Development Economics

GS F234
Leela Rani, PhD
Associate Professor, Management
BITS Pilani Email: leela_r@pilani.bits-pilani.ac.in
Pilani Campus
 BITS Pilani
Pilani|Dubai|Goa|Hyderabad

Development Economics
Chap 03: Population growth and natural resources
Nigeria
1. Multi-religious and multi-lingual
2. Its chaotic sociopolitical and
economic environment
3. Lack of leader with the skills and
knowledge to address the
systemic bottlenecks
4. Unbridled corruption
5. Non-functional health care
6. Poor education systems
7. Lacking institutions and infrastructure
8. => weak economy, rising youth
unemployment, poverty & insecurity
Role of international moderators and
supporting institutions

1. IMF and World Bank together with National governments will

often push change of policies and institutional framework to
pull countries out of low growth traps and stagnation

2. For example, In 1980s,  African and Latin American countries

were almost compelled to follow structural adjustment
policy(SAP),  instead of ISI  for revival and growth. 

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 Latin America hyperinflation in 1980s

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 1. Better health and education will
lead to higher growth and
eventually development
2. Higher growth in GDP  will lead
to more expense on education
and health
3. So both the casualty and reverse
causality work

1. Countries want to put their

investment in buying technology
and conventional capital  as that
gives quick returns
2.  however, making this work also
requires education and health of
citizens
3.  Thus,  the investments made in
this way do not work up to their
full potential
4.  this eventually leads to slow
growth of GDP per capita  with
the same technologies

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Discount rate

1. Discount rate is one of the factors to understand the worthiness of a project or

investment
2. The discount rate is a measure of how much return is one expects from a
project. 
3. A high discount rate is used for calculating the  worthiness of projects that are
risky 
4. A low discount rate is used for calculating worthiness of projects that are
welfare-oriented and critical

The use of a high discount rate implies that people put less weight on the future and therefore
that less investment is needed now to guard against future costs. ...

The use of a low discount rate supports the view that we should act now to protect future
generations from climate change impacts.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

HDI, new HDI: Part of 1 assignmentst 1st assignment: Presentation
….5+5 ……10% …..7th Feb to
28th March

HDI  index is calculated as a simple average of three indexes:

1.  Life expectancy at birth as a measure of long and healthy life
2.  The level of education measured as the weighted average of adult literacy rate and combined primary
and tertiary school  enrolment ratio
3.  GDP per capita in PPP conversion as a measure of the standard of consumption and living

4. Index ranges from 0 to 1

5. Since HDI includes 2 two factors which are highly related to economic growth: 
6. Level of education and GDP per capita, 
7. The spearman's correlation is high between HD and GDP per capita
8. Despite this HD is a very important and unique indicator.

Notes posted on Nalanda (ref: Todaro) for PPP and HDI

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Chap 2:
PPP video:
https://www.youtube.com/watch?v=tboPF8w-554

Topic: Population, natural & food resources- to be covered by assign.

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Presentation assignment (10%)

The class list will be shared with everyone

Students are expected to interact with each other and form groups of three
Subsequently each group feels up Google form to freeze the groups
Deadline for this is 8 February,  Tuesday

Part A: 5%
1. Each group selects two developed countries and two developing countries 
2.  refer to the definition of developed versus developing from united nations portal
3.  For each of these four countries construct the human development index  and the new human development index,  giving
statistics,  it’s source and the workout based on formula
4.  For the last 20 years,  provide average GDP per capita in blocks of 5 years for each of the countries. 
5. Provide GDP per capita both as per current exchange rate and PPP
6. Submission date: 23rd Feb. 

Part B: 5%
7. For any one developing country map, increase in average school in years,  increase in life expectancy and increase in in
food production per capita for each block of timespan,  all of these against growth rate of GDP per capita
8. Provide all statistics  in tabular form before  displaying them on graphs. 
9.  Provide,  driving factors and obstacles for what is seen in the  3 graphs  by giving details like year,  incident,  stakeholders
and its impacts. 
10. Submission date: 28th March
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 BITS Pilani
Pilani|Dubai|Goa|Hyderabad

Development Economics
Chap 03: Population growth and natural resources
Overview

1.  Low-income countries,  trying to get out of growth and development trap,  face
population as a biggest challenge. 
2.  They are characterized by high growth rate of population
3.  Population growth rate=  birth rate-  death rate
4.  Natural  endowments remained largely fixed 
5.  Therefore,  per capita natural resources decreases rapidly
6.  With per capita income at low levels and natural resource also low,  growth
becomes difficult
7.  Aim is to see how this problem unfolds and what are the solutions

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Trends in population growth  across the world
It burdens and opportunities
https://www.youtube.com/watch?v=Ur77lDetI9Q

Factors that lead to growth in population  and its pace  (historical changes in WP):
https://www.youtube.com/watch?v=BNSC10BksBs

Note:
1.The accelerated growth of population in Europe from  1750 ( start of industrial revolution) to 1970
( increased share from 20% to 40%),
=> is in line with  the understanding that population growth was an endogenous phenomena
induced by economic growth. 
2.In the same period,  the total population of Asia and Africa went down from 80 % to 60% share,
then recovered to 70% by 1980. 
3. The rise for Asia and Africa was not driven by economic (endogenously),  as it was not
accompanied by income growth
4. Population growth of developing countries is very fast as compared to developed economies
5. Additionally, poorer the economy the faster is their population growth,  leading to population
explosions,  which are not endogenous. 
Demographic changes in population across countries

