Development

Economics

Chapters 1 and 2;
Department of Economics, College
of Business and Economics, Addis
Ababa University, Ethiopia

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Brief Evolution of Dvt Ecocs-Context 1
• It can dates back to the classical economics(Adam
Smith, 1776 & Others), since economics contributed to
the understanding of human welfare, Indeed Efficiency
determines human well-being.
• They argued that markets would act to co-ordinate
people’s plans i.e. the “invisible hand” of Adam Smith
would take care the coordination of the economy.
• Say’s law. “supply creates its own demand” focusing
on creating productive capacity;
 The economy is inherently stable and this is achieved
since prices and wages are fully flexible.
 The economy is always at its full employment
equilibrium
• Systematic study of Devt Ecocs started after WWII in
1945, the Marshall Plan of Reconstructing Europe.

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 Origins of Marshall Plan
1. After World War I, the European economy had been greatly
damaged, and a deep recession lasted well into the 1920s
2. After six years of WWII, much of Europe was devastated
with millions killed or injured. In European nations, the
economies were well below their pre-war levels -
agricultural production was 83% of 1938 levels, industrial
production was 88%, and exports only 59%
• Shortages of goods, fuel, coal, leading to hundreds of death by
freezing; The European nations had all but exhausted their foreign
exchange reserves during the war, and the Marshall Plan aid
represented almost their sole means of importing goods from abroad;
• Rationing, e.g. Britain, 1947 power cuts
• Churchill, ‘a rubble heap, a breeding ground of hate’
• Most major cities had been badly damaged, with industrial
production especially hard-hit
• High unemployment and food shortages led to strikes and unrest in
several west European countries, a breeding place for expansion of
communism
• Europe under two spheres of control: US sphere (West Europe) &
Soviet sphere of influence (East Europe)

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 Origins of the Marshall Plan-U.S. Economic Interest

• The US was the only major power

whose infrastructure had not
been significantly harmed during
WWII,
• The long-term health of the U.S.
economy was dependent on
trade; continued prosperity
required markets to export
surplus goods. Marshall Plan aid
would largely be used by the
Europeans to buy manufactured
goods and raw materials from
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 Marshall Plan-Containment Policy
Against Communism
• Marshall Plan was the centerpiece of the new
doctrine of containment policy against
communism, aid as an instrument of foreign policy
• An unofficial goal was the containment of growing Soviet
influence in Europe
• Creation of NATO in 1949
• During the negotiation for the Marshall Plan, Americans –
pushed the importance of free trade and European
unity to form a bulwark against communism.
• Korea war of early 1950s (1950-1952)
• China communist Revolution of 1949
• High workers and communist movement in
Western Europe, Greece, France, Italy

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 Marshall Plan-Note
• Officially named the European Recovery Program
(ERP), 4 yrs government intervention, 1947-
1951.
• Primary plan of the United States for rebuilding the
allied countries of Europe and repelling
communism after World War II
• Named for United States Secretary of State George
Marshall
• Western European countries asked for $22 billion in
aid, but President Truman (USA) cut this to $17
billion in the bill he presented to Congress.
• In the same year, the participating countries (Austria,
Belgium, Denmark, France, West Germany, Great
Britain, Greece, Iceland, Italy, Luxembourg, the
Netherlands, Norway, Sweden, Switzerland, Turkey,
and the United States) signed an accord establishing a
master coordinating agency, the Organization for
European Economic Cooperation
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Organization for Economic
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 Aims of the Marshall
Plan
• Stop spread of Communism
• Help economies of Europe
recover; rebuild European
prosperity
• Provide a market for
American goods
 How successful was the Plan?
 $12-13 billion dollars poured into 16 non-Communist European states;
 Some $13 billion of economic and technical assistance—equivalent
to around $130 billion in 2006—was given to help the recovery of the
European countries that had joined in the Organization for Economic
Cooperation and Development, (OECD)
 1948 to 1952 saw the fastest period of growth in European history
 Industrial production increased by 35%
 Standards of living increased dramatically
 Allowed the nations of Western Europe to relax austerity measures
and rationing, reducing discontent and bringing political stability.
 Communist influence on Europe was greatly reduced.
 Trade relations helped forge the North Atlantic Alliance,
NATO.
 Note Europe was rebuilt, not built for 1st time.
 Appropriate institutions, Human Resources, knowledge,
culture was there endogenously developed. This is
contrary to the experience of former colonized countries
including SSA. What they needed most was financial
capital as there were established institutions, knowledge,
human resources, and development culture.
Europe under sphere of Influences
Late 1940s-Early 1990s
 Bipolar Global Competition, Aid-Context 3

• Cold war, bipolar competition for global dominance,

revealed in competing ideologies, liberal free market
capitalism and socialist central planning.
• Dvt Ecocs as a instrument of the ideological fight,
which was the guise for the competition for global
dominance.
• Aid was based on the experience of the “Marshall
Plan”, which assumed institutions and HRD & HRM,
exogenous values had to be imposed on the newly
liberated countries. Marshall plan as a Dvt Model for
newly decolonized countries.
• Dvt Aid, technical assistance, God-fatherhood as an
instrument of global competition.
• USAID since 1961, as an instrument of USA’s foreign
Policy
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 Colonialism Collapsing
• Colonialism failed apart owing to the
relative power shift to the USA and USSR,
both of which did not have interest in
colonial power.
• They were not for direct colonialism, but for
expanding their spheres of influence
indirectly, what some call it
“neocolonialism”
• Formal political liberation of most African,
Latin American and Asian countries in the
1950s, 1960s with no clear ideology, theory
of their own, no or weak institutional
capacity.
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 Prime Objective of Newly Liberated
Countries-Context 4
1. Political consolidation as prime
objective; no genuine commitment for
dvt!
2. Development assistance as an extension
of global competition for global
dominance, based on Europe’s Model
3. No endogenous institutions for
development,
a. Endogenous institutions & knowledge, were
unconsciously replaced.
b. Unlike Europe, non of Ethiopian religious
schools evolved to universities .

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 What is Development?
What is Development
Economics About?

