 ) + 𝒔𝑾

which can then serve as a formula for ascertaining the adequacy of current saving out of profit
and wage income. For example, if a 4% growth rate is desired and if δ = 0.03, c = 3.0, and π>Y =
0.5, the above equation reduces to 0.42 = sπ + sW. If savings out of capital income amount to
25%, wage earners must save at a 17% rate to achieve the targeted rate of growth. In the
absence of such a savings rate out of labor income, the government could pursue a variety of
policies to raise domestic saving or seek foreign assistance.

2. Multi-sector models and sectoral projections

Input-output model i (industrial model): a model that divides economy into sectors and
tracks the interindustry flow of purchases (inputs) and sales (outputs).

Input-output analysis is usually expanded into two ways. The first is by entering data on
payment factors, sources of household income, and patterns of consumption of household
goods through social groups (such as urban and rural households), a social accounting matrix
(SAM) is created. A SAM therefore provides a broad and detailed quantitative description of
interrelationship in an economy as they exist at a point in time, making it suitable as a tool for
evaluating the impact of alternative development policies. SAM often goes on to explain in
more detail with computable general equilibrium (CGE) models, which assumes that
households maximize utilities and companies maximize profits.

3. Project appraisal and social cost-benefit analysis

Project appraisal: quantitative analysis of the desirability relationship (profit) from

investing a given sum of private or public funds in alternative projects.

Methodology:

Cost-benefit analysis: a tool of economic analysis in which the actual and potential
private and social costs of various economic decisions are considered with the actual and
potential private and social benefits.

Social benefits are the difference between social benefits and social costs, both directly
and indirectly.

Calculate social benefits:

1. Specify the objective function to be maximized — ordinarily, net social benefits — with some
measure of how different benefits
2. To arrive at calculations of net social benefits, we need social measures of the unit values of
all project inputs and outputs. Such social measures are often called accounting prices or
shadow prices of inputs and outputs to distinguish them from actual market prices. The
greater the divergence between shadow and market prices, the greater the need for social
cost-benefit analysis in arriving at public investment decision rules.
3. Finally, we need some decision criterion to reduce the stream of projected social benefits
and cost flows to an index, the value of which can then be used to select or reject a project
or rank it relative to alternative projects.

Setting objectives

Given the difficulty of attaching numerical values to such objectives as national

cohesion, self-reliance, political stability, modernization, and quality of life, economic planners
typically measure the social worth of a project in terms of the degree to which it contributes to
the net flow of future goods and services in the economy—that is, by its impact on future levels
of consumption.

Computing Shadow Prices and Social Discount Rates

The core of social cost-benefit analysis is the calculation or estimation of the prices to
be used in determining the true value of benefits and the real magnitude of costs. Five such
reasons, in particular, are often cited.

1. Inflation and currency overvaluation. Many developing countries are still beset by
inflation and varying degrees of price controls. Controlled prices do not typically
reflect the real opportunity cost to society of producing these goods and services.
With inflation and unaltered foreign exchange rates, the domestic currency becomes
overvalued. Exchange rate is the rate at which the domestic currency may be
converted into (sold for) a foreign currency such as the U.S. dollar.

2. Wage rates, capital costs, and unemployment. Almost all developing countries
exhibit factor price distortions resulting in modern-sector wage rates exceeding the
social opportunity cost (or shadow price) of labor and interest rates understating the
social opportunity cost of capital. This leads to widespread unemployment and
underemployment and the excessive capital intensity of industrial production
 technologies. If governments were to use unadjusted market prices for labor and
capital in calculating the costs of alternative public investment projects, they would
underestimate the real costs of capital-intensive projects and tend to promote these
at the expense of the socially less costly labor-intensive projects that would be
more favorable to the poor.

3. Tariffs, quotas, subsidies, and import substitution. The existence of high tariffs, in
combination with import quotas and overvalued exchange rates, discriminates
against the agricultural export sector and favors the import substituting
manufacturing sector. It also encourages socially wasteful rent seeking on the part
of competing exporters and importers. They vie with each other (often through
bribes and threats as well as direct lobbying efforts) to capture the extra profits that
can accrue to traders with import licenses, export subsidies, tariff protection, and
industrial preferences. Rent seeking refers to efforts by individuals and businesses
to capture the economic rent arising from price distortions and physical controls
caused by excessive government intervention, such as licenses, quotas, interest rate
ceilings, and exchange control.

