Final DevEcon Lecture 3

San Beda University
College of Arts and Sciences

Department of Economics
Development
Economics: Theory and
Policy
DEVECON
Assistant Prof. C. B. Mendoza, Jr.
50 Years of Excellence in Economics
Operational Framework of
Economic Development
Measuring Economic Growth and
Development and its Characteristics
OUTLINE
• Mechanics of Economic Growth
• Conceptual Considerations in the
Measurement of Economic Development
• Measurement of Economic Development
• Human Development Index
• Millennium Development Goals
• Stylized Characteristics of Developing
Countries
Mechanics of Economic
Growth
MECHANICS OF ECONOMIC
GROWTH
• Do small growth rates matter?
• Why or why not?
GROWTH
• Will it make a difference if per capita

income grows by the same rate for the next
three to five years?
• Why or why not?
GROWTH
• Compound interest formula
V=P(1+i) t
V is the value of money after t years/ future value
P is the principal amount deposited/ present value
I is the annual interest in decimal form
t is the number of years
GROWTH
• Example: What is the value of P100 after 2 years if the

annual interest rate is 12%
V=P(1+i) t
V = 100 ( 1 + 0.12 ) 2
V = 100 ( 1.12 ) 2
V = 125.44
GROWTH
• Compounding Economic Growth Rates
y1 = y0 ( 1 + R ) t
y1 is per capita income in the terminal

year
y0 is per capita income in the base year
R is the rate of growth of per capita income in
decimal form
t is length of time or number of years
GROWTH
Example: What will be the per capita income of country A if it
grows by 7% for 7 years and its base year per capita income is
$1,000?
y1 = y0 ( 1 + R ) t
y1 = 1,000 ( 1 + .07 ) 7
y1 = 1,000 ( 1.07 ) 7
y1 = 1,605.78
GROWTH
•Two major types of growth rate problems
1. Length of time needed to achieve a growth rate

2. Growth rate needed to achieve a target growth
rate in t years
GROWTH
•Length of Time Problems
Problem 1 (Doubling Time)
How long will it take country A to double per capita

income if it grows at 5% per year?
GROWTH
• Length of Time Problems
Problem 2:
How long will it take country A to triple/quadruple etc. per

capita income if it grows by 5% per year?
GROWTH
•Length of Time Problems
Problem 3:
How long will it take country A to reach a per capita

income level of $2,200 if it grows at 3% per year
and its present per capita income level is $1,000?
GROWTH
• Growth rate problems
Problem 1:
What is the growth rate needed to double income in 7

years?
GROWTH
• Growth rate problems
Problem 2:
What is the growth rate needed to triple/quadruple etc.

income in 7 years?
GROWTH
•Growth rate problems
Problem 3:
Assume that the present per capita income level of

country A is $800 and its target per capita income is
$1,750. What is the growth rate needed to achieve
the target per capita income in 10 years?
GROWTH
•Growth rate problems
Problem 4:
Assume that the base year real per capita income of

Country A is 800 US$ and its target real per capita
income is 5,500 US$. How long will it take Country A to
achieve its target real per capita income if it grows by
10% every year?
Forecasting using Growth Rates
Review
 Growth Rates compare the present value or
volume with the past. This can be
expressed either in absolute or percentage
changes.
 Average percentage changes can be
computed in two ways:
o Arithmetic method
o Compounded growth method
 The figures arrived at can be adjusted to
incorporate value judgement.
 Crude but easy to use
Forecasting using Growth Rates
Three Major types of growth rate problems
 Future value given time and growth rate
= *
 Length of time needed to achieve a growth target