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 The Problem : Grave Development Deficit

1. Developing countries, notwithstanding the

enormous strides they have made in the last few
decades, display fundamental economic
inadequacies in a wide range of indicators.
a. Levels of physical capital per person are small.
b. Abject poverty: Massive and deep poverty: Denial of the very
basic minimum requirement for survival, violating the right to
live.
c. Nutrition levels are low.
d. Other indicators of human capital such as education — both at
the primary and secondary levels — are well below developed-
country benchmarks.
e. So are access to sanitation, safe water and housing.
f. Population growth rates are high, and so are infant mortality
rates.
g. One could expand this list indefinitely.
2. Why are underdeveloped countries
underdeveloped?
Tsegabirhann W.Giorgis Abay,
3. Why are the developed
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 Global Challenges
1.What are the nature, the width and depth of the
challenges the world is facing? What are the hopes of
humanity into the future in the face of global challenges?
Can we think of development without having hope into a
better future?
a. Some challenges are lingering: deprivations, poverty, homelessness,
joblessness, marginalization etc.
b. Some are deepening. Different manifestation of inequalities: rich vs. poor
income groups, gender, religious, ethnic, rural-urban, source of livelihood
(pastoral, sedentary agriculture, manufacturing, service industries),
Continental divide (SSA lagging behind), etc.
c. Some are emerging. Violent extremism, organized crime, women & child
trafficking, drugs, epidemics and pandemics, sea piracy, etc. These
emerging trends indeed show the mighty of the poor, the marginalized, the
squalor. Who can defeat any person who carries a time bomb in his/her
stomach, willing to blow up for whatever cause?
2.Most of these challenges are mutually reinforcing.
3.Whatever their nature or reach, these challenges have an
impact on people’s well-being in both present and future
generations. (UNDP, 2016, p.iii)
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 Definitions: Development Economics

No single definition. The

definition and scope of Dvt
Ecocs has evolved over time.
a. Traditional economics- efficient
allocation of scarce resources
b. Political economics- social and
political process & Interaction of
political forces/agents/
c. Development economics- Role of
values, attitudes, and institutions.

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 Definition of Economic Development: 1950s

1. Production Function Approach:

Growth=Dvt
2. What is Economic Growth? An increase in
Gross National Product (GNP) or GDP
and increased share of the
industrial/specifically the
manufacturing industry/ sector from
total GNP.
3. In economic terms, development is the
capacity of a nation to generate and
sustain an annual increase in its
GNP of 5% or more.
4. Though a definition of the 1950s, it is
still relevant one.
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What Explains such Differences in GNP?

GNP Per Capita (US $)

Country Exchange rate PPP

UK 24,500 23,550
USA 34,260 34,260
Zimbabwe 480 2,590
Bangladesh 380 1,650
China 840 3,940
India 460 2,390
Sri Lanka 870 3,470
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Australia, Canada, New Zealand and USA
Stylized Facts about the World Distribution of
Per Capita GNP
1. The relative distribution appears to have been quite
stable in the last 50 years or so.
2. Over that period the average per capita income of the
richest 5 % was about 32 times that of the poorest 5%
– a staggering disparity.
3. Although the distribution has been stable, there has been
a significant movement of countries within the
distribution (for example the identity of the top and
bottom 5% has not remained the same). The movement
up and down relative to the US has been roughly symmetric,
which is why the overall distribution has not changed a lot.
4. While there has been significant mobility, movement
from below the average to above it, and from above
the average to below it are rare. Most countries have
remained roughly in the same part of the distribution.

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 Problems with the Growth Approach to Dvt

1. Underreporting of income by developing countries

a. High proportion of income is generated for self-consumption.
b. Prices of non-traded goods are not appropriately reflected in
exchange rates.
c. Markets are not competitive and externalities are not
reflected.
2. Can GDP really be an indicator of human development or
human welfare?
 Is a quantity based concept - not quality based
3. Too much focus on material wellbeing at the expense of
other dimensions of life, values, culture, issue of freedom
from whatever suppressive environment
4. Issue of equity, stability and peace taken for granted, as a
byproduct of sustained growth, social devt and welfare of
those non-capitalist subjected to trickling effect
5. Despite its weaknesses, still one of the important
dimensions of development, material well-being, income
still constitute the important aspect of individual well-
being, the basis for other needs.
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 Some Methodological Problems of NCEs Approach to
Development
• The major premises, underlying theoretical beliefs behind the
production function approach, neo-classical economics (NCEs)
approach to Development include:
1. What is the prime purpose and hence objective of a human
person? What is the purpose and hence objective of a
society? For Neoclassical Economists, the prime purpose and
hence objective of a person is utility/profit/ maximization. The
utility maximizing person is extended to society. So the
society prime objective is to maximize social welfare
expressed in terms of the sum of the value of production
of goods and services of a given economy at a given time.
It undermines other aspects of human life, values, beliefs, needs,
morality, social responsibility etc..
2. Methodological individualism: This is based on the belief that
the whole is the sum of its parts. Yes it works in set theory. But
does it work in biological and societal entities? Is a
biological entity a sum of its organs? Is society a sum of its
population? According the GNP, GDP, National Income etc. are the
horizontal summation of sectors which in turn are the sum
of industries whichTsegabirhann
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in turn is the Abay,
W.Giorgis sum of individual agents
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(corporations/firms/ and individual producers).
 Definition of Economic Development:
1970s & 1980s
• Dethronement of GNP in the 1970s
and increasing emphasis on
“redistribution from growth”
• Increasing emphasis on non-
economic social indicators
• Economic development consists of
the reduction or eradication of
poverty, inequality and
unemployment within the context
of a growing economy.
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 World Bank’s Definition of Economic
Development: 1990s
•World Bank in its 1991 WDR asserted that the “challenge of
development is to improve the quality of life (QOL).”
•The improved QOL involves higher incomes, better education,
higher standards of health and nutrition, less poverty, a
cleaner environment, more equality of opportunities, greater
individual freedom, and a richer cultural life. (WDR, 1991)
•But note the source material of the World Bank is stating ‘more
equality of opportunities’, ‘greater individual freedom and richer
cultural life’ . This perspective allows a conceptual room for some
people to be left behind, based on neoclassical theory of justice,
which believes in creating a playfield, creating equality of
opportunity, the it is up to the individual whether or not
he/she makes it up.
•Hence the society and hence a government of the same
society does not take responsibility to address any collective
problem of a given society and to develop an individual
human person. For Neoclassical Economics, Development is
not understood as a human right of every human person.
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 Human Rights Approach to Development
1. The UN, Human Rights Declaration of 1948 and
briefly discussing the major issues including
the
a. Civil and Political rights
b. Economic, social and cultural rights
c. Collective or group rights (Gender, race,
religion, ethnic, etc.)
“The indivisibility and interdependence of all
human rights – civil, political, economic,
social, and cultural – are fundamental tenets of
international human rights law.” (UN, 2005; Economic,
Social and Cultural Rights, a Handbook, UN, New York and Geneva)

