Economic Development

1. Economic Development Problems and Policies Natalya Brown

2. Topics Covered Economics, Institutions and Development Human Capital: Education and Health Agricultural and Rural Development The Environment Policymaking and the Roles of the Market, State and Civil Society Trade, Balance of Payments and External Debt Financial Resources for Development

3. Economics, Institutions and Development Overview Global Differences in Standard of Living Purpose of Development Studies: Values and Objectives The Meaning of Development International Economic Integration

4. Economics, Institutions and Development Global Differences in Living Standards The majority of the 6.4 billion people in the world live in relative poverty. Differences in: Household Size, Income and Property Educational Attainment and Opportunities Health and Nutrition Access to basic necessities (e.g. clean water) Life Expectancy

5. Economics, Institutions and Development Global Differences (Cont�d) Employment Opportunities Inequality within Countries/Cities Interdependence: Economic and Environmental interdependence in an ever-shrinking world

6. Economics, Institutions and Development

11. Table 2.3

12. Economics, Institutions and Development The Purpose of Development Studies Although development economics often draws on the principles and concepts of other branches of economics, it differs from traditional economics and political economy. Traditional economics (neoclassical economics) is concerned with the efficient allocation of scarce productive resources and sustained optimal growth of production possibilities over time. This is appropriate for studying advanced capitalist economies Perfect and Complete Markets Purely Capitalist Incentives in Decision-making Economic Rationality

13. Economics, Institutions and Development The Purpose of Development Studies (cont�d) Political economy analyzes how politics and economics are related. It studies the social and institutional mechanisms through which decisions about the allocation of scarce productive resources are made. Development economics has a broader scope. The focus is not just on efficient allocation of scarce resources and sustained growth but also analyzing the role of economic, social, political and institutional mechanisms that exist in promoting/hindering the well being of the people in less developed countries.

14. Economics, Institutions and Development The Purpose of Development Studies (cont�d) It is the economics of the contemporary poor, underdeveloped nations with varying ideological orientations, diverse cultural backgrounds, and very complex yet similar economic problems. These problems demand a different approach than those of advanced capitalist and centrally planned economies.

15. Economics, Institutions and Development The Purpose of Development Studies (cont�d) Additional Challenges Market Imperfections Informational Asymmetries Structural Transitions Multiple Equilibria and Disequilibrium Political and Social Considerations Attitudes toward life, work and authority, cultural traditions, integrity of government agencies, levels of political participation, bureaucratic, legal and administrative structures, level of political participation, systems of land tenure, flexibility/rigidity of economic and social classes. Requires larger government role, wide scale planning and coordinated efforts

16. Economics, Institutions and Development Questions asked in Development Studies: Can traditional, low-productivity, subsistence societies be transformed into modern, high-productivity, high-income nations? To what extent are the development goals of developing countries thwarted by the economic activities of developed nations? How is it that extreme inequality can exist not only across continents but within cities and countries?

17. Economics, Institutions and Development More Questions: What lessons can developing countries learn from the historical record of economic progress of developed countries? What are the primary causes of extreme poverty? What strategies have been most successful in eradicating poverty?

18. Economics, Institutions and Development Even more questions: What roles do population growth and migration play in the development process? Do the educations systems in developing countries promote development and reduce inequality or do they help to sustain wealth and class structures? Are deregulation and privatization the answer?

19. Economics, Institutions and Development Values in Development Economics The goals of this discipline are derived from subjective value judgments about what is good and desirable. Economic and Social Equality Elimination of Poverty Universal Education Higher Living Standards

20. Economics, Institutions and Development Values (cont�d) Political and Economic Freedom and Participation Self-reliance National Independence Institutional Modernization Personal Fulfillment

21. Economics, Institutions and Development Core Values of Development Common goals sought by all individuals and societies Sustenance: ability to meet basic needs � food, shelter, health and protection. �Absolute underdevelopment� describes the absence of these basic needs. Self-Esteem: to achieve a sense of worth and self-respect (i.e. dignity) Freedom from Servitude: emancipation from alienating material conditions of life, from social servitude to nature, ignorance, other people, misery, institutions, and dogmatic beliefs. United Nations� Millennium Development Goals

22. Economics, Institutions and Development Core Objectives of Development The improvement in the access and distribution of basic necessities The improvement of living standards The expansion economic and social opportunities

23. Economics, Institutions and Development The Meaning of Development Traditional Measures The capacity of a once relatively stagnant national economy to generate and sustain significant economic growth Annual increases of 5% or higher in gross national product. Alternative measures include income per capita and real income per capita (�real� � accounting for inflation). Changes in the structure of production � shifts from agriculture towards manufacturing and services (i.e. industrialization) Little attention paid to eradicating poverty, unemployment, inequality and discrimination.

24. Figure 2.2

25. Table 2.5

27. Economics, Institutions and Development Contemporary Measures Broader definition of development to include the reduction of poverty, unemployment and inequality within the context of a growing economy. The goal can no longer be just higher incomes. The objectives of development must also include better education, health and nutrition, equal opportunities, individual rights and freedoms, clean environment etc.

28. Economics, Institutions and Development Sen�s Capability Approach �Economic growth cannot be sensibly treated as an end in itself. Development has to be more concerned with enhancing the lives we lead and the freedoms we enjoy.� -Amartya Sen, Development as Freedom 1998 Nobel Laureate in Economics

29. Economics, Institutions and Development Sen�s Functionings and Capabilities Functionings: what an individual does (or can do) with the commodities of given characteristics that are in his/her possession or control. This reflects the various things an individual may value doing or being. Capabilities: the freedom an individual possesses with respect to choice of functionings, given his/her personal traits and his control over commodities.

30. Economics, Institutions and Development Sen points to the limitations of traditional measures of real income in defining well being. These measures fail to include: Personal heterogeneities Environmental diversities Variations in social climate Differences in relational perspectives Distribution within households Sen argues that changes in functions and capabilities are better measures of development

31. Figure 2.3

33. Table 2.9

34. Common Characteristics of Developing Nations Low levels of living Low levels of productivity High rates of population growth and dependency burdens Substantial dependence on agricultural production and primary-product exports Prevalence of imperfect markets Dependence and vulnerability

35. How Developing Countries Today Differ from Developed Countries in Their Earlier Stages Physical and human resource endowments Per Capita incomes and levels of GDP in relation to the rest of the world Climate Population size, distributions and growth Historical role of international migration International trade benefits Basic R&D capabilities Stability and flexibility of political-social institutions Efficacy of domestic economic institutions

36. International Economic Integration Development and Globalization Development in the Post-Industrial Age Case Study: Indian Software Industry

37. Economic Globalization

38. Development and Globalization Expansion of opportunities for LDCs. Improved resource allocation Increased efficiency through competition Learning and technology transfer Shift to value-added activities Marginalized economies Increase in the number of countries whose GNP per capita falls in the lowest quintile. Fewer middle income countries. Slower upward mobility Emphasizes differences in infrastructure and policymaking aptitude.

40. Development in the Post-Industrial Age Geographical boundaries losing meaning Modern Era vs. Post-modern Era definition of development Benefits to Globalization and the Information Revolution Integration into the world market Development of new industries �Leap-frogging� into the digital age. Source of economic security

41. Costs � increased inequality The �digital divide� A premium placed on infrastructure: education and access to computers and communication networks New meaning for �geographical isolation�.

42. Case Study: Indian Software Industry Success story but also an example of dualism in development History and Growth factors Advantages and Disadvantages

43. Economics, Institutions and Development Next topic: Human Capital: Health and Education