t=
 Growth rate need to achieve a growth (target
volume) in number of years
-1
= terminal year
= base year
t = no of years
= growth rate
Measuring Economic
Growth and Development
and its Characteristics
Classic Theories of Economic Growth
and Development
Classic Theories of Economic
 Every nation strives for development
 But economic progress is not the only component
 DEVELOPMENT > material & financial
 Widespread realization = national context +
international economic + social system
FOUR APPROACHES
1. Linear stages of growth
2. Theories and patterns of structural change
3. International-dependence revolution
4. Neo-classical, free market counterrevolution
POST WORLD WAR II
 Context:
o Struggle to rebuild
o Postwar economic boom
o Demand for consumer goods
o Flowing foreign aid to countries like PH
o PH context: Bell Trade Act (no import duties for US
products)
Classic Theories of Economic Growth and Development
LINEAR STAGES THEORY
DEVELOPMENT AS GROWTH
Post-war interest on poor nations
o Economists had no conceptual apparatus for largely
agrarian countries w/o modern economic structures
Strands of thought
o Marshall Plan: US financial and technical assistance
to war-torn European countries
o All modern industrial nations were once
underdeveloped agrarian societies
STRUCTURAL CHANGE MODELS
PROBLEMS:
o Mechanisms of development embodied in
the theory DOES NOT ALWAYS WORK
o WHY? More savings and investment are not
Sufficient
o Worked for Europe because of necessary
structural, institutional, and attitudinal
conditions
2-SECTOR SURPLUS MODEL/LEWIS THEORY
OF DEVELOPMENT
o Structural transformation of a subsistence economy
 Presence of 2 sectors: overpopulated rural
sector w/ zero marginal labor productivity and
a high-productivity industrial sector
 Transfer of labor from traditional to modern,
growth of product output
OF DEVELOPMENT
OF DEVELOPMENT
LEWIS THEORY OF DEVELOPMENT

 Growth until surplus labor is absorbed by
industrial sector
 Lewis turning point: declining labor-to-land ratio
(marginal product of rural labor no longer 0) =
labor supply curve positively sloped as modern-
sector wage & employment grow
LEWIS THEORY OF DEVELOPMENT
CRITICISMS:
1. Assumes labor transfer & employment creation proportional
to capital accumulation. But what if profits invested in
laborsaving equipment?
2. Contemporary research show little surplus labor in rural
areas (except in some countries like China)
3. Urban surplus labor
4. Wages increase amid unemployment
PATTERNS OF DEVELOPMENT ANALYSIS
o Economic, industrial and institutional structure of
an economy transformed to permit new industries
as engine of growth
o Capital accumulation + changes in economic
structure needed
o Constraints (affect level of dev’t): Internal -
resources, population size, government policies;
External – access to capital, technology, trade
(countries as part of internatl system)
o Empirical work of Harvard economist Holllis Chenery and
his colleagues, cross-sectional and time-series studies of
countries at diff. levels of per capital income, identified
characteristic features of the development process:
 Shift from agri to industrial production
 Steady accumulation of physical and human capital
 Change in consumer demand from basic necessities to
diverse manufactured goods
 Growth of cities and urban industries
 Decline in family size ad overall population
o Empirical work of Harvard economist Holllis Chenery and his
colleagues, cross-sectional and time-series studies of countries at
diff. levels of per capital income, identified characteristic features of
the development process:
 Shift from agri to industrial production
 Steady accumulation of physical and human capital
 Change in consumer demand from basic necessities to diverse
manufactured goods
 Growth of cities and urban industries
 Decline in family size ad overall population
o Proponents of structural change model prefer “facts to speak for
themselves” unlike theories such as stages of growth
CONCLUSIONS
o Major hypothesis: development is an identifiable
process of growth and change with features similar
in all countries.
o Problem: The model does not recognize differences,
factors influencing development process.
o Limitations of emphasizing patterns over theory.
May draw wrong conclusions about causality.
o Optimistic that “correct” mix of policies will
generate beneficial patterns
INTL DEPENDENCE REVOLUTION
o 1970s – International-dependence models gained
support because of disenchantment w/ stages and
structural-change models
o Resurgence in various forms in the 21st century
o Developing countries caught in a dependence and
dominance relationship with rich countries
because of institutional, political and economic
rigidities = difficulty for poor nations to be self-
reliant and independent
NEOCOLONIAL DEPENDENCE MODEL
o Indirect outgrowth of Marxist thinking
o Underdevelopment as result of historical evolution
of highly unequal international capitalist system of
rich country-poor country relationships
o Regardless if intentional, nations are under
unequal power relations between the center and
the periphery
NEOCOLONIAL DEPENDENCE MODEL
o Revolutionary struggles or major restructuring of world
capitalist system required to free dependent nations
o Theotonio Dos Santos: Dependence as conditioning
situation; Expand based on expansion of dominant
countries; Dominant countries w/ technological,
commercial, capital and sociopolitical predominance
can exploit and extract local surplus; Dependence as
based on the international division of labor – industrial
development in some and restricted in others
o Pope John Paul II: One must denounce the existence of
economic, financial, and social mechanisms which,
although they are manipulated by people, often function
almost automatically, thus accentuating the situation of
wealth for some and poverty for the rest. These
mechanisms, which are maneuvered directly or
indirectly by the more developed countries, by their very
functioning, favor the interests of the people
manipulating them. But in the end they suffocate or
condition the economies of the less developed countries.
FALSE-PARADIGM MODEL
o less-radical
o Underdevelopment as result of faulty and
inappropriate advice by well-meaning, though
uninformed or biased advisers from developed
country agencies and orgs
o Inappropriate policies merely serving vested interests
of existing power groups (domestic and international)
o Intellectuals, economists, civil servants trained in
alien and “irrelevant” Western concepts
DUALISTIC-DEVELOPMENT THESIS
o Dualism – divergence between rich and poor
nations, rich and poor peoples on various
levels
4 KEY ARGUMENTS
o Different sets of conditions coexist: rich and poor, modern
and traditional (Lewis model), elites and masses, powerful
industrialized nations and impoverished peasant societies
o Chronic coexistence (not temporary) of wealth and poverty
will not be rectified in time.
o Degrees of superiority or inferiority show no signs of
diminishing and instead increases
o Superior element does little to pull up or “trickle down” to the
inferior element, may even push it down
o IDR models, amid ideological differences, all reject the
emphasis on traditional neoclassical economic theories
o Question validity of the Lewis-type models, reject Chenery
observation of “well-defined empirical patterns” that should be
followed by poor countries
o Emphasis on international power imbalances and need for
economic, political and institutional reforms (internal & world)
o Expropriation of private assets w/ expectation that public
asset ownership and control will help address poverty &
unemployment
NEOCLASSICAL COUNTERREVOLUTION
WEAKNESSES:
o Appealing explanation but no insight on how countries
initiate and sustain development
o Actual economic experience of developing countries that
pursued revolutionary campaigns of industrial
nationalization and state-run production has been mostly
negative
o Based on dependency theory, countries could pursue a
policy of autarky or inwardly directed development & trade
w/other developing countries
o Challenges statist models in favor of free