1. Why do BR and DR
change?
2. Which phase is a country
in?
3. How does this affect
growth?
4. The case of India: HW
5. Malthus
6. Household utility max.
model….no graph…only
utility and disutility
drivers
https://www.youtube.com/watch?v=QsBT5EQt348
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Population Aging and Economic Growth: Impact and Policy Implications (eg. Korea)
https://www.youtube.com/watch?v=4osipc8LeGk

 Why are countries running out of population and its impacts

https://www.youtube.com/watch?v=Hc00FCtwHZc

End of China’s one child policy

https://www.youtube.com/watch?v=Fg7jIjmLyWs

Japan’s ageing problem:

https://www.youtube.com/watch?v=tALSvwS1XAM Self see
Population pyramids show the age profile of a country’s population
https://www.youtube.com/watch?v=RLmKfXwWQtE

Some theories:
Maluthus on population growth (1798):
https://www.youtube.com/watch?v=r1ywppAJ1xs

The limits to growth theory of 1972

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

 Ricardo’s analysis on population & natural resources constraint for growth
 David Ricardo (  1772 -  1823):  mechanism on how economic growth is constrained by
natural resources 

1. Figured out evidence from the industrial revolution  of UK, as the driving force of economic growth
2. He called  capital (K)=  wage fund …. it was essentially investment
3. Wage fund = payments made to labour in advance of their services+  payment made for raw
material machinery and infrastructure
4. Like Malthus,  he assumed labour supply was constant in short run
5. With new wage fund  or investment,  the demand for labour increased
6. This lead to increase in wage rate above the subsistence wage rate
7. Subsistence wage rate means basic wage rate which is needed to support existence
8. This largely dependent on food prices
9. The population increases in long run,  so that higher wage rate will fall back to subsistence wage
rate. 
10. With fall in wage rate profits will increase from same capital investments
11. This will motivate entrepreneurs to set up new factories,  growth will continue

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

1. However since subsistence wages depend on food prices, there is an extra element
2. Agriculture normally shows decreasing returns in production,  because land is limited
and fertile land is all the more  limited
3. The cost of producing on a fertile land is less and determines the lower food prices
4. With increasing population,  demand for food increases,  demand to bring more land
under cultivation also increases
5. Since fertile land is limited,  in the second phase,  an inferior land will be cultivated
6.  This will increase the cost of production
7.  Which further increases,  the food prices
8.  This impacts wages,  and subsistence wages must go up
9.  When wages go up profits decrease
10.  With continuously increasing population and continuously rising food,  industrialist get
to a point where profits are so small that they don't motivate for the investments
11.  At this point there will be growth stagnation

A common assumption with classical and Marxian economics,  was that at a subsistence wage rate,  laborers will
consume most of their income and will the capital is will be invest nearly all their capital stock.
1. Ricardo suggested to the UK government,  that this problem can be solved by
relaxing the corn law,  thereby allowing for more and more food imports
2. Then a growing population with stable food prices will keep wages at
subsistence level and encourage investment and growth
3. This was possible for UK,  as they had good reserves of foreign exchange from
their industrial activities and exports

Applying the same  to developing economies,  might not be e a long-term solution, 

because developing economies are anyway a poor in foreign exchange

4.  For developing economies,  the solution is to improve agricultural productivity,  and also
industrial activity
5. Industrial activity can lead to more  domestic income and exports’  income so that,  some
deficits in in food needs can be solved
6. Additionally a high demand for agricultural products from several developing countries,  can
lead to increasing international food prices

The dual sector model: W Arthur Lewis

The dual economy model
Lewis dual sector model

 This was given by W.  Arthur Lewis

 Built upon Ricardo model,  includes new to sector aspect
Two sectors are:  agriculture and  industrial
Lewis made few assumptions:
1. These two sectors have different behavioral principles
2. Agricultural sector is driven by customs of mutual help and income sharing within family
3.Industrial sector is driven by individualistic  account of contribution and wages
4. Initially,  tendency exist for agricultural  population to remain in villages
5. Industrial sector employment is offered at fixed institutional rate ( at least in short run)
6.  All profits from industrial sector is re-invested for further capital formation,  which in turn leads
to growth
 Lewis said that,  surplus labour in agriculture would lead to falling marginal
productivity (or marginal output) ultimately stagnating marginal productivity or even
MP = ΔTP /ΔL
making it negative

2. All of it leading to lower average productivity,  and therefore average wage rate ( captured by
average consumption)  for rural population……..they get paid as per their average production
Þ This problem will  move excess agricultural workers to industrial sectors
Þ The institutional wage rate would be expected to be a little higher 

This happens not only because of:

1. higher marginal productivity in industrial sector with use of more capital equipment
2. Industrial sector is poised to grow

Now let's look at the same scenario graphically

 L supply (SL) moves up & more wage is
demanded due to increase in food prices

T: Fei turning point
1. O1 to O2 is total supply of L
2. Start: Agriculture has all L
3. 2nd stage: Industry gets O1S units of L
4. This happens even with same wage rate
5. As removing L from Ag
……doesn’t reduce total output
…but increases average production (AP)

S: Lewis turning point

Shortage point for food

Long term industrial growth can

be promoted by increased ag.
Production and productivity