Economic Development - Characteristics:
 commodity and resource markets are typically
Chapter 1: Introducing Economic Development: A Global
Perspective
1.1 How the Other Half Live
1.2 Economics and Development Studies
 The Nature of Development Economics
 Why Study Development Economics? Some
Critical Questions
 The Important Role of Values in Development
Economics
 Economies as Social Systems: The Need to Go
Beyond Simple Economics
1.3 What Do We Mean by Development?
 Traditional Economic Measures
 The New Economic View of Development
 Amartya Sen’s “Capability” Approach
 Development and Happiness
 Three Core Values of Development
 The Central Role of Women
 The Three Objectives of Development
1.4 The Future of the Millennium Development Goals
How the Other Half Live
Absolute poverty - situation of being unable to meet the
minimum levels of income, food, clothing, health care,
shelter, and other essentials.
Peasant Family = favela (squatters’ slum)
Subsistence economy - economy in which production is
mainly for personal consumption; standard of living yields
little more than basic necessities of life—food, shelter, and
clothing
Development - process of improving the quality of all human
lives and capabilities by raising people’s levels of:
Living Self-esteem Freedom
Beyond increased in income, those who live in poverty also
need and demand access to health care, education, and —
especially for women—empowerment.
Developing Countries (Less Developed Countries)
- process cannot be analyzed without considering the
role of economically developed nations
- characterized by low levels of living and other
development deficits
1
highly imperfect
 consumers and producers have limited info
 major structural changes takes place in both the
society and the economy
 potential for multiple equilibria rather than a
single equilibrium is more common
 disequilibrium situations often prevail (prices do
not equate supply and demand)
More developed countries (MDCs) - economically advanced
capitalist countries
Economics and Development Studies
 The Nature of Development Economics
Traditional Economics
- emphasizes utility, profit maximization, market
efficiency, and determination of equilibrium
- assumes economic “rationality” and a purely
materialistic, individualistic, self-interested orientation
toward economic decision making
Political Economy
- certain groups of economic and political elites
influence the allocation of scarce productive
resources, either for their own benefit exclusively or
for that of the larger population as well
Development Economics
- study of how economies are transformed:
stagnation – growth
lowincome – high-income status
- overcome problems of absolute poverty
- must also deal with the economic, social, political, and
institutional mechanisms, necessary to bring about
rapid and large-scale improvements in levels of living
- Ultimate Purpose: to help us understand developing
economies in order to help improve the material lives
of the majority of the global population.
- 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
 Why Study Development Economics? Some Critical
Questions
Globalization - increasing integration of national economies
into expanding international markets.
 The Important Role of Values in Development
Economics
Economics
- a social science
- concerned with human beings and the social systems =
organize their activities to satisfy basic material needs
(e.g., food, shelter, clothing) and nonmaterial wants
(e.g., education, knowledge, spiritual fulfillment)
Ethical or normative value premises about what is or is not
desirable are central features of the:
 economic discipline in general
 development economics in particular
The very concepts of economic development and
modernization = represent implicit and explicit value
premises – achieve “realization of the human
potential” by Mahatma Gandhi.
Realization of Human Potential – requires each individual to
consider their future possibilities relative to their current
capabilities so that they may develop and execute a plan to
gain knowledge, experience, and opportunities.
 Economies as Social Systems: The Need to Go Beyond
Simple Economics
Social system
- organizational and institutional structure of a
society, including its values, attitudes, power
structure, and traditions
- Interdependent relationships between economic and
noneconomic factors.
Noneconomic Factors - vary widely from one region to
another
 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
 the flexibility or rigidity of economic and social
classes
Social scientists sometimes mistakenly dismiss these
noneconomic variables as “nonquantifiable” = these variables
often play a critical role in the success or failure of the
development effort
2
Be mindful of the crucial roles that values, attitudes, and
institutions play in the overall development process.
Values – principles, standards, or qualities that a society or
groups within it considers worthwhile or desirable.
Attitudes – states of mind or feelings of an individual, group,
or society regarding issues – material gain, hard work, saving
for the future, and sharing wealth.
Institutions – norms, rules of conduct, and generally
accepted ways of doing things
Economic Institutions – humanly devised constraints that
shape human interactions; include both informal and formal
“rules of the game” of economic life in the widely used
framework of Douglass North.
What Do We Mean by Development?
 Traditional Economic Measures
Development
- traditionally meant achieving sustained rates of
growth of income per capita = enable a nation to
expand its output at a rate faster than the growth rate
of its population
“Real” Per Capita Gross National Income (GNI)
- 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
- total domestic and foreign output claimed by residents
of a country
- Formula: Gross Domestic Product (GDP) + factor
incomes accruing to residents from abroad - the
income earned in the domestic economy accruing to
persons abroad
Gross domestic product (GDP)
- total final output of goods and services produced by
the country’s economy, within the country’s territory,
by residents and nonresidents
 The New Economic View of Development
A number of developing countries experienced relatively high
rates of growth of per capita income but the levels of living of
the masses of people showed little or no improvement
During the 1970s, economic development came to be
redefined: reduction or elimination of poverty, inequality,
and unemployment within the context of a growing economy
Development
- must involve 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
 Amartya Sen’s “Capability” Approach
The “capability to function” is what really matters for status
as a poor or nonpoor person.
Poverty cannot be properly measured by income or by utility;
what matters is not the things a person has—or the feelings
these provide—but what a person is, or can be, and does, or
can do.
Sen notes that functioning depends also on:
1. social conventions in force in the society in which the
person lives
2. the position of the person in the family and in the society
3. the presence or absence of festivities such as marriages,
seasonal festivals and other occasions such as funerals,
4. the physical distance from the homes of friends and
relatives
The capacity to maintain valued social relationships and to
network leads to external capabilities (James Foster and
Christopher Handy)
External Capabilities - abilities to function that are conferred
by direct connection or relationship with another person
Capabilities (by Sen)