markets, public choice & market-friendly
approaches
o Developed nations: favored supply-side
macroeconomic policies, rational expectations
theories and privatization of public corporations
o Developing countries: freer markets and
dismantling of public ownership, statist
planning and government regulation
Context
o Emerged in the 1980s during political ascendancy of
conservative governments of US, Canada, Britain and
West Germany
o Neoclassicists on the board of powerful international
agencies World Bank and International Monetary
Fund as influence of International Labor Organization,
United Nations Development Program and United
Nations Conference on Trade and Development eroded
Argument
o Underdevelopment resulted from poor resource allocation
because of incorrect pricing policies and state
intervention(corruption, inefficiency, lack of incentives, etc.)
o State intervention slows economic growth
o Neoliberals: economic efficiency and growth will be stimulated
by free markets, privatizing state enterprises, export expansion
and eliminating government regulation and price distortions
o Allow “magic of the marketplace” and “invisible hand” to guide
resource allocation and stimulate economic dev’t
3 component approaches
1.
Free-market approach - markets alone are efficient; competition is
effective, technology and information freely available and costless;
gov’t is counterproductive
2.
Public choice approach - new political economy approach;
governments do nothing right because of selfish interests;
misallocation of resources
3.
Market-friendly approach – imperfections in economy and need
gov’t for market-friendly interventions (social services and climate
for private enterprise); acceptance of market failures
Traditional Neoclassical Growth Theory