4. Savings deficiency. Given the substantial pressures for providing higher immediate
consumption levels to the masses of poor people, the level and rate of domestic
savings in most developing countries is often thought to be suboptimal. According to
this argument, governments should use a discount rate that is lower than the market
rate of interest in order to promote projects that have a longer payoff period and
generate a higher stream of investible surpluses in the future.

5. The social rate of discount. In our discussion of the shadow price of savings, we
mentioned the need for governments to choose appropriate discount rates in
calculating the worth of project benefits and costs that occur over time. Social rate
of discount is the rate at which a society discounts potential future social benefits to
find out whether such benefits are worth their present social cost. The social rate of
discount (also sometimes referred to as social time preference) is essentially a
price of time—the rate used to calculate the net present value of a time stream of
project benefits and costs, where the net present value (NPV) is calculated as

𝑩𝒕 − 𝑪𝒕
𝑵𝑷𝑽 = ∑
( 𝟏 + 𝒓 )𝒕
𝒕
where 𝑩𝒕 is the expected benefit of the project at time t,
𝑪𝒕 is the expected cost both evaluated using shadow prices), and
𝒓 is the government’s social rate of discount.

Net Present Value (NPV) is the value of a future stream of net benefits
discounted to the present by means of an appropriate discount (interest) rate.

Choosing projects: some decision criteria

Normally, economists advocate using the NPV rule in choosing investment projects;
that is, projects should be accepted or rejected according to whether their NPV is positive or
negative. As noted, however, NPV calculations are very sensitive to the choice of a social
discount rate. An alternative approach is to calculate the discount rate that gives the project an
NPV of zero; compare this internal rate of return with either a predetermined social discount
rate or, with less justification, an estimate of either the marginal product of capital in the
economy or the market rate of interest; and choose projects whose internal rates exceed the
predetermined or market rate. This approach is widely used in evaluating educational
investments.

Internal rate of return is the discount rate that causes a project to have a net present
value of zero, used to rank projects in comparison with market rates of interest.
Conclusions: planning models and plan consistency

The process of formulating a comprehensive, detailed development plan is obviously a

more complicated process than that described by our three-stage approach. It involves a
constant dialogue and feedback mechanism between national leaders who set priorities and
planners, statisticians, research workers, and departmental or ministry officials. Internal
rivalries and conflicting objectives (not to mention political pressure from powerful vested-
interest groups) are always to be reckoned with.

Market over planning: Government Failure and Preferences

Problems of Plan Implementation and Plan Failure

The results of development planning have generally been disappointing. The broad
rejection of comprehensive development planning based on poor performance has had a
number of practical results, the most important of which is adoption in most developing
countries from more market-oriented economic systems. To take a particular case about the
arguments of market failure and the alleged role of government in reconciling the difference
between assessing the private and social benefits of benefits and costs, the experience of
government policy in many developing countries has been one that often exacerbates rather
than reconciles the deviation of government failure rather than this market failure. . For
example, public policy has raised wage rates above labor's shadow price or the value of
scarcity by various instruments such as minimum wage laws, binding wages for the level of
education, and the level of remuneration structuring at a higher level on the basis of the
international salary scale. Plans are often too ambitious. They try to achieve too many goals at
once without consideration that some goals will compete or even conflict. They are often
grandiose in design but are vague about specific policies to achieve their stated goals. The
economic value of the development plan depends to a large extent on the quality and reliability
of the statistical data that is based. Because most developing countries have an open economy
dependent on changes in international trade, aid, "heat" speculative capital inflows and foreign
private investment, it becomes very difficult for them to be involved in even short term
forecasting, let alone long-term plans. The institutional weaknesses of the planning process in
most developing countries include the separation of planning bodies from day to day decisions
to make government machinery; the failure of planners, administrators, and political leaders to
engage in ongoing dialogue and internal communication about goals and strategies