Governments have the duty of respecting,

protecting and fulfilling these human rights.
 Economic, Social & Cultural Rights

• In 1966, two separate treaties, covering almost

entirely all the rights enshrined in the Universal
Declaration of Human Rights were adopted after
approximately 20 years of negotiations: one for civil
and political rights, the International Covenant on
Civil and Political Rights (ICCPR), and one for
economic, social and cultural rights, the International
Covenant on Economic, Social and Cultural Rights
(ICESCR). The ICESCR was adopted by the United Nations
General Assembly on 16 December 1966 and entered
into force on 3 January 1976. So it took 28 years to be
enforced at the UN Level, merely because of the
fights among the veto powers.
• HRs evolved over time following global power shifts
and compromises over ideological fight.
(WHO, World Health Organization, Regional office for the Eastern Mediterranean,
International Covenant on Economic, Social and Cultural Rights)
 Human Goals of Economic Development :
Amartya Sen’s “Capabilities” Approach: 1985

• Economic growth is not an end in itself and has to

enhance the lives people lead and the freedoms that
they enjoy.
• Development can be seen . . . as a process of
expanding the real freedoms that people enjoy.
(Amartya Sen, Nobel laureate in economics)
• Capability to function is what matters for status as a
poor/non-poor person and it goes beyond availability of
commodities
• Capabilities: “freedom that a person has in terms of
the choice of his functionings ,…”
• Functionings is what a person does with
commodities of given characteristics that they
possess/control.

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 Larger Freedom-Trinity of the UN Goals
1. “We will not enjoy development
without security, we will not enjoy
security without development,
and we will not enjoy either
without respect for human rights”.
UN Secretary General, Kofi Anan,
2005
2. Development programs should
a. further human rights (goal),
b. be guided by human rights (process)
and
c. contribute to the development of the
capacities of ‘duty-bearers’ to meet
 Underlying Theory of Justice Behind
Development Intervention
• Is development economics concerned to bring
about change, improve the wellbeing of the
majority, the few or everyone? (UNDP, 2016,
p.iii)
• Is development based on merit, create an
opportunity and then let those who can make it
succeed and those who cannot be left behind?
• Or is it based on the principle, that development
is a human right and hence no one should be
left behind. Everyone, every human person,
every child, every student, every farmer, every
job seeking young, every patient deserves the
same right and should be not left behind.

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 Substance of Development:
Full Freedom
• Human development is all about human freedoms: freedom
to realize the full potential of every human life. (UNDP,
2016, p.iii)
• Over the past quarter-century there has been impressive
progress on many fronts in human development, with people
living longer, more people rising out of extreme poverty and
fewer people being malnourished. Human development has
enriched human lives—but unfortunately not all to the same
extent, and even worse, not every life. (UNDP, 2016, p.iii)
• This is to liberate everyone from all political (suppressions,
operations & violations), economic (constraints, &
deprivations), intellectual (ignorance, lack of information,
disinformation that deprives the understanding and
analytical capacity of a person), psychological and moral
degradations, (emotional & spiritual barriers, shortcomings,
hindrances, fear, irresponsibility, negative values &
attitudes to life and others), that hinder the realization of
full potential of every human life.

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 Assignment I: Realization of Full Potential
1. What do you understand by the definition of
development as “Human development is all about
human freedoms: freedom to realize the full
potential of every human life.” (UNDP, 2016, p.iii)?
2. Hint & Advice:
a. Appreciate the evolution of the definition of
development over time, comparative analysis of the
different definitions is expected.
b. Understand what is meant by realizing full potential of
every human life.
c. What does realization of full potential means to each
and every one of you in each group?
d. What policy direction should countries follow?
e. Read and reflect individually, and independently write
the answer.
f. Then discuss, debate, argue among yourself with the
aim of coming up an integrated, synthesized paper. If
you do not come into an agreement, present each line
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of argument in a comparative
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 Global Consensus on Poverty Eradication
• Different developments contributed towards the recognition
of income distribution/inequity, poverty
reduction/eradication/ as development agenda across
the globe;
• The Debt Crisis of the 1980s: Where debtors failed to
repay, started with Mexico in 1982 and invaded L.
America, SSA, Asia. The financial sector of the DCs is
based on the credit market. Debt crisis meant failure
and collapse of the credit market, which is the mainstay
of Economies, cities in the DCs, like London, Paris, etc.
• Terrorism which received global attention after Sept 11,
2001, was evolving since the early 1990s; One of the root
causes of terrorism is absolute poverty, desperation,
marginalization, loss of trust, hope among the youth.
• Ideological Pressure from Socialists: Westerns need to
embrace the issue of inequity which was championed
primarily by the Marxist ideology since the 19th century.
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 Evolution of Global Consensus in
the Fight Against Poverty & Under
Development
• Following the debt crisis in the first
half of the 1980s, cancellation of
debts was tailored to anti-poverty
strategies, which evolved to the
global ‘Poverty Reduction
Program’.
• Then MDGs emerged that was
broader than the poverty reduction
programs
• Then SDGs was designed to
persistently
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fight poverty and
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 Millennium Development Goals-2000-2015- after
1 Eradicate extreme poverty and hunger

2 Achieve universal primary education

3 Promote gender equality and empower women

4 Reduce child mortality

5 Improve maternal health

6 Combat HIV/AIDS, malaria, and other diseases

7 Ensure environmental sustainability

8 Develop a global partnership for development : Trading & Financial

System; Debt, Landlocked Cs, ICT, Essential Drugs

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 Sustainable Development Goals (SDGs)-Post 2015 Goals
1 End Extreme Poverty including Hunger
a. End extreme poverty, including absolute income poverty
b. End hunger & achieve food security, appropriate nutrition, & zero
child stunting
c. Provide enhanced support for highly vulnerable states & LDCs.