o Liberalization – opening up of markets, draw
investment and increase rate of capital accumulation
o Solow neoclassical growth model - economies to
converge to same income level if same rates of savings,
depreciation, labor force and productivity growth.
o Source of output growth: labor quantity and quality,
increase in capital and technology improvement
o Openness – encourages access to foreign production
ideas, technological progress
CONCLUSIONS
o Finger-pointing between dependence theorists (many from
developing countries, seeing underdevelopment as externally
induced phenomenon) and neoclassical revisionists (most
from Western economies, blame gov’t intervention and bad
economic policies)
o Market price allocation may do a better job than state
intervention but developing economies have very different
structures:
o Competitive free markets generally do not exist, information
is limited, markets fragmented, etc.
CONCLUSIONS
o Invisible hand often lifts those already well-
off, failing to offer opportunities for upward
mobility of the majority
o Lessons from supply-and-demand analysis to
arrive at “correct” prices
o “In an environment of widespread
institutional rigidity and severe
socioeconomic inequality, both markets and
governments will typically fail.”
RECONCILING DIFFERENCES
Each approach has strengths and weaknesses
o Controversies – ideological, theoretical or empirical – makes
the study of economic development challenging
o Evolving patterns of insights and understandings
o CONSENSUS? Significance from each approach:
 Linear stages: crucial role of savings and investment
 Two-sector model: transfer of resources from low to high
productivity activities, linkages between traditional &
modern
 Dependence theory: importance of world economy and
decisions of developed world affecting developing economies
 Neoclassical: efficient production, proper price systems
Conceptual Considerations in
the Measurement of
Economic Development
CONCEPTUAL CONSIDERATIONS IN THE
MEASUREMENT OF ECONOMIC
DEVELOPMENT
• Why isn’t real per capita income (RPCY) sufficient as

measure of economic development?
CONCEPTUAL CONSIDERATIONS IN THE
DEVELOPMENT
• RPCY does not
– Directly measure well-being
– Account for changes in standard of living
– Account for the living conditions of the poor
– Show the distribution of income and consumption
– Reflect purchasing power parity
MEASUREMENT OF
ECONOMIC DEVELOPMENT
DEVELOPMENT
• We need to complement real per capita income

with measures of multi-dimensional and
progressive changes.
DEVELOPMENT
• Some complementary measures of economic

development
1. Physical Quality of Life Index (PQLI)

2. Human Development Index (HDI)
Physical Quality of Life Index
• The PQLI was developed by Morris D. Morris in the 1970s.
• It is a composite index made up of three components:

– life expectancy at age 1
– infant mortality rate
– literacy rate
Human Development Index
• The HDI was developed in the early 1990s.
• It was originally developed by Mahbub ul-Haq based

on the ideas of Nobel prize winner Amartya Sen.
TWO WAYS OF MEASURING
DEVELOPMENT /
WELFARE
(According to Amartya Sen)
Goods-oriented welfare measurement of welfare in
approach (traditional terms of goods
approach)
real per capita income
approach
TWO WAYS OF MEASURING
DEVELOPMENT / WELFARE
(According to Amartya Sen)
Goods-oriented welfare measurement of welfare in
approach (traditional terms of goods
approach)
real per capita income
approach
Capabilities-oriented welfare measurement of welfare in
approach terms of entitlements,
capabilities, and functionings
(actual achievements)
Personal:
what we
possess
or acquire functionings
capabilities
entitlements
Political: What the government provides
What a person can be

or can do (beings and
doings)
capabilities functionings
entitlements
Freedom to choose
what to be or to do
entitlements actual achievements
chosen outcomes
actual or potential activities
entitlements
utility
Happiness/ satisfaction
entitlements
utility
Exhibits a person’s capabilities and functionings
entitlements
Should be the focus of the measurement

of economic development
• SUMMARY
• What you possess and acquire
• Enables you to expand your choices
• Bestows freedom to be what you want to be and to do

what you want to do
• utility/ happiness
SEN’S CONCEPT OF DEVELOPMENT
1. Development has
something to do with the
nature of life.
Enhancing the lives we lead
Enhancing the freedoms we