The market includes many positive things, at least those that provide the goods
consumers want, where and when they want, and provide incentives for innovation. Deception,
corruption, monopoly, and other market failures do not disappear with a wave of neoclassical
wands. Nathan Keyfitz and Robert Dorfman have identified 14 institutional and cultural
requirements for effective private market operations. Given the existence of these institutional
and cultural preconditions, a functioning market system requires at least 11 markets that
facilitate legal and economic practices. It is clear that market reform involves more than just
eliminating price distortions, privatization of public companies, and declaring a free market.
For most of the 1980s and until the 1990s, called the Washington Consensus on development
policy holding power. This consensus, packaged by John Williamson, reflects a free market
approach to development followed in the following years by the IMF, World Bank, and US
Government Agencies. The Washington consensus also focuses on a free market approach,
even in areas where market failure is prevalent, such as the financial sector. In recent years,
major changes in the world view of the Washington Consensus have occurred in Washington
and elsewhere. even in areas where market failure is prevalent, such as the financial sector. In
recent years, major changes in the world view of the Washington Consensus have occurred in
Washington and elsewhere. even in areas where market failure is prevalent, such as the
financial sector. In recent years, major changes in the world view of the Washington
Consensus have occurred in Washington and elsewhere.
Development of Political Economy: Theories of Policy Formulation and Reform

Until now, there are 2 extreme views that dominate the discussion about the role of
government in development economics:

1. Effective governance is not only concerned with facing market failures but, it may also
achieve economic development.
2. People in government (politicians and bureaucrats) act selfishly and selfishly like company
owners, but the shortcomings in the market cannot hold them.

Understanding voter patterns in policy improvement

If voters are risk-averse, they might reject the policy if they see that they will incur
risks to all who are harmed as a result of the policy. If voters are risk-neutral, they might
choose policies that do not benefit the majority. If a minority knows that the policy will benefit
him then they will vote for the policy. Policy improvements usually occur after a crisis.

Institution: formal and informal regulations in the economic game

Path dependency: conditions where the past conditions of individuals or the economy affect
future conditions.

Democracy vs. Autocracy: which facilitates acceleration of growth?

Democracy is a system of government whose highest power is in the hands of the

people while the autocracy of its highest power is in the hands of one person (dictator).
Development policies in democracies are more short-term because there is a period of
elections while autocracy is longer so that they can be sustained. But dictators can use state
power to limit individual incomes. According to Amartya Sen, market freedom and politics are
valuable for the results of development for personal rights and also complement economic
development. However, democracy is good for broader development goals such as equity,
education, health, and hunger prevention.

Development Roles of NGOs and The Broader Citizen Sector

Development success depends not only on the high enthusiasm of the private sector
and the efficiency of the public sector, but also the citizen sector. Non Government
Organizations (NGOs) are non-profit organizations that are often involved in providing financial
and technical assistance in developing countries.

Seven comparative advantages of NGOs:

1. Innovation
2. Program Flexibility
3. Specialized technical knowledge
4. Targeted local public goods
5. Common-property resource management design and implementation
6. Trust and credibility
7. Representation and advocacy

But NGOs can also cause Voluntary failure, which is the inability of NGOs and citizens in
general to efficiently achieve social goals in their areas that are expected to have a
comparative advantage.

Trends in Government and Remedies

1. Overcoming the problem of corruption

2. Decentralization
3. Post-participatory development
PART III. MacroEconomics and International Development:
Issues and Policies
The first section discusses seven basic issues related to the environment and economic
development. This section shows that there are environmental issues associated with many of
the topics we have previously discussed.

Sustainable development and environmental accounting: The concept of sustainable

development is introduced, and can loosely be said to occur when the needs of the present
generation are met without compromising the needs of future generations. The concept of
environmental accounting defines a method of incorporating environmental decay into the
national income accounts.
Population, resources, and the environment: The consequences for the environment of
rapidly growing populations are mentioned, some of which were already discussed.
Poverty and the environment: Increasing income and expanding options can lead to
more environmentally sound decisions.
Growth versus the environment: The idea that there may be a tradeoff between the two
is introduced.
Rural development and the environment: Sustainable methods of farming are
mentioned.
Urban development and the environment: Urban pollution problems are discussed.
The global environment: Many environmental problems are global in nature, and hence
present special challenges.

