Development Economics

1. Development Economics Prof. Dr. Hans H. Bass Jacobs University, Spring 2010

2. Agenda Feb. 04 Development Economics 0. Introductory remarks, grading, topics for presentation, and overview • Economics 1.1 Approaches in mainstream economics 1.2 Approaches in Development Economics • Development 2.1 Meaning 2.2 Measurement

3. Overview Development Economics Voices of the Poor ... ... and some questions for our course: “Why does affluence coexist with dire poverty not only on different continents but also within the same country? Can traditional low-productivity, subsistence societies be transformed into modern, high-productivity, high-income nations? To what extent are the development aspirations of poor nations helped or hindered by the economic activities of rich nations? ...” (Todaro/Smith 2009, p. 7)

4. The economic problem 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development Material wants exceed productive capacity  scarcity! Utility maximization under conditions of scarcity  Economics is about making choices What is the most efficient way to allocate scarce resources and allow optimal growth of these resources?

5. From Adam Smith to modern times ... 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development Adam Smith, 1776 (founder of classical economics) („An Inquiry into the Nature and Cause of the Wealth of Nations“) modern mainstream economics(neo-classical and beyond)

6. Main neo-classical assumptions 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development • homo economicus (fully informed, completely rational, utility maximizing behavior) • decisions made on the basis of marginal, private-profit, and utility calculations • consumer sovereignty, producer sovereignty • perfect markets (perfect market information + no participant with market power to set prices + no barrier to entry or exit + equal access to production technology = perfect competition) • prices equate supply and demand, immediate price adjustments • equilibrium outcomes in all product and factor markets

7. The new economic problem 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development What is the most efficient way to allocate scarce resources and allow optimal growth of these resources? and: What are the economic, social, and political mechanisms necessary to bring about rapid and large-scale improvements for the world’s poor(est), i.e. 150+ economies?

8. Development Economics assumes ... 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development • imperfect markets are the rule rather than the exemption; • consumers and producers have limited information; • prices often do not equate supply and demand  disequilibrium situations prevail; • economic calculations can be dominated by political or social priorities (building new nations, replacing foreign advisors with local decision makers, resolving ethnic conflicts …); • non-economic (extended family, tribal …) considerations may take precedence over private, self-interested utility or profit-maximizing calculations.

9. Development Economics assumes ... 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development strategic economic variables (savings, investment, product and factor prices, forex rates ...) and non economic factors (attitudes to life, work, authority; bureaucratic structures, kinship, religion, values ...) can be equally important to increase national production, raise standards of living, promote employment opportunities

10. Development Economics assumes ... 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development Economics is not a formal science (as mainstream economists, “formalists” tend to believe), but a social science (“substantivist approach”): • It is about societies organizing their production, distribution, and consumption (rather than only about “making choices”) • It implies value judgments in the identification of its subjects (“poverty is worth being investigated”) and its research goals (“poverty should be eradicated”). • The heterogeneity of the Developing World and its complexity need eclectic and multi-disciplinary approaches. • Its research must be policy-oriented.

11. What they say about each other 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development (1) Development Economics is an amalgamation and basically an unaltered application of traditional fields (micro, macro, monetary economics, public finance ...) with a specific focus on industrializing economies in Asia, Africa, and Latin America. (2) Neo-classical mainstream economics is “monoeconomics” (A.O.Hirschman): A book about horses cannot be called “Animals” (D. Seers)!