enjoy
Expanding human
capabilities and
functionings
SEN’S CONCEPT OF DEVELOPMENT
1. Development has
something to do with the
nature of life.
2. Poverty is the failure to
Enhancing the lives we lead achieve certain basic
capabilities and
Enhancing the freedoms we functionings up to
enjoy minimally adequate levels.
Expanding human
capabilities and functionings
SEN’S CONCEPT OF HUMAN WELL-BEING
1. Well-being is “being
well”.
Being healthy
Being well- nourished
Being well-clothed
Being literate
Being long-lived
SEN’S CONCEPT OF HUMAN WELL-BEING
1. Well-being is “being well”. 2. In a broader sense, well-
being is
Being healthy
Being able to take part in
Being well- nourished community life
Being well-clothed Being mobile
Having the freedom to choose

Being literate
what we can become and can
do
Being long-lived
Measurement of the Human
Development Index
DIMENSIONS OF
DEVELOPMENT INDICATORS
Long and healthy life Life expectancy at birth
(Longevity)
Access to knowledge Mean years of schooling
(Education) Expected years of
schooling
Decent/Improved Real per capita GDP ( in
Standard of Living PPP$)
(Income)
Development Index
DIMENSION DIMENSION SUB-INDEX
INDEX
Life expectancy Life Expectancy none
(longevity) Index (LEI)
Access to knowledge Education Index (EI) Mean years of
(Education) schooling index
(MYSI)
Expected years of
schooling index
(EYSI)
Decent/ Improved Income Index (YI) none
Standard of Living
(Income)
Development Index
• Dimension
Index
o actual is actual value of the indicator

o min is minimum value of the indicator
o max is maximum value of the indicator
.Note: Maximum and minimum values are based on different data

bases and surveys.
Development Index
MAXIMUM VALUE MINIMUM VALUE
Life Expectancy 83.7 20
(Longevity) (years) (Japan, 2015)
Mean years of 13.2 0
schooling (years) (USA, 2000)
Expected years of 20.6 0
schooling (years) (Australia, 2002)
Combined Education 0.951 0

index (New Zealand, 2010)
Real per capita GNI 123,860 163

(PPP$) (Qatar, 2013) (Zimbabwe, 2008)
Development Index
•
Development Index
•
• The income index uses the formula for the
dimension index except that the logarithmic
values of the actual, minimum, and
maximum values are used.
Development Index
HDI = (life expectancy index1/3)

x (education index1/3) x
(income index1/3)
(Old formula: 1/3 life expectancy

index + 1/3 education index + 1/3
income index)
Development Index
HDI VALUE INTERPRETATION
(RANGE)
0.8 – 1.0 High
0.5 – 0.79 Medium
0.0 – 0.49 Low
HDI MEASUREMENT
• Example:
• Data:
• Life expectancy 70 years
• Mean years of schooling 10 years
• Expected years of schooling 15 years
• Real per capita GDP 2,000 PPP$
CRITICISMS OF THE PQLI AND
HDI
Measurement-related objections to the PQLI
and HDI
• Choice of indicators/ variables and
weights is arbitrary
• Composite index measure
• Quality of data
CRITICISMS OF THE PQLI AND
HDI
Content-related objections to the PQLI and

HDI
• Indicators/ variables appear closely
correlated with per capita income
• Choice of indicators can be politically
motivated
Misery Index
• The misery index is the sum of the inflation

rate and the unemployment rate at a given
period of time.
Other Indexes
• Corruption Index
• Global Hunger Index
• Governance Index
• Economic Freedom Index
• Happiness Index
• Multidimensional Poverty Index (Alkire)
• Etc.
DEVELOPMENT GOALS
MILLENNIUM DEVELOPMENT
GOALS
Millennium United Millennium