2 Promote Economic Growth & Decent Jobs within Planetary

Boundaries
3 Ensure Effective Learning for All Children & Youth for Life &
Livelihood
4 Achieve Gender Equality, Social Inclusion, & Human Rights

5 Achieve Health and Wellbeing at all Ages

Improve Agriculture Systems and Raise Rural Prosperity
6
Empower Inclusive, Productive and Resilient Cities
7
Curb Human-Induced Climate Change & Ensure sustainable
8 energy
Secure BiodiversityTsegabirhann
& Ensure Good
W.Giorgis Management of Water,36
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9 Oceans, Forests & Natural
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Resources ;
 Definition of Economic Development:
Conclusion
“Development is a multi dimensional
process of change involving 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.” (Todaro and
Smith)
Note:
• Dynamic & sustainable process of
change
• Inclusiveness: equity & fairness
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 Definition -Conclusion 2
• Development is both a physical reality and a state
of mind for attaining a better life.
• Three basic core values as a practical guideline
for understanding development
• Life Sustenance: The Ability to Meet Basic Needs
• Self-esteem: To be a Person, self-respect,
independence, sovereignty, avoiding the feeling
of inferiority, feeling of being neglected,
dominated, deprived, humiliated, lack of
confidence, Gross appreciation of others at the
expense of once-self.
• Freedom: freedom from the three evils of ‘want,
ignorance and squalor’. Freedom to determine
once destiny,
• Three of the core values are inherently related to each
other. Low life sustenance could lead to loss of self-
esteem and ecoc imprisonment.
• Specific components of better life vary from
time to time andTsegabirhann
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from W.Giorgis
society
Abay, to society.
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 Broad Development
Goals/Objectives
HIGH INCOME & HDI
Income Targets FUNDAMENTA
& HD Targets L: BOTTOM-
US$15,000 -
$20,000 LINE-
per capita by 2020
SURVIVAL/SU
STAINANCE

Quality
Enables all
of Life Meets
communiti present
es to fully needs
without
benefit from
compromisi
INCLUSIVEN the wealth
ng future
of the
ESS: country generati SUSTAINABI
BASIS FOR ons LITY
PEACE
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 Conclusion: Three Objectives of
Development
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 descent,
quality, jobs, better education, and greater attention
to cultural and human values, all of which will serve not
only to enhance material wellbeing but also to generate
greater individual and national self-esteem.
3. To expand the range of economic and social choices
(FREEDOM) 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.

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 Conclusion
• 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.
• 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.
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 Questions & Issues for Reflections & Discussions
1.Why should we develop? Why should the poor develop? Why do we care
to study the poor, the unemployed, the less developed countries, Africa?
2.How does the concept of “capabilities to function” help us gain insight
into development goals and achievements? Is money enough? Why or
why not? How do you relate the capabilities approach with the MDGs?
3.What do you understand by the MDGs & SDGs and
a. What are the changes in both UN endorsed development goals? Compare and
contrast the MDGs and SDGs.
b. What is there for you in the SDGS as potential young graduates?
c. How do you relate them with thee three core values of development?
4.What does each of the three core values mean to you? Which one of
them is more important to a typical underdeveloped country like
Ethiopia? How do you relate them to your-self, your country and your
society? How can the three core values relate to women’s emancipation?
5.Why is the concept of equality so important? Do you think the concept
of efficiency and equality are consistent to each other? What are the
dilemmas? How to address the dilemmas?
6.Do you think neoclassical economics (at least from the micro and macro
courses you have taken so far) have the conceptual space for
understanding and explaining Inequality?
7.Can one think of development without addressing inequality?

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 Why Bother about
Development?

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 Why Bother about Development?-1

• Why as societies, should we

bother about the development of
the impoverished people, Africa,
low income countries?
• Why you as an individual are
studying about the poor society
instead of focusing on and
learning about something that
transforms your personal life?
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 Why Bother? Essentially Because-2
• Human beings are social
animals. So we care about
others.
• “The world is like the human
body: If one part aches, the rest
will feel it; if many parts hurt,
the whole will suffer.”
• There can no longer be two
futures, one for the few rich and
the other for the very many poor.
“There will be only one future—
04/04/2023
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 Why Bother about Development?-
Global Factors
• Immigration, some European countries are being threatened
by immigrants owing to low population growth of native
population. So supporting at the source instead of being
engulfed by immigrants.
• Fundamentalism and terrorism: addressing underlying root
causes of terrorism, why people just decide to blow up?
Afghanistan and Somalia, Syria, Iraq, Libya, Tunisia,
Egypt have become breeding grounds for extremism
and violent conflict.
• Globalization of Crime, Somalia Sea Piracy 2011-12
• Pandemics is becoming a frequent experience, erupting
from any angle and invading the globe: HIV –AIDs, Covid
19, etc.
• Global market should expand and increase. You cannot travel
long with impoverished population, as market will be so small.
• Humanity: Globalization of Human Rights
• Global agendas like Environment and Climate Change
Tsegabirhann W.Giorgis Abay,
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Why Bother about Development?-Local Factors
• One of the manifestation of underdevelopment is an
abject poverty, marginalization of social groups,
inequity, unfairness.
• But there are limits that any political body can
survive with such social and economic evils.
• Increasing enlightened public over time:
education, access to media, including electronic
media, global labor mobility etc all these increase
public expectations on government,
• Functional legitimacy lasts so far as governments
address societal demands and problems;
• Sustained stability and peace rests on socio-
economic performance, status of living standards of
society;

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 Development is Becoming a
Genuine Agenda
• Thus, from both local and global
factors/developments/ there
appears to be a convergence
towards making development as
prime agenda of governments.
• If indeed, development has
become a prime political agenda,
then it can be taken as a political
capital.