Persistent rural poverty is shown to be the root cause of many of the environmental
problems in less developed countries. Common environmental problems include deforestation,
soil erosion, and ground water contamination. The principle health and productivity
consequences of environmental damage are summarized. Two hypothetical examples, one in
Africa and one in South America, are presented to clarify the relationship between rural
poverty and environmental degradation.

The section on traditional economic models of the environment includes a definition of

the optimal allocation of resources, and discusses different types of market failure which can
lead to inefficient resource allocation. Topics include characteristics of perfect property rights,
externality and common property resource problems, and public good and free rider problems.
Some limitations of each of these frameworks of analysis, particularly for specific developing
country situations, are mentioned. The section on urban development and the environment
contains some interesting descriptions of the severity of urban pollution in developing
countries and the associated health impacts. An analysis of some of the different types of
pollution control policies that can be used is presented. The negative impact of environmental
degradation on economic growth is described, which suggests that in many cases pollution
control can have a positive effect on growth and development.

A section on the 'greenhouse' phenomenon is presented. This section highlights the fact
that pollution and environmental degradation are global issues. Policy discussion is divided
into what developing and developed countries can do. The developing countries can practice
more efficient resource pricing, work closely with villages to address their economic and
environmental concerns together, clarify property rights, introduce urban pollution control
policies, and most important, intensify programs to alleviate absolute poverty and improve
conditions of rural women. The developed countries can reduce protectionism, offer debt relief
including debt-for-nature swaps, increase aid levels, assist with research and development on
clean technologies appropriate for LDCs, curtail their own emissions, and reduce demand for
environmentally harmful products.
For further details of the lesson you can read the book of Todaro Chapter 10; you may
refer to Chapter 13 and Chapter 18 of Nafziger.

International Trade Theory & Development Strategy

The impact of international trade on development is examined in terms of the effects on
growth, income distribution, poverty, and employment. To summarize the detailed analysis of
the text, trade can be an important stimulus to rapid economic growth by promoting greater
utilization of idle human and capital resources, increasing foreign exchange earnings, and
expanding access to technological knowledge. At the same time, for a majority of developing
countries, the principal benefits of world trade have accrued disproportionately to foreign
residents and wealthy nationals (as well as to the developed countries). This is the result not
of trade as such, but of the imbalanced structure of the world economy in which trade takes
place, with bargaining power concentrated in the hands of developed country private and
public institutions. Trade, because of its biased distributional effects, may often tend to
reinforce existing inequalities rather than serve development objectives.
Two broad strategies are defined, outward-looking development policies and inward-
looking development policies. Outward-looking development policies encourage free trade and
the free movement of the factors of production, while inward-oriented development policies
encourage greater self-reliance and restricted trade and movement of factors of production.
Within these two broad approaches lie the debate between free traders and protectionists and
the debate between import substitution and export promotion as the best strategy for
industrialization. The major topics addressed include:
• Encouraging the export of primary products.
• Encouraging industrialization via the import substitution strategy.
• Encouraging industrialization via the export promotion strategy.
• The trade optimist-trade pessimist debate.
• Encouraging South-South trade and economic integration.
The pros and cons of emphasizing primary product exports as a growth strategy are
discussed. Five important demand factors tend to work against the success of this strategy
(low income and price elasticity of demand for the primary products, slow population growth in
developed countries, the development of synthetic substitutes, and the growth of agricultural
protection in the developed countries). Supply side factors emphasize what was learned with
respect to the structure of production and low productivity.
The export of manufactured goods as a growth strategy is mentioned, particularly with
respect to the spectacular performance of the four Asian Tigers. The text cites rising
protection by the developed countries as a barrier against the success of this strategy. The text
also points to the need for more South-South trade, as is discussed later in the chapter.
The import substitution strategy involves identifying relatively simple consumer goods which
are currently being imported, and replacing these imports with domestic production. A second
stage would involve expanding domestic production to more sophisticated manufactured
items, including those with linkages to the consumer goods sectors established in the first
stage. Key points mentioned include:
• A built in demand for the product already exists.
• The infant industry argument.
• The use of tariffs and quotas.
• The effective rate of protection.
• The appropriate exchange rate policy.
• The role of backward and forward linkages.
• Reasons for the failure of the strategy.
A section on foreign exchange rates, exchange controls, and the devaluation decision
reviews the concept of an exchange rate market, and discusses the options available for
maintaining the official exchange rate. Overvalued exchange rates, dual exchange rate
systems, and currency devaluation are discussed.
Supplemental readings can be found in Chapter 12 of Todaro et al. book and Chapter 17 of
Nafziger.