Summit of Nations Devp’t Goals
the United Millennium (2015)
Nations Declaration
(2000)
MILLENNIUM DEVELOPMENT
GOALS
GOALS GOALS
1. Eradicate extreme 5. Improve maternal
poverty and hunger health
2. Achieve universal 6. Combat HIV/AIDS,
primary education malaria, and other
diseases
3. Promote gender 7. Ensure environmental
equality and empower stability
women
4. Reduce child mortality 8. Develop a global
partnership for
development
SUSTAINABLE DEVELOPMENT
GOALS
• On September 25th 2015, countries adopted a set of
goals to end poverty, protect the planet, and ensure
prosperity for all as part of a new sustainable
development agenda. Each goal has specific targets
to be achieved over the next 15 years.
• The 193 member states of the United Nations (UN)
gathered to affirm commitments towards ending all
forms of poverty, fighting inequalities and increasing
country’s productive capacity, increasing social
inclusion and curbing climate change and
protecting the environment while ensuring that no
one is left behind over the next fifteen years.
GOALS
192 member-states
Australia 2014
Rio +20
United The Future United

Nations We Want Nation’s Post-
Conference (future int’l 2015 Devp’t
on devp’t goals) Agenda
Sustainable
Devp’t
(2012)
GOALS
STYLIZED CHARACTERISTICS
OF DEVELOPING COUNTRIES
• How should we call poor countries?
– economically backward, traditional?
– Third world countries?
– less developing countries?
• World Bank classification: high income, upper

middle-income, lower middle-income, low income
1. Low real per capita income (RPCY)
2. Widespread poverty
3. Unequal distribution of income
4. Pervasive unemployment, underemployment, and
disguised unemployment
5. Low productivity
6. Smallness of the trade sector
7. Market failures
8. Government failures (poor governance and corruption)
5. Low productivity
7. Market failures
• Why is per capita income low?
• Standard argument: because population is high
• Is RPCY low because population is high? Is
this always true?
5. Low productivity
7. Market failures
• Who are the poor?
• Republic Act 8425 (Social Reform and Poverty
Alleviation Act)
• The poor are those families and individuals whose income
fall below the poverty threshold and can not afford in a
sustained manner to provide for their basic needs.
• What is poverty threshold?

• It is the annual per capita income needed to satisfy
nutritional requirements (2000 kilo calories) and
other basic (food and non-food) needs.
YEAR ANNUAL PER CAPITA
(Based on the FIES POVERTY
year) THRESHOLD
2006 13,357 pesos
2009 16,871 pesos
2012 18,935 pesos
2015 21,753 pesos
2018
• Poverty incidence is determined based on the annual
per capita poverty threshold.
– Poverty incidence (population) – proportion of

population with annual per capita income below poverty
threshold (called the “head count” of the poor)
– Poverty incidence (families) – proportion of families with
annual per capita income below poverty threshold
YEAR POVERTY POVERTY
INCIDENCE (Families) INCIDENCE
in % of total families (Population)
in % of total
population
2006 21.0 26.6
2009 20.5 26.3
2012 19.7 25.2
2015 17.9 23.5
2018 12.1 17.6
Poverty as Acquirement Problem
Two Difficult Questions to Answer
Multi-
faceted • What causes poverty?
concern
Multi-
pronged • How do we address poverty?
approach
• Poverty is an acquirement problem. (Sen)

• What is the acquirement problem?
• It is the problem of establishing command over
commodities.
• Hence, poverty is associated with the lack of
command over goods and services or the lack of
entitlements.
Low
purchasing
power
Low actual Low

achievements entitlements
Low Low
functionings capabilities
Low HH budget;
Low low total spending
purchasing for G & S
power
Low actual Low

Low Low
Low HH budget;
power
Low actual Low

Lack of
command over
G&S
Low Low
Low HH budget;
power
Low actual Low

Seen as
Lack of
absolute/
command over
material poverty
G&S
Low Low
• A household’s command over goods

and services is limited by its budget or
purchasing power. This can be
expressed in the following equation:
( p + t ) X = wk – z + s
( p + t ) X = wk – z + s
TOTAL TOTAL
EXPENDITURES PURCHASING
(ENTITLEMENTS) POWER
Symbols used:
p = price of goods and services
t = indirect taxes imposed on goods and services
X = quantity of goods and services
w = prices paid to the resources owned by households
k = quantity of resources owned by households
wk = market income of households
z = direct taxes
s = subsidies to goods and services to which
households are politically entitled (publicly provided
goods and services or political entitlements)
• Why does absolute poverty happen?
• Because families and individuals lack command over