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 Common Features of
Under Development:
Comparative
Development Study
(Chap 2 of Todaro)

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 What is
Development/Underdevelopment?
• Apart from the definition and
scope, we need to understand
more as to what we mean by
development and
underdevelopment.
• To that effect we will
characterize the undeveloped
economies through comparative
development study
• Appreciate the Different
Dimensions of under
development and hence the
Tsegabirhann W.Giorgis Abay,
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 Common Features of & Areas of
Heterogeneity of Under
Development
1. Lower levels of living and productivity
2. Lower levels of human capital
3. Higher levels of inequality and absolute poverty
4. Higher population growth rates
5. Greater social fractionalization, fragmentation
6. Larger rural populations but rapid rural-to-urban
migration
7. Lower levels of industrialization
8. Adverse geography
9. Underdeveloped financial and other markets
10.Lingering colonial impacts such as poor institutions
and often external dependence.
11.Initial condition of today’s UDCs and DCs are
different
Tsegabirhann W.Giorgis Abay,
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 Defining & Characterizing the
Developing Countries
1. Economic classification: per capita income based classification :
a. Low income economies (LICs)
b. Middle income economies
 lower middle-income countries (LMCs),
 upper-middle-income countries (UMCs)
c. High income economies,
2. Exceptions: high income countries with one developed sector like oil
export but less education, health of the general public may be
classified as developing economies: Saudi Arabia & United Arab
Emirates
3. Another widely used classification is that of the least developed
countries (LDCs), a United Nations designation that as of 2010
included 49 countries, 33 of them in Africa (Ethiopia is one of them),
15 in Asia, plus Haiti. For inclusion, a country has to meet each of
three criteria:
 Low income,
 Low human capital, and
 High economic vulnerability
4. Such classifications warns against over generalization!
We have diversity among the group LICs, LDCs etc.

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 Diversity in & Shared Features of
Underdevelopment
• The shared mix and severity of
these challenges largely set the
development constraints and
policy priorities of a developing
nation
• However, there is diversity
among the LDCs. Though there
are shared common problems,
there are differences among the
LDCs. This suggest that
development needs to be
Tsegabirhann W.Giorgis Abay,
contextual, relevant to the
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 How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages?

There are eight significant differences in initial

conditions that define the growth prospects of present
LDCs. (Todaro P. Michael and Smith C. Stephen;
11th edition, 2012; pp: 71-77)
1. Physical and human resource endowments
2. Per capita incomes and levels of GDP in relation to the rest of the
world
3. Climate : Temperate Vs. Equatorial climate
4. Population size, distribution, and growth
5. Historical role of international migration
6. International trade benefits
7. Basic scientific and technological research and development
capabilities
8. Efficacy of domestic institutions
Tsegabirhann W.Giorgis Abay,
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 Physical and Human Resource Endowments

1. Physical object gap: factories, roads, and

modern machinery
2. Idea gap = Ingenuity gap: Ability to apply
innovative ideas to solve practical social
and technical problems. knowledge about
marketing, distribution, inventory control,
transactions processing, and worker motivation.
• But, human capital defined as the productive
investments in people, such as education,
skills and health resulting from expenditures
on education, on-the-job training programs,
and medical care, is it an endowment or an
outcome of development process?
Tsegabirhann W.Giorgis Abay,
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 Divergence/Convergence/ Trends-1
• Are the developing countries “catching up” by
growing faster on average than developed
countries? Two Perspectives:
• Divergence: A tendency for per capita income (or output)
to grow faster in higher-income countries than in lower-
income countries so that the income gap widens across
countries over time (as was seen in the two centuries after
industrialization began).
• Convergence: The tendency for per capita income (or
output) to grow faster in lower income countries than in
higher-income countries so that lower-income countries
are “catching up” over time. When countries are
hypothesized to converge not in all cases but other things
being equal (particularly savings rates, labor force growth,
and production technologies), then the term conditional
convergence is used.
Tsegabirhann W.Giorgis Abay,
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 Drivers of Convergence-Drivers of Catch up
• Technology Transfer, Developing countries need not
“reinvent the wheel”; So LDCs can and should “leapfrog”
over some of the earlier stages of technological development.
Thus it will take shorter time to double output per worker, to
catch up. Practically, technology transfer never was/is free and
easy. It proved to be an issue that called for a deliberate and
conscious investment to develop and/or adapt it. Success has not
been automatic with technology transfer.
• As per the traditional neoclassical analysis, due to the law of
diminishing returns, the marginal product of capital and
the profitability of investments would be lower in DCs. The
impact of additional capital on output would be expected to be
smaller in a developed country compared to that of LDCs. So we
expect more investment (both national investment and FDI) until
both DCs and LDCs converge into one level of per capita income.
However, due to sustained innovativeness, the
diminishing returns does not seem to work in practice.

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 Divergence/Convergence/ Trends-2
• In general there has been a
trend of divergence between
the development performance
of the DCs and the LDCs. At the
dawn of the industrial era, average
real living standards in the richest
countries were no more than three
times as great as those of the
poorest. Today, the ratio
approaches 100 to 1.
Tsegabirhann W.Giorgis Abay,
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 Divergence/Convergence/ Trends-3

• China’s average income was just 3% of that

of the United States in 1980, it was
estimated to have reached 14% of U.S.
income by 2007. But in the same period, the
income of the Dem. Rep. of Congo fell from
about 5% of U.S. levels to just 1%. But
globally, evidence for relative convergence
is weak at best, even for the most recent
decades.
• Convergence trends experienced in East &
South Asian Countries, India, Malaysia,
Thailand, S.Korea, Brazil, while the opposite
in majority of least developed countries.

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 Critical Questions &
Issues of Under
development: Defining
the Dimensions and
Scope of Development
Economics.