What matters for well-being is how and why consumers - the freedom that a person has in terms of the choice
utilize commodities. of functionings, given his personal features
(conversion of characteristics into functionings) and his
Functionings command over commodities
- to convert the characteristics of commodities into
- what people do or can do with the commodities that functionings = requires health and education as well as
they come to possess or control income
- functionings that people have reason to value can - Sen’s perspective placed so much emphasis on health
range from being healthy, being well-nourished, and and education, and more recently on social inclusion
well-clothed, to being mobile, having self-esteem, and and empowerment
“taking part in the life of the community”
Human “Well-Being” (for Sen) - means being well, in the
Functioning – what an individual chooses to do or to be basic sense of being healthy, well nourished, well clothed,
literate, and long-lived, and more broadly, being able to take
Commodity – an instrument which enables her to achieve
part in the life of the community, being mobile, and having
different functionings
freedom of choice in what one can become and can do
Five Sources of Disparity Between (measured) Real Incomes
and Actual Advantages by Sen:
 Development and Happiness
1. Personal Heterogeneities
connected with disability, illness, age, or gender greater happiness = expand an individual’s capability to
2. Environmental Diversities function
heating and clothing requirements in the cold or
infectious diseases in the tropics, or the impact of The average level of happiness or satisfaction increases with
pollution a country’s average income. Studies show that financial
3. Variations in Social Climate security is only one factor affecting happiness.
prevalence of crime and violence, and “social capital” or
moral values and trust in others Richard Layard’s Seven Factors Affecting Average National
4. Distribution Within the Family Happiness:
incomes received in a family because it is the basic unit
1. family relationships
of shared consumption, but family resources may be
2. financial situation
distributed unevenly
3. work
5. Differences in Relational Perspectives
4. community and friends
some goods are essential because of local customs and
5. health
conventions
6. personal freedom
7. personal values
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 Three Core Values of Development
Sustenance: The Ability to Meet Basic Needs
- basic goods and services, such as food, health,
clothing, protection, and shelter, that are necessary to
sustain an average human being at the bare minimum
level of living
- a condition of “absolute underdevelopment” exists
when any of these is absent or in critically short supply
- rising per capita incomes, the elimination of absolute
poverty, greater employment opportunities, and
lessening income inequalities constitute the necessary
but not the sufficient conditions for development
Self-esteem: To Be a Person
- 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
- sense of worth and self-respect, of not being used as a
tool by others for their own ends
Freedom: To Be Able to Choose
- 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
- W. Arthur Lewis concluded that the advantage of
economic growth is not that wealth increases
happiness, but that it increases the range of human
choice
 The Central Role of Women
 Women have primary responsibility for child rearing
 The resources that they are able to bring to child
rearing will determine whether the cycle of
transmission of poverty from generation to
generation will be broken
 Mothers tend to spend a significantly higher fraction
of income under their control for the benefit of their
children than fathers do
 Women transmit values to the next generation
 The 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
higher incomes, provision of more jobs, better
education, and greater attention to cultural and
human values = generate greater individual and
national self-esteem
4
3. To expand the range of economic and social choices
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
 The Future of the Millennium Development Goals
Millennium Development Goals (MDGs) - set of eight goals
adopted by the United Nations in 2000 deemed achievable
by 2015:
1. Eradicate extreme poverty and hunger
 reduce by half proportion of people living on less
than $1 a day and who suffer from hunger
2. Achieve universal primary education
 all children complete a full course of primary
schooling
3. Promote gender equality and empower women
 eliminate gender disparity in primary and secondary
(2005) and at all levels (2015)
4. Reduce child mortality
 reduce by two-thirds the mortality rate among
children under 5
5. Improve maternal health
 reduce by three-quarters the maternal mortality
6. Combat HIV/AIDS, malaria, and other diseases
 halt and begin to reverse the spread of HIV/AIDS
and incidence of malaria and other major diseases
7. Ensure environmental sustainability
 integrate the principles of sustainable development
 reverse the loss of environmental resources
 reduce by half the proportion of people without
sustainable access to safe drinking water
 achieve significant improvement in the lives of at
least 100 million slum dwellers (2020)
8. Develop a global partnership for development
 develop further an open, rule-based, predictable,
nondiscriminatory trading and financial system
 address the special needs of the least developed
countries
 address the special needs of landlocked countries
and small-island developing states
 deal comprehensively with the debt problems of
developing countries
 develop and implement strategies for decent and
productive work for youth – in cooperation with
developing countries
 provide access to affordable essential drugs in
developing countries – in cooperation with
pharmaceutical companies
 make available the benefits of new technologies – in
cooperation with the private sector
Key international agencies, including the United Nations, the
World Bank, the International Monetary Fund (IMF), the
Organization for Economic Cooperation and Development
(OECD), and the World Trade Organization (WTO), all helped
develop the Millennium Declaration.
The MDGs assign specific responsibilities to rich countries,
including increased aid, removal of trade and investment
barriers, and eliminating unsustainable debts of the poorest
nations.
The life of all Filipinos in 2040: Filipinos are
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
- vision that guides the future and is the anchor of the
country’s plans
- result of a long-term visioning process that began in
2015