goods and services (entitlements)
• Their entitlements are low because they have low

purchasing power.
( p + t ) X = wk – z + s
LOW TOTAL LOW PURCHASING

SPENDING POWER
(LOW ENTITLEMENTS)
( p + t ) X = wk – z + s
LOW TOTAL LOW PURCHASING

SPENDING POWER
(LOW ENTITLEMENTS)
WHY IS THIS LOW?

Why is purchasing power low?
wk – z + s
Low market income
1. Inadequate amount of assets (k)

2. Low-priced assets/ Poor quality
of assets (w)
Why is purchasing power low?

Low subsidies
wk – z + s to publicly
provided goods
and services
1. Inadequate amount of publicly

provided goods and services
2. Poor quality of publicly provided
goods and services
How do we raise the purchasing power of the poor and
consequently expand their entitlements?
INSIGHT HOW?
1. Increase the market income a) Improve the quality of assets
of poor households owned by poor households
b) Sustain economic growth to

increase the quantity of assets
of poor households
c) Redistribute income and

wealth thru taxation and the
efficient use of taxes
How do we raise the purchasing power of the poor
and consequently expand their entitlements?
INSIGHT HOW?
2. Increase the quantity Efficient and equitable
and improve the quality of public spending on
publicly provided goods health, education, water,
and services and other publicly
provided goods and
services
Efficient and effective use
of taxes
5. Low productivity
7. Market failures
• Measured by the Gini coefficient
• Gini coefficient is based on the Lorenz curve
diagram
• Range of values of the Gini coefficient
• 0 = perfect equality
• 1 = perfect inequality
Area of inequality
Line of perfect equality
Lorenz curve
Stylized Characteristics of
Developing Countries
YEAR GINI COEFFICIENT
2006 0.4580
2009 0.4641
2012 0.4605
2015 0.4439
2018 0.4267
• Is income inequality indicative of poverty

incidence?
• What is Kuznets’ inverted “U” hypothesis?
KUZNET’S INVERTED U-CURVE
Kuznet’s Inverted
“U” Hypothesis
4. Pervasive unemployment, underemployment,
and disguised unemployment
5. Low productivity
7. Market failures
4. Pervasive unemployment, underemployment,
and disguised unemployment
Who is the unemployed?

Who is the underemployed?
Who is the disguised unemployed?
UNEMPLOYED UNDEREMPLOYED DISGUISED
UNEMPLOYED
Without work or Want to have Zero marginal

business additional hours of productivity
work in their
present job
Currently available Want to have an
for work additional job
Seeking or not Want to have a new

seeking work job with longer
working hours
5. Low productivity
7. Market failures
5. Low productivity
What are the determinants of average

labor productivity?
DETERMINANTS OF AVERAGE LABOR
PRODUCTIVITY
1. Quality and quantity of 5. Entrepreneurship and
human capital management
2. Quality and quantity of 6. Politics and legal
physical capital environment
3. Land and other natural
resources
4. Technology
5. Low productivity
Does economic growth necessarily follow from

technological and scientific breakthroughs?
What is one function of government crucial to

economic success in relation to investments in
innovations and inventions?
5. Low productivity
7. Market failures
6. Predominance of agriculture in the economy
• Why do many developing countries promote
industry at the expense of agriculture?
• Should countries industrialize at the expense of

agriculture? Why or why not?
• What are the major characteristics of the trade
sector of developing countries?
• Commodity concentration (export primary and
low-value added products; import manufactured
products)
• What are the consequences of commodity
concentration?
• What are the major characteristics of the trade
sector of developing countries?
• Geographic concentration (Export destinations
are limited.)
• What are the consequences of geographic
concentration?
5. Low productivity
7. Market failures
7. Market failures
• When do market failures happen?
• What are some examples of market failures in

developing countries?
7. Market failures
• Examples of market failures: LAND MARKET