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Major & Critical Questions of Development Economics

1. The critical questions of development economics may

be summarized into:
a. Why have some economies developed and why is that the
LDCs are lagging behind in the development ladder? Why
they failed to develop?
b. What are the underlying root and symptom causes of
underdevelopment?
c. What are the common features of underdeveloped
economies?
d. Do we have heterogeneity with commonalities? What do the
heterogeneity of LDCs imply?
e. What are the key differences between conditions in today’s
developing countries and those in now developed countries?
2. Yet in order to appreciate the different dimensions of
underdeveloped we can venture for details of
questions and issues of development in order to
appreciate the diverse dimensions of
underdevelopment.
Tsegabirhann W.Giorgis Abay,
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 Critical Questions of Devt Ecocs 2
What explains Development Performance? Why are some
growing/developing while others are lagging?
1. We were all poor 1,000 years ago, or more. Sustained
growth in per-capita income started only (some) 200 years ago:
called Industrial Revolution. What explains the sustained
growth/development/ in income of few countries, over the
last 200 years, since the industrial revolution? What
explains the failure of many countries, to do so?
2. What are the sources of national and international
economic growth? Why do some countries make rapid
progress toward development while many others
remain poor?
3. What constraints most hold back accelerated growth,
depending on local conditions?
4. What are the causes of extreme poverty and what
policies have been most effective for improving the
lives of the poorest of the poor?

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 Critical Questions of Devt Ecocs 3

Broad Dimensions of Underdevelopment (Multi-

dimensionality of Underdevelopment):
Is rapid population growth threatening the economic progress of
developing nations?
Why is there so much unemployment and underemployment in the
developing world, especially in the cities, and why do people continue to
migrate to the cities from rural areas even when their chances of finding a
conventional job are very slim?
Wealthier societies are also healthier ones because they have more
resources for improving nutrition and health care. But does better health
also help spur successful development? What is the impact of poor
public health on the prospects for development, and what is needed to
address these problems?
Do educational systems in developing countries really promote economic
development, or are they simply a mechanism to enable certain select
groups or classes of people to maintain positions of wealth, power, and
influence?
As more than half the people in developing countries still reside in rural
areas, how can agricultural and rural development best be promoted? Are
higher agricultural prices sufficient to stimulate food production, or are rural
institutional changes (land redistribution, roads, transport, education, credit,
etc.) also needed?
Tsegabirhann W.Giorgis Abay,
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 Critical Questions of
Devt Ecocs 4
Sustainability Issues
1. What do we mean by “environmentally
sustainable development”? Are there
serious economic costs of pursuing
sustainable development as opposed to
simple output growth, and who bears the
major responsibility for global
environmental damage—the rich North or
the poor South?
2. Institutional sustainability
3. Cultural Sustainability
Tsegabirhann W.Giorgis Abay,
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 Critical Questions of Devt Ecocs 5-1
Relative Role of Government and Market and Policy
Making
1. Why do so many developing countries select
such poor development policies, and
what can be done to improve these choices?
2. What is the role of financial and fiscal
policy in promoting development? Do large
military expenditures stimulate or retard
economic growth?
3. What is microfinance, and what are its
potential and limitations for reducing poverty
and spurring grassroots development?

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 Critical Questions of Devt Ecocs 5-2
Relative Role of Government and Market and Policy
Making
1.Are free markets and economic privatization the answer to
development problems, or do governments in developing countries
still have major roles to play in their economies?
2.A central issue in development is the interaction between
governments and markets. WDR 1991. But how to ensure the
developmental interaction between governments and markets?
3.Competitive market are the best way yet found for efficiently
organizing the production and distribution of goods and services.
Yet how to bring about such competitive markets?
4.Yet the competitive market requires to be built. If there is no well-
matured private sector, strong free market institutions, the next
option is the government for both developing the private sector and
to directly involve in the production of goods and services
5.Different perspectives on the role of government
a. Government as A Regulator (in line with WB, IMF)
b. Government as Facilitator of Dvt (in line with WB, IMF)
c. Government as a ‘player’ direct Producer, investor: infrastructure,
strategic sectors (Proponents of Developmental State)
6.It is not a question of state or market: each has a large and
irreplaceable role. WDR, 1991
Tsegabirhann W.Giorgis Abay,
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 Critical Questions of
Devt Ecocs 6
Income distribution; Non-inclusive
Political Economy:
1. Who benefits from the growth and
development? and why? What
sustains inequity in a given country?
2. How did the extremes between rich
and poor be so very great?
3. How can improvements in the role and
status of women have an especially
beneficial impact on development
prospects?
Tsegabirhann W.Giorgis Abay,
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 Critical Questions of Devt Ecocs- 7
Underdevelopment is the mother of every type of
political problem!!
1. How to ensure sustainable peace and stability? What
are the underlying economic, political, social and
institutional causes of conflict and instability?
2. How to establish national consensus, and avoid
divisive politics?
3. How to establish a strong and cohesive nation-state?
4. How to establish and sustain a strong and effective
government?
5. Should Democracy come first and development latter
or Vice Versa? Can both be attained simultaneously?
6. Is Democracy a matter of design and wish or is it an
evolutionary process requiring socio-economic and
political foundations?

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 Critical Questions of Devt Ecocs 8-1
Globalization and the External Competitive Environment
1.
Is underdevelopment an internally (domestically) or externally
(internationally) induced phenomenon?
2.
What is meant by globalization, and how is it affecting the
developing countries? Can it be an option?
3.Is expanded international trade desirable from the point of view of
the development of poor nations? Who gains from trade, and how are
the advantages distributed among nations?
4.When and under what conditions, if any, should governments in
developing countries adopt a policy of foreign-exchange control,
raise tariffs, or set quotas on the importation of certain
“nonessential” goods in order to promote their own industrialization or
to ameliorate chronic balance of payments problems? What has been
the impact of International Monetary Fund “stabilization programs”
and World Bank “structural adjustment” lending on the balance of
payments and growth prospects of heavily indebted less developed
countries?
5.Should exports of primary products such as agricultural commodities
be promoted, or should all developing countries attempt to
industrialize by developing their own manufacturing industries as
rapidly as possible?
04/04/2023
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Critical Questions of Devt Ecocs 8-2

Globalization and the External Competitive

Environment-2
1. How did so many developing nations get into such serious
foreign-debt problems, and what are the implications of
debt problems for economic development? How do financial
crises affect development?
2. What is the impact of foreign economic aid from rich
countries? Should developing countries continue to seek
such aid, and if so, under what conditions and for what
purposes? Should developed countries continue to offer such
aid, and if so, under what conditions and for what purposes?
3. Should multinational corporations be encouraged to
invest (FDI) in the economies of poor nations, and if so,
under what conditions? How have the emergence of the
“global factory” and the globalization of trade and finance
influenced international economic relations?