1. Matatag: Strongly Rooted

Sector - subset (part) of an economy, with four usages in - there is work-life balance = there is time to spend with
economic development: family and friends during weekends
- spend time to serve the community, help others who
 technology (modern and traditional sectors)
are in need, and contribute to various causes =
 activity (industry or product sectors) volunteer opportunities
 trade (export sector)
2. Maginhawa: Comfortable
 sphere (private and public sectors)
- Filipino families live in comfortable homes with the
desired amenities and secure tenure = no one is poor
and hungry
The panel (High-Level Panel of Eminent Persons on - Families and friends are within reach = transport is
Development Agenda - diverse panel of political leaders) convenient and affordable
repeatedly stressed that SDGs (Sustainable Development - Children receive quality education
Goals) is “a universal agenda” for all countries, developed as - Decent jobs that bring sustainable income are
well as developing and without exceptions, “to be driven by available
five big, transformative shifts.” 3. Panatag: Secure
- expect to live long and enjoy a comfortable life upon
These universal shifts are:
retirement
1. Leave no one behind - there are resources and savings to cover unexpected
expenses
move “from reducing to ending extreme poverty, in all
- feel safe in all places in the country
its forms;” in particular, to “design goals that focus on
- Filipinos trust their government because it is free of
reaching excluded groups”
corruption and provides equal service to all
2. Put sustainable development at the core
integrate the social, economic, and environmental
dimensions of sustainability
3. Transform economies for jobs and inclusive growth
while moving to sustainable patterns of work and life.
4. Build peace and effective, open, and accountable
institutions for all
encourage the rule of law, property rights, freedom of
speech and the media, open political choice, access to
justice, and accountable government and public
institutions.
5. Forge a new global partnership
each priority should involve governments and also
others, including people living in poverty, civil society
and indigenous and local communities, multilateral
institutions, business, academia, and philanthropy

Filipinos live in a high-trust and caring society.