Balance of Payment, Debts, Financial Crises and Stabilization Policies

The lesson moves away from examining international commodity trade and instead focuses
on international monetary and macroeconomic issues. The major topics are:
• Understanding the balance of payments accounts
• Identifying recent trends in LDC balance of payments accounts
• Understanding the causes and effects of the debt crisis
• Evaluating the controversy about the IMF policy of macroeconomic stabilization
Basic balance of payments accounting is introduced in the first section of the chapter. Key
definitions include the current account, the capital account, the cash account or international
reserve account, and capital flight. A detailed numerical example is used to illustrate how the
accounts work, as well as the impact of capital flight. Options for financing and reducing
payments deficits are discussed and include increasing net exports, changing the official
exchange rate, borrowing, adopting IMF stabilization policies, and acquiring SDRs.
The dimensions of the debt crisis have been expanded by the rising oil prices over the
previous four decades. The text summarizes the history of the debt crisis by noting that oil
shocks triggered international lending through a combination of increased loan demand and
the recycling of petrodollars that expanded the supply of loanable funds. The accumulation of
external debt, which requires greater debt service payments, has made it more difficult to
borrow more funds to finance developmental projects and programs.
Typical elements of IMF stabilization policies are outlined, including liberalization of foreign
exchange and import controls, devaluation, interest rate increases, deficit reduction, wage
restrictions, reduced price controls, and the general opening up of the economy. These policies
have not worked well in response to the debt crisis, leading to adjustment without growth and
negative development consequences.
Newer initiatives and suggestions for managing the debt crisis include debt forgiveness,
debt restructuring, new SDR allocations, repayments linked to export earnings, debt-for-equity
swaps, debt-for-nature swaps, and the Brady Plan. Finally, the text considers whether the debt
crisis is really over. If the crisis is defined as a threat to the large commercial banks it may be
over. If defined as a threat to development prospects, the text argues that it is not over.
For more discussions about this topic you can read the basic concepts in Chapter 13 book
of Krugman etal.; also same Chapter of Todaro and Chapter 15 of Nafziger.

Foreign Finance, Investment, Aid and Conflict: Controversies and

Opportunities
The discussion starts with examining the international flow of financial resources, and
weighs the pros and cons of the different forms of those financial resources:
• Private foreign direct investment and portfolio investment: Direct investment by
multinational corporations, and stocks and bonds in LDC emerging credit and equity
markets are discussed.
• The role and growth of remittances are presented.
• Foreign aid: Both government and non-government aid is discussed.
The first section of the chapter presents data on foreign direct investment, and
multinational corporations in particular. Characteristics of MNCs are presented, including the
fact that the goal of the MNC, profit maximization, may differ from a country's development
goals. The size of the largest MNCs in dollar terms is compared to the size of some developing
countries entire economies.
Multinational corporations are firms that by engaging in direct foreign investment own or
manage resources in more than one country. Their argued benefits include filling gaps in
savings, foreign exchange, government revenue, management skills, technology, and
entrepreneurship, all of which may ultimately increase economic growth throughout the
country. The text shows that these contributions may be small because 1) capital is often
raised locally, perhaps from the government at subsidized rates, 2) little of the profits may be
reinvested, 3) MNCs may import many of the intermediate and capital goods they use in
production, 4) liberal tax concessions and tax-avoiding transfer pricing may be present, and 5)
there may be negative effects on indigenous entrepreneurship. Additional drawbacks may
include reinforcement of dualism and inappropriate consumption of luxury goods, use of
excessively capital-intensive techniques, displacement of indigenous production, and
development of allied local groups. The text in effect argues that the net benefits of MNCs are
an empirical question to be evaluated on a case by case basis.
Remittances have grown due to improved accounting, greater number of migrant workers,
and the ease of funds transfer from host to home countries. Following a very rapid growth
after 200, India has emerged as the largest recipient country. Remittances provide a significant
pathway out of families for many LDC families.
Foreign aid is defined as a flow of official capital to LDCs that has a noncommercial,
nonmilitary, and pro-development objective from the point of view of the donor and features
concessional interest rates and/or repayment periods. Some measurement issues are
mentioned and some data is presented on the volume and source of foreign aid. It is noted that
there is a fine line between commercial and noncommercial objectives, and the tied aid
phenomenon is stressed. The discussion of why donor countries give aid cites political as well
as economic objectives. The two-gap model is introduced to describe the role of aid in relieving
the foreign exchange gap. LDCs tend to accept aid to supplement scarce domestic resources
and speed up the development process. The growing role of non-governmental organizations
is mentioned, as a source of aid. The role of foreign aid into the next century is discussed at the
end of the chapter, and summarizes past concerns as well as some possible new directions.
A new section presents the effects, consequences, and prevention methods of armed
conflict, ethnic violence, and interstate wars on economic development. The high cost of
conflict deprives the LDCs of much needed funds for developmental programs and projects.
Refer to Chapter 14 of Todaro’s book for more details about this topic.