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 Conclusion Points
• Development is a complex process
of change
• It is multi dimensional involving
quite diverse, economic, social
and political problems including
stability and peace issues.
• Though there has been success
stories in many East and South Asian
countries, LDCs have not been
catching up over the past 6 or so
decades since the 1950s and 1960s
Tsegabirhann W.Giorgis Abay,
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 Questions and Issues for Reflections
and Deliberations
• What are the major lessons you learned so far
from this characterization of development and
definition of development economics?
• What common problems/characteristics/ of
underdeveloped have you observed/learned/?
• What are the possible drivers of convergence of
development? How effective have they been in
closing the development gaps of the LDCs and the
DCs?
• What should be the relative role of government in
economic development? Why?
• What is meant by the statement that many
developing nations are subject to “dominance,
dependence, and vulnerability” in their relations
with rich nations? Can you give some examples?

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 Root Causes and
Symptoms of Under
Development : Issue of
Long-Term
Development

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 Dimensions, Symptoms, Correlates of
Underdevelopment
• Too many manifestations, dimensions, symptoms,
correlates of underdevelopment,
• Are all dimensions, causes, dimensions,
symptoms, correlates equally important?
Should we give equal weight for every type
of problem? Which are the causes and which
are the effects? Which of the causes are the
root causes and which are the intermediate
or proxy causes?
• If we treat all problems and dimensions of
underdevelopment to be equal, then we may end
up into vicious cycle approach to the problems
and challenges faced by least developed countries.

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Vicious circle of poverty (VCP): "Implies a circular
constellation of forces tending to act and react in such a way
as to keep a country in the state of poverty". (Nurkse)

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 Correlates of Economic Growth Vs
Fundamental Causes
• The correlates of economic growth, such as physical
capital, human capital, and technology, could be
too many factors
• If Indeed, technology, physical capital & human
capital are important factors that explain
development, then, why do certain societies fail
to improve their technologies, invest more in
physical capital, and accumulate more human
capital?
• How did South Korea and Singapore manage to grow,
while Nigeria & Congo failed to take advantage of their
growth opportunities? Note that Nigeria & Congo are
two of the naturally endowed countries with large
potential for sustained development. Ethiopia was by
far better endowed with natural resources than Japan
in the early 20th century. Why does Ethiopia failed and
Japan succeeded Tsegabirhann
04/04/2023 despite such Abay,
W.Giorgis
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difference in resources
76
What are the causes of a Headache?
• There are a number of causes of headache.
Different sickness show similar/same/ symptoms.
• Diagnosis-1: The physician listens to and asks the
complaints of the patient.
• Diagnosis-2: Then she/he/ recommends for further
examination using different medical
technologies: laboratory tests, MRI, X-ray, etc.
• Successful treatment: First prescription may not
be effective. there may be certain degree of trial and
error. when the actual(real/root) cause is
identified and then effective medication taken on the
basis of prescription of the doctor,
• Yet the way the way the patient manages her/his/ self
matters. i.e. implementation matters a lot to
reclaim healthy body.
Tsegabirhann W.Giorgis Abay,
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 Major Dvt Methodological
Approaches
1. Which of these are the causes
and which are the effects?
2. Out of the causes which you
may have identified,
a) Which ones of them are long-
run causes of development?
b)Which ones are root causes
and which are symptoms?

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Fundamental Cause or Symptoms?
• Any theory that focuses on the intervening variables
(proximate causes) alone, without understanding the
underlying driving forces, would be incomplete.
• Understanding fundamental causes is central to attain
development/growth/ objectives, since attempting to
increase growth merely by focusing on proximate
causes would be tantamount to dealing with
symptoms of diseases without understanding what the
diseases themselves are.
• Fundamental causes can only have a big impact on
economic growth if they affect parameters and
policies that have a first-order influence on physical
and human capital and technology.
(Acemoglu, 2009; Introduction to Modern Economic
Growth; Princeton University Press; Princeton and
Oxford; USA and UK)

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 Fundamental/Root/ Causes of
Underdevelopment
• For Acemoglu, 2009 the
fundamental causes of
underdevelopment include the
following:
a. Geography
b. Initial condition
c. Institutions
d. Culture
e. Politics Tsegabirhann W.Giorgis Abay,
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 1.Geography
• Climate
• Landlocked countries have clear
disadvantage
• Prevalence of Malaria
• For detail see diagrammatic
presentation by (Todaro & Smith,11th
edition, 2011, p.84)

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1. Geography Determined Colonial
Regime
• Geography affected the types of colonies established
• High mortality rates in colonial areas (high prevalence of
malaria) dictated extractive colonial regime.
Colonizers ruled at arm’s length and avoided large, long-
term settlement. Their interest could be summarized as
“steal fast and get out” or “get locals to steal for
you.” Unfavorable institutions were therefore established,
favoring extraction over production incentives.
• Less hazardous climate led to investment and
expansion of plantations. where mortality was low,
populations were not dense, and exploitation of
resources required substantial efforts by colonists,
institutions broadly encouraging investments,
notably constraints on executives and protection
from expropriation, were established.

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 2.Economic Institutions-1
• Economic institutions, which play an important role
in comparative development, are defined as the
“rules of the game” of economic life. As such,
institutions provide the underpinning of a
market economy by establishing the rules of
property rights and contract enforcement;
improving coordination; restricting coercive,
fraudulent, and anticompetitive behavior—
providing access to opportunities for the broad
population; constraining the power of elites;
and managing conflict more generally. Moreover,
institutions include social insurance (which also
serves to legitimize market competition) and the
provision of predictable macroeconomic stability.