5
 Chapter 2: Comparative Economic Development
1.1 Defining the Developing World
1.2 Basic Indicators of Development: Real Income, Health,
and Education
 Purchasing Power Parity
 Indicators of Health and Education
1.3 Holistic Measures of Living Levels and Capabilities
 The New Human Development Index
1.4 Characteristics of the Developing World: Diversity within
Commonality
 Lower Levels of Living and Productivity
 Lower Levels of Human Capital
 Higher Levels of Inequality and Absolute Poverty
 Higher Population Growth Rates
 Greater Social Fractionalization
 Larger Rural Populations but Rapid Rural-to-
Urban Migration
 Lower Levels of Industrialization and
Manufactured Exports
 Adverse Geography
 Underdeveloped Markets
 Lingering Colonial Impacts and Unequal
International Relations
1.5 How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages
 Physical and Human Resource Endowments
 Relative Levels of Per Capita Income and GDP
 Climatic Differences
 Population Size, Distribution, and Growth
 The Historical Role of International Migration
 The Growth Stimulus of International Trade
 Basic Scientific and Technological Research and
Development Capabilities
 Efficacy of Domestic Institutions
1.6 Are Living Standards of Developing and Developed
Nations Converging?
1.7 Long-Run Causes of Comparative Development
Defining the Developing World
The most common way to define the developing world is by
per capita income.
Classifications of countries by their Economic Status
Created by International Bank for Reconstruction and
Development (IBRD) or the World Bank:
Ranked by their levels of gross national income (GNI) per
capita:
 low-income countries (LICs) = $1,025 or less
 lower-middle-income countries (LMCs) = $1,026 - $4,035
6
 uppermiddle-income countries (UMCs) = $4,036 -
$12,475
 high-income countries = $12,476 or more
LMCs and UMCs are informally grouped as the middle-income
countries.
World Bank
- known as an “international financial institution”
- provides development funds to developing countries
in the form of interest-bearing loans, grants, and
technical assistance
Newly industrializing countries (NICs)
- special distinction among upper-middle-income or
newly high-income economies
- countries at a relatively advanced level of economic
development with a substantial and dynamic industrial
sector and with close links to the international trade,
finance, and investment system
- designate some that have achieved relatively
advanced manufacturing sectors
Ranked through their degree of international indebtedness:
classified countries as severely indebted, moderately
indebted, and less indebted
Another widely used classification is that of the least
developed countries: low income, low human capital, and
high economic vulnerability
Human capital - productive investments in people, such as
skills, values, and health resulting from expenditures on
education, on-the-job training programs, and medical care
Emerging Markets
- introduced at the International Finance Corporation to
suggest progress (avoiding the then-standard phrase
Third World that investors seemed to associate with
stagnation)
- we do not use this because:
 emerging market is widely used in the
financial press to suggest the presence of
active stock and bond markets
 referring to nations as markets may lead to an
underemphasis on some non-market
priorities in development
 usage varies and there is no established or
generally accepted designation of which
markets should be labeled as emerging and
which as yet to emerge (the latter now
sometimes dubbed frontier markets in the
financial press)
Basic Indicators of Development: Real Income, Health, and
Education
Basic Indicators of Three Facets of Development:
1. real income per capita adjusted for purchasing power
2. health as measured by life expectancy,
undernourishment, and child mortality
3. educational attainments as measured by literacy and
schooling
 Purchasing Power Parity
Gross National Income (GNI) per capita
- most common measure of the overall level of
economic activity
- often used as a summary index of the relative
economic well-being of people in different nations
- Calculation: total domestic and foreign value added
claimed by a country’s residents without making
deductions for depreciation of the domestic capital
stock.
Value added - portion of a product’s final value that is added
at each stage of production
Depreciation (of the capital stock) - wearing out of
equipment, buildings, infrastructure, and other forms of
capital, reflected in write-offs to the value of the capital
stock.
Capital stock - total amount of physical goods existing at a
particular time that have been produced for use in the
production of other goods and services
Conversion of national currency figures into U.S. dollars does
not measure the relative domestic purchasing power of
different currencies.
Purchasing power parity (PPP)
- calculation of GNI using a common set of international
prices for all goods and services, to provide more
accurate comparisons of living standards
- defined as the number of units of a foreign country’s
currency required to purchase the identical quantity of
goods and services in the local developing country
market as $1 would buy in the United States
 Indicators of Health and Education
Health:
 Life Expectancy - average number of years newborn
children would live if subjected to the mortality risks
 Undernourishment - consuming too little food to
maintain normal levels of activity = “problem of
hunger”
7
 Child Mortality – under 5 years old
 Birth Rate - high fertility can be both a cause and a
consequence of underdevelopment
Educational Attainments:
 Literacy - fraction of adults reported or estimated to
have basic abilities to read and write
Holistic Measures of Living Levels and Capabilities
 The New Human Development Index
Human Development Index (HDI)
- index measuring national socioeconomic
development, based on combining measures of
education, health, and adjusted real income per capita
- Ranks each country on a scale of:
0 = lowest human development
1= highest human development
Based on three goals or end products of development:
1. a long and healthy life as measured by life
expectancy at birth
2. knowledge as measured by a combination of
average schooling attained by adults and expected
years of schooling for school-age children
3. decent standard of living as measured by real per
capita gross domestic product adjusted for the
differing purchasing power parity of each
country’s currency to reflect cost of living and for
the assumption of diminishing marginal utility of
income
Diminishing Marginal Utility - the subjective value of
additional consumption lessens as total consumption
becomes higher
Two steps in calculating the New HDI:
1. Creating the three “dimension indices”
2. Aggregating the resulting indices to produce the
overall New Human Development Index (NHDI)
In the New HDI, instead of adding up the health, education,
and income indexes and dividing by 3, the New HDI is
calculated with the geometric mean: NHDI = H1/3E1/3I1/3
H = health index, E = education index, I = income index
The wide range of income, health, education, and HDI
indicators already reviewed is sometimes called a “ladder of
development.”
Characteristics of the Developing World: Diversity within
Commonality (Read Group Work)
 Lower Levels of Living and Productivity
The wide disparity in income largely corresponds to the large
gaps in output per worker between developing and
developed countries
Low income leads to low investment in education and health
as well as plant and equipment and infrastructure, which in
turn leads to low productivity and economic stagnation =
poverty trap or what Nobel laureate Gunnar Myrdal called
“circular and cumulative causation”
A misconception about this implies that countries are
doomed to remain poor. However, the concept of poverty
traps suggests that poverty can be a dynamic condition, with
the potential to persist but also to be broken with the right
interventions.
 Lower Levels of Human Capital
Human capital - health, education, and skills
Developing world has lagged in its average levels of nutrition,
health, and education.
There are strong synergies (complementarities) between
progress in health and education = under-5 mortality rates
improve (lesser deaths) as mothers’ education levels rise
 Higher Levels of Inequality and Absolute Poverty
Very high levels of inequality (gap between rich and poor
within individual developing countries) are found in many
middle-income countries.
Extreme poverty is due in part to low human capital but also
to social and political exclusion and other deprivations.
Development economists use the concept of absolute
poverty to represent a specific minimum level of income
needed to satisfy the basic physical needs of food, clothing,
and shelter in order to ensure continued survival = problem
arises when these minimum subsistence levels vary from
country to country and region to region
 Higher Population Growth Rates
Crude Birth Rate – number of children born alive each year
per 1,000 population
A major implication of high birth rates: active labor force has
to support proportionally almost twice as many children as it
does in richer countries
Both older people and children are often referred to as an
economic dependency burden in the sense that they must be
supported financially by the country’s labor force
8
Dependency burden – proportion of the total population
aged 0 to 15 and 65+, which is considered economically
unproductive and therefore not counted in the labor force.
The higher the crude birth rate is, the higher its dependency
burden is
 Greater Social Fractionalization
Fractionalization – significant ethnic, linguistic, and other
social divisions within a country
The greater the ethnic, linguistic, and religious diversity of a
country, the more likely it is that there will be internal strife
and political instability.
Being indigenous makes it much more likely that an
individual will be less educated, in poorer health, and in a
lower socioeconomic stratum than other citizens
 Larger Rural Populations but Rapid Rural-to-Urban
Migration
Shift from agriculture to manufacturing and services
Although modernizing in many regions, rural areas are poorer
and tend to suffer from missing markets, limited information,
and social stratification.
A massive population shift from rural to urban areas, fueling
rapid urbanization.
 Lower Levels of Industrialization and Manufactured
Exports
Industrialization - associated with high productivity and
incomes and has been a hallmark of modernization and
national economic power
Developing nations tended to have a higher dependence on
primary exports. Most developing countries have diversified
away from agricultural and mineral exports to some degree.
The low-income countries remain highly dependent on a
relatively small number of agricultural and mineral exports.
 Adverse Geography
Geography must play some role in problems of agriculture,
public health, and comparative development more generally.
Developing countries are primarily tropical or subtropical,
and this has meant that they suffer more from tropical pests
and parasites, endemic diseases such as malaria, water
resource constraints, and extremes of heat.
Resource endowment - nation’s supply of usable factors of
production, including mineral deposits, raw materials, and
labor
High mineral wealth is no guarantee of development success.
Conflict over the profits from these industries has often led
to distribution of wealth, social strife, undemocratic
governance, high inequality, and even armed conflict, in what
is called the “curse of natural resources.”
 Underdeveloped Markets
Market underdevelopment lacks:
1. a legal system that enforces contracts and validates
property rights
2. a stable and trustworthy currency
3. an infrastructure of roads and utilities that results in low
transport and communication costs
4. a well-developed and efficiently regulated system of
banking and insurance
5. substantial market information for consumers and
producers about prices, quantities, and qualities of
products and resources
6. social norms that facilitate successful long-term business
relationships
Infrastructure – facilities enabling economic activity and
markets, such as transportation, communication and
distribution networks, utilities, water, sewer, and energy
supply systems
Imperfect market – market in which the theoretical
assumptions of perfect competition are violated by the
existence of a small number of buyers and sellers, barriers to
entry, and incomplete information
Incomplete information – absence of information that
producers and consumers need to make efficient decisions
resulting in underperforming markets
 Lingering Colonial Impacts and Unequal International
Relations
Colonial Legacy:
Despite important variations that proved consequential,
colonial era institutions often favored extractors of wealth
rather than creators of wealth, harming development then
and now.
Developing countries have more often lacked institutions and
formal organizations of the type that have benefited the
developed world: Domestically, property rights have been
less secure, constraints on elites have been weak, and a
smaller segment of society has been able to gain access to
and take advantage of economic opportunities. Problems
with governance and public administration, as well as poorly
performing markets, often stem from poor institutions.
9
Property rights - acknowledged right to use and benefit from
a tangible (land) or intangible (intellectual) entity that may
include owning, using, deriving income from, selling, and
disposing
External Dependence:
Developing nations have weaker bargaining positions than
developed nations in international economic relations
Developing nations often also voice great concern over
various forms of cultural dependence
Developing nations are dependent on the developed world
for environmental preservation, on which hopes for
sustainable development depend. Of greatest concern, global
warming is projected to harm developing regions more than
developed ones; yet both accumulated and current
greenhouse gas emissions still largely originate in the high-
income countries.
Developing world endures what may be called environmental
dependence, in which it must rely on the developed world to
cease aggravating the problem and to develop solutions,
including mitigation at home and assistance in developing
countries
How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages
1. Physical and Human Resource Endowments
2. Relative Levels of Per Capita Income and GDP
3. Climatic Differences
4. Population Size, Distribution, and Growth
5. The Historical Role of International Migration
Brain drain - emigration of highly educated and
skilled professionals and technicians from the
developing countries to the developed world
6. The Growth Stimulus of International Trade
Free trade = “engine of growth. “ Trade in which
goods can be imported and exported without any
barriers in the forms of tariffs, quotas, or other
restrictions
Terms of trade - ratio of a country’s average export
price to its average import price.
7. Basic Scientific and Technological Research and
Development Capabilities
Research and development (R&D) Scientific
investigation with a view toward improving the
existing quality of human life, products, profits,
factors of production, or knowledge
8. Efficacy of Domestic Institutions
Are Living Standards of Developing and Developed Nations and slow growth of manufacturing employment in
Converging? low-income countries