12. From Adam Smith to modern times ... 1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics2. Development Adam Smith, 1776 John Maynard Keynes, 1936 Paul N. Rosenstein-Rodan, 1943 Gunnar Myrdal, Nobel Prize 1974 (not for D.E.) A. William Lewis & Theodore Schultz, Nobel Prize 1979 Amartya K. Sen, Nobel Prize 1998 Joseph Stiglitz, Nobel Prize 2001 Muhammad Yunus, Nobel Peace Price 2006

13. Agenda Feb. 04 Development Economics • Economics 1.1 Approaches in mainstream economics 1.2 Approaches in Development Economics • Development 2.1 Meaning 2.2 Measurement

14. Three phases 1. Economics2. Development2.1 Meaning2.2 Measuring • Turning the vicious circle of poverty into a virtuous circle of growth – resulting in a diversified industrial economy and higher per capita incomes (1950s) • Looking beyond averages: Reducing poverty, unemployment, and inequality (1970s) • Replacing the domination of circumstances and chance over individuals by the domination of individuals over chance and circumstances (1990s)

15. Phase I: Vicious to virtuous circles 1. Economics2. Development2.1 Meaning2.2 Measuring “Low productivity is the problem. The economic remedy for the problem is capital creation, ... ... though I readily agreed that non-economic remedies may be more important.” “Economic progress is not a spontaneous or automatic affair.”  “Big push” (Ragnar Nurkse 1953)

16. Development Paradigms 1. Economics2. Development2.1 Meaning2.2 Measuring

17. Paradigm 1950s/1960s 1. Economics2. Development2.1 Meaning2.2 Measuring Policies capital accumulation, planning, industrialization, diversification, infrastructure investment Goal:Economic Growth (GNI, GNI p.c.) Theories big push, critical minimum effort, no full employment natural  state intervention Data national accounts

18. Phase II: Social Dimensions of Growth 1. Economics2. Development2.1 Meaning2.2 Measuring “What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? ... If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result ‘development’ even if per capita income has soared.”There is no trickle-down effect! (D. Seers 1969)

19. Phase II: Social Dimensions of Growth 1. Economics2. Development2.1 Meaning2.2 Measuring

20. Paradigm 1970s / early 1980s 1. Economics2. Development2.1 Meaning2.2 Measuring

21. Phase III: Development as Freedom / Capabilities 1. Economics2. Development2.1 Meaning2.2 Measuring „The process of economic development has to be concerned with what people can or cannot do, e.g. whether they can live long, escape avoidable morbidity, be well nourished, be able to read and write and communicate, take part in literary and scientific pursuits ...“ Sustenance, self-esteem, freedom (A. K. Sen 1983)

22. Phase III: Development as Freedom / Capabilities 1. Economics2. Development2.1 Meaning2.2 Measuring

23. Paradigm late 1990s / present 1. Economics2. Development2.1 Meaning2.2 Measuring

24. Government as Main Protagonist Emphasis on Production Emphasis on Distribution Market Forces as Main Protagonists

25. Government as Main Protagonist Goals Policies Goals Policies Emphasis on Production Emphasis on Distribution Theories Data Theories Data 1950s / 60s 1970s late 1990s - present Goals Policies Theories Data Market Forces as Main Protagonists

26. Millennium Development Goals 1. Economics2. Development2.1 Meaning2.2 Measuring • Eradicate Extreme Hunger and Poverty • Achieve Universal Primary Education • Promote Gender Equality and Empower Women • Reduce Child Mortality • Improve Maternal Health • Combat HIV/AIDS, Malaria and other diseases • Ensure Environmental Sustainability • Develop a Global Partnership for Development

27. MDG Targets 1. Economics2. Development2.1 Meaning2.2 Measuring • Eradicate Extreme Hunger and Poverty Target 1. Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a dayTarget 2. Halve, between 1990 and 2015, the proportion of people who suffer from hunger • Reduce Child Mortality Target Reduce by two-thirds the mortality rate among children under 5.

28. Quiz 1 Todaro/Smith, Economic Development, 9th ed., 2005 http://wps.aw.com/aw_todarosmit_econdevelp_9/35/9052/2317470.cw/index.html  Chapter 1

29. Questions for Discussion • (Why) is economics central to an understanding of the problems of development? • (Why) is a strictly economic definition of development inadequate? • Are there dimensions of development not mentioned so far? Which ones?

30. Download Link http://www.hs-bremen.de/internet/de/hsb/struktur/mitarbeiter/bass/lehrveranstaltungen/schwerpunkt_internationale_wirtschaft/Development_Economics/