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 2.Economic Institutions-2
• Postcolonial institutional quality has a strong impact
on the effectiveness of the private, public, and citizen
(or civil society) sectors. Democratic governance, rule of
law, and constraints on elites will encourage more and better
quality public goods. Better property rights protections and
contract enforcement for ordinary citizens and broad access
to economic opportunities will spur private investments. And
institutions will affect the ability of civil society to organize
and act effectively as a force independent of state and
market.
• Forces that protect narrow elites in ways that limit
access of the broader population to opportunities for
advancement are major obstacles to successful
economic development. If institutions are highly
resistant to attempts at reform, this helps clarify why
development is so challenging.
• Poor institutions have generally proved very resistant
to efforts at reform
Tsegabirhann W.Giorgis Abay,
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 2. Non Colonized Countries
• Never-colonized countries also show a dramatic range in
performance; Ethiopia and Afghanistan remain very
poor, Thailand is in the lower-middle range, Turkey
is in the upper-middle range, and Japan is among
the very wealthiest countries; China, starting among
the poorest countries 30 years ago, is now rapidly
ascending the income tables. The quality of institutions
(and inequality) undoubtedly mattered in non-colonized
societies;
• It is generally true that legacies of colonialism,
slavery, and Cold War dictatorships have affected
the growth prospects of LDCs
• Economic and social development will often be
impossible without corresponding changes in the
social, political, legal, and economic institutions of a
nation.
Tsegabirhann W.Giorgis Abay,
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 3. Initial Conditions
• Pre-colonial institutions also mattered to the
extent that they had influence on the type of
colonial regime established.
• Why the colonizers were strong to colonize
and why the colonized were vulnerable to
colonialism?
• Since apparent political liberalization in the
1960s of most countries, why should it take so
long to develop, irrespective of the impact of
slave trade and colonialism?
• Colonial impact on inequity led to inbuilt long-
run factor that affected the peace and stability
of a country and institutions that sustained
inequity.
Tsegabirhann W.Giorgis Abay,
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 4. Culture
• Cultural factors may also matter
in influencing the degree of
emphasis on education,
postcolonial institutional quality,
and the effectiveness of civil
society, though the precise roles
of culture are not clearly
established in relation to the
economic factors surveyed.
• Asian values as one explaining factor
of Asian growth
Tsegabirhann W.Giorgis Abay,
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 5. Politics
• Politics has multiple effects on development,
including:
1. It provides developmental leadership,
2. Sustainable Peace and Stability are essential
preconditions for development,
3. Democratic governance is a preferred governance
system of a given country. This requires regularly
conducted free and fair elections as a minimum
precondition.
4. Responsive governance system, a democratic
system that is all inclusive at all times, at all
decision making levels and periods. This goes
beyond electoral democracy. Inclusive political
landscape, responsive governance system are
minimum requirements for effective
developmental leadership.
Tsegabirhann W.Giorgis Abay,
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 Questions and Issues for Reflections &
Discussions
1. Discuss the need for distinguishing between
root (fundamental) causes and symptoms.
2. What is geographical determinism? Discuss
3. Compare and contrast the significance of
each of the fundamental causes, geography,
institutions and initial conditions
4. Compare and discuss each of the three core
values of development with root causes of
underdevelopment
5. Discuss what institutions are and their roles
in development
6. Discuss the significance of culture in
explaining development

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 Measuring
Development & Growth

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 Measuring Dvt/Growth/
a. Note that the methodological, measurement and estimation
issues are quite broad and demanding, involving qualitative
and quantitative methodological approaches though
economics so far has the inclination towards quantitative
techniques. So here, only cursory review hoping students
will strengthen their readings on the subject
b. GDP/GNP Measures and Estimation;
c. Millennium Development Goals (MDG’s) (to be achieved by
2015)
d. Human Development Index (HDI): achievement of the goals or
improvement in the index is a measure of development
e. Measuring values, culture, norms, self-esteem, freedom,
institutions remains challenging , poverty, inequity (both
income & none income,) are complex, challenge and so far
the achievement is incomplete. Here only sketchy
presentation for exposure

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 Traditional Economic Measures

1. GDP: is the market value of all final goods and services produced within a country in a
given period of time
Y=C+I+G+NX
2. GNP: is the market value of all final goods and services produced by permanent
residents of a country in a given period of time
GNP= GDP+ net factor income from abroad
3.Common alternative index is the rate of growth of income per capita
or per capita GNP
a. Per capita GNP: is the per-head value of final goods and services
produced by permanent residents of a country in a given period of time. It
is converted to USD using the current exchange rate. This measure (Per
capita GNP/GDP/ are exaggerated by the use of official foreign-exchange
rates to convert national currency figures into U.S. dollars. This conversion
does not measure the relative domestic purchasing power of different
currencies.
b. Purchasing Power Parity (PPP) Measure: Researchers have tried to
compare relative GNIs and GDPs by using purchasing power parity
(PPP) instead of exchange rates as conversion factors. PPP is
calculated using a common set of international prices for all goods
and services. the number of units of a country’s currency required to
purchase the same of basket of goods and services in the local market that
a US $1 would buy in the USA. Under PPP, exchange rates should adjust
to equalize the price of a common basket of goods and services
across countries. Penn World Tables rank countries using the PPP
method.
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 Human Development Index
(HDI)
1. Initiated in 1990 and undertaken by UNDP in its
annual series of HDRs. So first HDR published by
UNDP since 1990
2. HDI is based on 3 goals & hence measures of
quality of life
a. Longevity: Life expectancy at birth (index of long
and healthy life)
b. Index of knowledge: (2/3) adult literacy rate +
(1/3) (secondary and tertiary gross enrollment
ratio)
c. Standard of living : GDP/capita (index of a decent
standard of living).
3. Weighted average: HDI= 1/3(Income index)
+1/3(Life expectancy index)+1/3(education index)

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Human Development Index
Ranks 175 countries into 3 groups
a. Low human development = 0.00-0.099
b. Medium human development = 0.5-
0.799
c. High human development = 0.80-1.00
Country HDI GDP rank-HDI rank

Low HD: Tanzania 0.436 +21

Medium HD: Turkey 0.735 -21

High HD: Canada 0.936 +3

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 Thank you for the Day

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