Divergence

- tendency for per capita income (or output) to grow
faster in higher-income countries than in lower-
income countries
- the income gap widens across countries over time (as
was seen in the two centuries after industrialization
began).
Convergence
- tendency for per capita income (or output) to grow
faster in lower-income countries than in higher-
income countries
- lower-income countries are “catching up” over time
Long-Run Causes of Comparative Development
Economic Institutions
- “Humanly devised” constraints that shape interactions
(or “rules of the game”) in an economy, including:
formal rules = embodied in constitutions, laws,
contracts, and market regulations
informal rules = reflected in norms of behavior and
conduct, values, customs, and generally accepted ways
of doing things

Conditional Convergence

- countries are hypothesized to converge not in all cases

but other things being equal (particularly savings rates,
labor force growth, and production technologies)

Relative Country Convergence

- examine whether poorer countries are growing faster

than richer countries
- occurs when the income of the poor country weighted
by the ratio between the income of the rich country
and that of the poor country increases more than that
of the rich country

Absolute Country Convergence

- despite higher growth, income gains were still smaller

in absolute amount than in the OECD
- even when the average income of a developing
country is becoming a larger fraction of developed
country average incomes, the difference in incomes
can still continue to widen for some time before they
finally begin to shrink

Population-Weighted Relative Country Convergence

- weight the importance of a country’s per capita

income growth rate proportionately to the size of its
population

World-as-One-Country Convergence

- think of the world as if it were one country

- take into account changes in inequality within
countries as well as between them