• uneven pattern of land ownership
• complicated system of land ownership
• legal records are difficult to obtain
5. Low productivity
7. Market failures
7. Market failures
• Examples of market failures: LABOR MARKET

• labor supply is greater than labor demand
but skilled labor is scarce
• low labor mobility
• different wages between rural and urban
sectors
• wages are not market-determined
(institutionally-determined)
7. Market failures
• Examples of market failures: CAPITAL MARKET

• scarce financial resources
• narrow and shallow capital market
• dualism (organized and unorganized capital
market)
7. Market failures
• Examples of market failures: MARKET FOR

ENTREPRENEURS
• lack of entrepreneurs because of
• lack of government incentives for
entrepreneurs to prosper
• lack of proper education, managerial training,
and skills
5. Low productivity
7. Market failures
8. Government failures (poor governance and
corruption)
corruption)
• What is governance?
• World Bank definition: governance is the manner
in which power is exercised in the management of
a country’s economic and social resources for
development
DIMENSIONS OF GOVERNANCE
WORLD BANK BRITISH GOVERNMENT
Control of corruption Competence
Government effectiveness Legitimacy and
accountability
Political Stability and Respect for Human Rights
Absence of and Rule of Law
Violence/Terrorism
Regulatory Quality
Rule of Law
Voice and Accountability
corruption)
• What is corruption?
 Corruption is increasingly recognized as a preeminent
problem in the developing world.
 Bribery, extortion, fraud, kickbacks, and collusion have
resulted in retarded economies, predator elites, and
political instability.
• Robert Klitgaard’s corruption framework
CORRUPTION PERCEPTIONS INDEX (PHL)
(TRANSPARENCY INTERNATIONAL)
YEAR SCORE
2010 24
2011 26
2012 34
2013 36
2015 35
2019 34
Note: 100 is the highest score (least corrupt) while 0 is the lowest score (most
corrupt)

Final DevEcon Lecture 3

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San Beda University

College of Arts and Sciences

• Do small growth rates matter?

• Why or why not?

• Will it make a difference if per capita

• Why or why not?

• Example: What is the value of P100 after 2 years if the

y1 is per capita income in the terminal

1. Length of time needed to achieve a growth rate

Problem 1 (Doubling Time)

How long will it take country A to double per capita

How long will it take country A to triple/quadruple etc. per

How long will it take country A to reach a per capita

What is the growth rate needed to double income in 7

What is the growth rate needed to triple/quadruple etc.

Assume that the present per capita income level of

Assume that the base year real per capita income of

 Length of time needed to achieve a growth target

LEWIS THEORY OF DEVELOPMENT

o Challenges statist models in favor of free

Traditional Neoclassical Growth Theory

• Why isn’t real per capita income (RPCY) sufficient as

• We need to complement real per capita income

• Some complementary measures of economic

1. Physical Quality of Life Index (PQLI)

• It is a composite index made up of three components:

Human Development Index

• The HDI was developed in the early 1990s.

• It was originally developed by Mahbub ul-Haq based

Political: What the government provides

What a person can be

entitlements actual achievements

actual or potential activities

Exhibits a person’s capabilities and functionings

Should be the focus of the measurement

• What you possess and acquire

• Enables you to expand your choices

• Bestows freedom to be what you want to be and to do

Enhancing the lives we lead

Enhancing the freedoms we

Being well- nourished

Being well-clothed Being mobile

Having the freedom to choose

o actual is actual value of the indicator

.Note: Maximum and minimum values are based on different data

Combined Education 0.951 0

Real per capita GNI 123,860 163

HDI = (life expectancy index1/3)

(Old formula: 1/3 life expectancy

0.5 – 0.79 Medium

0.0 – 0.49 Low

Content-related objections to the PQLI and

• The misery index is the sum of the inflation

Millennium United Millennium

United The Future United

• World Bank classification: high income, upper

• What is poverty threshold?

– Poverty incidence (population) – proportion of

Two Difficult Questions to Answer

• Poverty is an acquirement problem. (Sen)

Low actual Low

Low actual Low