Financial and Fiscal Policy for Development

The international flow of financial resources, and weighs the pros and cons of the different
forms of those financial resources:
• Private foreign direct investment and portfolio investment: Direct investment by
multinational corporations, and stocks and bonds in LDC emerging credit and equity
markets are discussed.
• Foreign aid: Both government and non-government aid is discussed.
The first section of the chapter presents data on foreign direct investment, and
multinational corporations in particular. Characteristics of MNCs are presented, including the
fact that the goal of the MNC, profit maximization, may differ from a country's development
goals. The size of the largest MNCs in dollar terms is compared to the size of some developing
countries entire economies.
Multinational corporations are firms that by engaging in direct foreign investment own or
manage resources in more than one country. Their argued benefits include filling gaps in
savings, foreign exchange, government revenue, management skills, technology, and
entrepreneurship, all of which may ultimately increase economic growth throughout the
country. The text shows that these contributions may be small because 1) capital is often
raised locally, perhaps from the government at subsidized rates, 2) little of the profits may be
reinvested, 3) MNCs may import many of the intermediate and capital goods they use in
production, 4) liberal tax concessions and tax-avoiding transfer pricing may be present, and 5)
there may be negative effects on indigenous entrepreneurship. Additional drawbacks may
include reinforcement of dualism and inappropriate consumption of luxury goods, use of
excessively capital-intensive techniques, displacement of indigenous production, and
development of allied local groups. The text in effect argues that the net benefits of MNCs are
an empirical question to be evaluated on a case by case basis.
Private portfolio investment represents one-third of the net financial resource flow to
LDCs. The pros and cons of emerging country stock markets are mentioned, with reference to
Mexico, Russia, Asia, and Brazil.
Foreign aid is defined as a flow of official capital to LDCs that has a noncommercial,
nonmilitary, and pro-development objective from the point of view of the donor and features
concessional interest rates and/or repayment periods. Some measurement issues are
mentioned and some data is presented on the volume and source of foreign aid. It is noted that
there is a fine line between commercial and noncommercial objectives, and the tied aid
phenomenon is stressed. The discussion of why donor countries give aid cites political as well
as economic objectives. The two-gap model is introduced to describe the role of aid in relieving
the foreign exchange gap. LDCs tend to accept aid to supplement scarce domestic resources
and speed up the development process. The growing role of non-governmental organizations
is mentioned, as a source of aid. The role of foreign aid into the next century is discussed at the
end of the chapter, and summarizes past concerns as well as some possible new directions.
Two new features are added to this chapter. The case study of Box 15.1 states that even the
poor save some of their income because they avoid living hand to mouth. The cash flow, of the
poor in India and South Africa, is often a multiple of household income. In Box 15.2, we learn
that female micro-enterprises supported by local financing and training help develop
entrepreneurial skills of the poor and create a source of steady income.
Finally, a minute of reading on Chapter 15 of Todaro and Chapter 19 of Nafziger.
Congratulations!!! You’ve done your part not only does reading help you make smart decisions;
it gives you an excellent insight that will definitely help you on your journey to the world of
economics at some point.