Sectoral Convergence

- convergence in manufacturing = failure to find overall

convergence across countries is due to the small share
10
 Chapter 3: Classic Theories of Economic Growth and
Development
3.1 Classic Theories of Economic Development: Four
Approaches
3.2 Development as Growth and the Linear-Stages Theories
• Rostow’s Stages of Growth
• The Harrod-Domar Growth Model
• Obstacles and Constraints
• Necessary versus Sufficient Conditions: Some
Criticisms of the Stages Model
3.3 Structural-Change Models
• The Lewis Theory of Economic Development
• Structural Change and Patterns of Development
• Conclusions and Implications
3.4 The International-Dependence Revolution
• The Neocolonial Dependence Model
• The False-Paradigm Model
• The Dualistic-Development Thesis
• Conclusions and Implications
3.5 The Neoclassical Counterrevolution: Market
Fundamentalism
• Challenging the Statist Model: Free Markets,
Public Choice, and Market-Friendly Approaches
• Traditional Neoclassical Growth Theory
• Conclusions and Implications
3.6 Classic Theories of Development: Reconciling the
Differences
Classic Theories of Economic Development:
Approaches (Classic Post–World War II Literature)
1. Linear-stages-of-growth model
2. Theories and patterns of structural change
3. International-dependence revolution
4. Neoclassical, freemarket counterrevolution
Linear-stages-of-growth model
- development is a series of successive stages of
economic growth through which all countries must
pass
- right quantity and mixture of saving, investment, and
foreign aid were all that was necessary to enable
developing nations to proceed along an economic
growth path
Theories and patterns of structural change
- used modern economic theory and statistical analysis
- portray the internal process of structural change that a
“typical” developing country must undergo if it is to
succeed in generating and sustaining rapid economic
growth
International-dependence revolution
- more radical and more political
- viewed underdevelopment in terms of international
and domestic power relationships, institutional and
structural economic rigidities, and the resulting
increase of dual economies and dual societies both
within and among the nations of the world
- emphasize external and internal institutional and
political constraints
- emphasized on the need for major new policies to
eradicate poverty, provide more diversified
employment opportunities, and reduce income
inequalities
Neoclassical (or neoliberal) Counterrevolution
- emphasized the beneficial role of free markets, open
economies, and the privatization of inefficient public
enterprises
- failure to develop was primarily the result of too much
government intervention and regulation of the
economy rather than the exploitive external and
internal forces
Development as Growth and the Linear-Stages Theories
Capital Fundamentalism - emphasis on the central role of
accelerated capital accumulation
Four
 Rostow’s Stages of Growt
- transition from underdevelopment to development
can be described in terms of a series of steps or stages
through which all countries must proceed
- The Stages of Economic Growth:
1. Traditional Society – dependent on rural
economy (subsistence, barter, agriculture)
2. Pre-conditions for Takeoff into Self-
sustaining Growth (Transitional Stage) –
dependent on social appreciation of
educational and skill development
(specialization, surpluses, infrastructure)
3. Take-off - dependent on sub-urban economy
(industrialization, growing investment,
regional growth, political change)
4. Drive to maturity – dependent on growth and
developed economies (diversification,
innovation, less reliance on imports,
investment)
5. Age of high mass consumption – dependent
on global economy or market managing
economies (consumer oriented, durable
goods flourish, services sector become
dominant)
11
Marshall Plan - massive amounts of U.S. financial and
technical assistance enabled the war-torn countries of
Europe to rebuild and modernize their economies in a matter
of years
 The Harrod-Domar Growth Model (AK Model)
- more investment leads to more growth
- growth rate of gross domestic product (g) depends
directly on the national net savings rate (s) and
inversely on the national capital-output ratio (c)
AK Model
- based on a linear production function with output
given by the capital stock K times a constant, often
labeled A
- net additions to the capital stock (K) – new investment
– bring about corresponding increases in the flow of
national output, GDP (Y) = there is a direct relationship
between the K and Y
Capital-output ratio - ratio that shows the units of capital
required to produce a unit of output over a given period of
time
Net savings ratio - savings expressed as a proportion of
disposable income over some period of time
Explains 3 Types of Growth
1. Warranted growth (gw): all resources & savings are
used in capital
2. Actual growth rate of GDP(g): to find whether there's
growth or not
3. Natural growth rate (gn): growth an economy requires
to maintain full employment
 Obstacles and Constraints
The main obstacle to or constraint on development = low
level of new capital formation in most poor countries
“capital constraint” stages approach to growth and
development = became a rationale an opportunistic tool
(Cold War Politics) for justifying massive transfers of capital
and technical assistance from the developed to the less
developed nations
 Necessary versus Sufficient Conditions: Some Criticisms
of the Stages Model
Necessary condition - condition for an event to occur, but it
is not sufficient in and of itself.
12
Example: capital formation may be a necessary condition for
sustained economic growth, but social, institutional, and
attitudinal changes may have to occur for this growth to
continue.
Sufficient condition - causes or assures the occurrence of an
event
Theory of Stages of Growth Criticism:
 more saving and investment isn’t a necessary
condition for accelerated rates of economic growth
because it is not a sufficient condition
The Rostow and HarrodDomar Models Criticism:
 assume the existence of these same attitudes and
arrangements (well-integrated commodity and
money markets, highly developed transport
facilities, a well-trained and educated workforce, the
motivation to succeed, an efficient government
bureaucracy) in underdeveloped nations, but they
lack complementary factors (managerial
competence, skilled labor, and the ability to plan
and administer a wide assortment of development
projects)
 insufficient focus on another strategy for raising
growth
Structural-Change Models
- mechanism by which underdeveloped economies
transform their domestic economic structures from a
heavy emphasis on traditional subsistence agriculture
to a more modern, more urbanized, and more
industrially diverse manufacturing and service
economy
- underdevelopment is due to underutilization of
resources
 The Lewis Theory of Economic Development
Structural transformation
- transforming an economy in such a way that the
contribution to national income by the manufacturing
sector eventually surpasses the contribution by the
agricultural sector
- major alteration in the industrial composition of any
economy
Lewis two-sector model
- general theory of the development process in surplus-
labor developing nations
- surplus labor from the traditional agricultural sector is
transferred to the modern industrial sector
Underdeveloped economy consists of two sectors:
1. a traditional, overpopulated, rural subsistence
sector characterized by zero marginal labor
productivity - surplus labor can be withdrawn
from the traditional agricultural sector without
any loss of output
2. a high-productivity modern, urban industrial
sector into which labor from the subsistence
sector is gradually transferred
Surplus labor
- excess supply of labor over and above the quantity
demanded at the going free-market wage rate.
- Lewis two-sector model: portion of the rural labor
force whose marginal productivity is zero or negative
Production function – technological or engineering
relationship between the quantity of a good produced and
the quantity of inputs required to produce it
Average product = total output or product divided by total
factor input
Marginal product = increase in total output resulting from
the use of one additional unit of a variable factor of
production (such as labor or capital)
Self-sustaining growth – economic growth that continues
over the long run based on saving, investment, and
complementary private and public activities
Process of modern-sector self-sustaining growth and
employment expansion = continue until all surplus rural labor
is absorbed in the new industrial sector
Lewis turning point - declining labor-to-land ratio means that
the marginal product of rural labor is no longer zero
Criticisms of the Lewis Model:
1. Model assumes that rate of labor transfer &
employment creation is proportional to rate of modern-
sector capital accumulation (the faster the rate of capital
accumulation, the higher the growth rate of modern
sector & faster rate of job creation) ->
Rising GDP but little to no improvement in social welfare
(“Antidevelopmental” Economic Growth – all extra
income & output growth are distributed to the few
owners of capital = All of the extra output accrues to
capitalists in the form of profits)
2. Model assumes that surplus labor exists in rural areas
while there’s full employment in urban areas -> not valid
13
= contemporary research indicates that there is little
surplus labor in rural locations
3. competitive modern-sector labor market will ensure the
continuation of steady real urban wages until the supply
of rural surplus labor is depleted -> institutional factors
(union bargaining power, civil service wage scales, and
multinational corporations’ hiring practices) tend to
negate competitive forces in modern-sector labor
markets in developing countries
4. assumption of diminishing returns in the modern
industrial sector -> there is much evidence that
increasing returns prevail in industrial sector posing
special problems for development policymaking
 Structural Change and Patterns of Development
Patterns-of-development analysis
- focuses on the sequential process through which the
economic, industrial, and institutional structure of an
underdeveloped economy is transformed over time to
permit new industries to replace traditional agriculture
as the engine of economic growth
- increased savings and investment are perceived as
necessary but not sufficient conditions for economic
growth
Domestic and International constraints on development:
Domestic: economic constraints (country’s resource
endowment, physical and population size) and institutional
constraints (government policies and objectives)
International: access to external capital, technology, and
international trade
Structural-change model recognizes the fact that developing
countries are part of an integrated international system that
can promote (as well as hinder) their development.
The International-Dependence Revolution
- view developing countries as beset by institutional,
political, and economic rigidities, both domestic and
international
- developing countries caught up in a dependence and
dominance relationship with rich countries
- Three major streams of thought:
 neocolonial dependence model
 false-paradigm model
 dualistic-development thesis
Dependence
- reliance of developing countries on developed-country
economic policies to stimulate their own economic
growth
- can also mean that the developing countries adopt
developed-country education systems, technology,
economic and political systems, attitudes, dress, etc.
accumulation or market liberalization without
considering needed social and institutional change)
 The Dualistic-Development Thesis
Dualism - existence and persistence of substantial and even
increasing divergences between rich and poor nations and
rich and poor peoples on various levels.

Dominance - In the developing countries, pockets of wealth within

broad areas of poverty
- developed countries have much greater power than
the less developed countries in decisions affecting
important international economic issues (prices of
agricultural commodities and raw materials in world 4 Key Arguments:
markets)
1. Coexistence of “superiority” and “inferiority”: e.g.
modern & traditional methods of production, highly
 The Neocolonial Dependence Model
educated elites & illiterate poor, and wealthy
- attributes the existence and continuance of
industrialized nations & weak peasant societies
underdevelopment due to highly unequal international
2. This coexistence is chronic and not transitional. The
capitalist system of rich country–poor country
difference between superior and inferior elements
relationship ((economic exploitation, unequal
could NOT be eliminated over time.
exchange, limited development, and continued
3. The degrees of superiority or inferiority fail to show
control)
any signs of diminishing – it has a tendency to
- the coexistence of rich and poor nations in an
increase
international system dominated by such unequal
4. The superior elements does little or nothing to pull
power relationships between the center (the
up the inferior element
developed countries) and the periphery (the
developing countries) renders attempts by poor
nations to be self-reliant and independent (sometimes
even impossible) Dependence theories have two major weaknesses:
- underdevelopment attributes a large part of the
1. Although they offer an appealing explanation of why
developing world’s continuing poverty to the existence
many poor countries remain underdeveloped, they
and policies of the industrial capitalist countries of the
give no insight into how countries initiate and
northern hemisphere and their extensions in the form
sustain development
of small but powerful elite or comprador groups in the
2. The actual economic experience of developing
less developed countries
countries that have pursued revolutionary
Comprador group - In dependence theory, local elites who campaigns of industrial nationalization and state-run
act as fronts for foreign investors production has been mostly negative

Underdevelopment - a consequence and a particular form of
capitalist development known as dependent capitalism
Some countries can expand through self-impulsion while
others, being in a dependent position, can only expand as a
reflection of the expansion of the dominant countries
It conclude that the best course for developing countries is to
become entangled as little as possible with the developed
countries and instead pursue a policy of autarky, or inwardly
directed development, or at most trade only with other
developing countries
Autarky – closed economy that attempts to be completely
self-reliant.

 The False-Paradigm Model

- attributes underdevelopment to faulty and
inappropriate advice provided by well-meaning but The Neoclassical Counterrevolution: Market
often uninformed, biased, and ethnocentric Fundamentalism
international “expert” advisers from developed-
 Challenging the Statist Model: Free Markets, Public
country
Choice, and Market-Friendly Approaches
- Development strategies were based on incorrect
models of development (e.g. overstresses capital
14
Neoclassical counterrevolution
- the 1980s resurgence of neoclassical free-market
orientation toward development problems & policies
- In developed nations: counterrevolution favored
supply-side macroeconomic policies, rational
expectations theories, and the privatization of public
corporations
- In developing countries: it called for freer markets and
the dismantling of public ownership, statist planning,
and government regulation of economic activities
Developing world is underdeveloped, not because of the
predatory activities of the developed world and the
international agencies that it controls, but rather because of
the heavy hand of the state and the corruption, inefficiency,
and lack of economic incentives that permeate the
economies of developing nations
Underdevelopment results from poor resource allocation due
to incorrect pricing policies and too much state intervention
by overly active developing-nation governments.
- state intervention in economic activity slows the pace
of economic growth
The neoliberals argue that by permitting competitive free
markets to flourish, privatizing state-owned enterprises,
promoting free trade and export expansion, welcoming
investors from developed countries, and eliminating the
plethora of government regulations and price distortions
Free markets
- prices of commodities or services freely rise or fall
base on its supply and demand
- where the laws of supply and demand provide the sole
basis for the economic system, without government
intervention
Promote free markets and laissez-faire economics within the
context of permissive governments that allow the “magic of
the marketplace” and the “invisible hand” of market prices to
guide resource allocation and stimulate economic
development.
Laissez-faire – policy of minimum governmental interference
in the economic affairs of individuals and society
Neoclassical counterrevolution can be divided into three
component approaches:
1. free-market approach
2. public-choice (new political economy) approach
3. “market-friendly” approach.
15
Free-market analysis
- theoretical analysis of the properties of an economic
system operating with free markets (assumption:
unregulated market performs better than government
regulated)
- any government intervention in the economy is by
definition distortionary and counterproductive
Public-choice theory (new political economy approach)
- argue that governments can do (virtually) nothing right
- politicians, bureaucrats, citizens, and states act solely
from a self-interested perspective, using their power
and the authority of government for their own selfish
ends:
 Politicians: use government resources to
consolidate and maintain positions of power
and authority.
 Bureaucrats and public officials: use their
positions to extract bribes from rent-seeking
citizens and to operate protected businesses
on the side
 Citizens: use political influence to obtain
special benefits (called “rents”) from
government policies (e.g., import licenses or
rationed foreign exchange)
 States: use their power to confiscate private
property from individuals
Market-friendly approach – notion that successful
development policy requires governments to create an
environment where markets can operate efficiently and to
intervene only selectively where market is inefficient
Market failure – market’s inability to deliver benefits due to
market imperfections (e.g. monopoly power, lack of
knowledge, significant externalities)
 Traditional Neoclassical Growth Theory
Solow neoclassical growth model
- exhibited diminishing returns to labor and capital
separately and constant returns to both factors jointly
- technological change generates long-term economic
growth
- implies that economies will converge to the same level
of income per worker “conditionally”—that is, other
things equal, particularly savings rates, depreciation,
labor force growth, and productivity
According to traditional neoclassical growth theory output
growth results from one or more of three factors:
 1. increases in labor quantity and quality (through Conclusion for All Theories
population growth and education)
2. increases in capital (through saving and investment) Linear-stages-of-growth model - underdevelopment is seen
3. improvements in technology as an externally induced phenomenon

Closed economy Structural-change theories – stress on internal constraints,

- economy in which there are no foreign trade
transactions or other economic contacts with the rest
of the world
- those with no external activities with lower savings
rates grow more slowly in the short run than those
with high savings rates and tend to converge to lower
per capita income levels
Open economy
such as insufficient savings and investment or lack of
education and skills.
International-dependence revolution – underdevelopment is
an externally induced phenomenon
Neoclassical, freemarket counterrevolution. – saw the
problem as an internally induced phenomenon of developing
countries, caused by too much government intervention and
bad economic policies

- economy that practices foreign trade and has

extensive financial and nonfinancial contacts with the
rest of the world
- experience income convergence at higher levels as
capital flows from rich countries to poor countries
where capital-labor ratios are lower and thus returns
on investments are higher

 Conclusions and Implications

Neoclassical counterrevolution’s contention that free

markets and less government = market price allocation
usually does a better job than state intervention

Criticisms of Neoclassical Counterrevolution:

 Competitive free markets generally do not exist

 Consumers as a whole are rarely sovereign about
what goods and services are to be produced
 Information is limited, markets are fragmented, and
much of the economy in low-income countries is still
non-monetized
 There are widespread externalities of both
production and consumption as well as
discontinuities in production and indivisibilities (i.e.,
economies of scale) in technology
 Producers, private or public, have great power in
determining market prices and quantities sold
 The ideal of competition is typically just that—an
ideal with little substance in reality
 Invisible hand often acts not to promote the general
welfare but rather to lift up those who are already
well-off while failing to offer opportunities for
upward mobility for the vast majority
 Enlightened governments can also make effective
use of prices as signals and incentives for influencing
socially optimal resource allocations

16