Economics of Development ASHESI UNIVERSITY COLLEGE , FALL 2011 Stephen E Armah E-mail: searmah@ashesi.edu.gh

Growth Measurement: Growth Rate of an Economy The growth Rate of an economy simply is a measure of movements in both a positive or negative direction from any given time period, e.g. GDP was 100 in year one, now its 105 in year two. Mathematically growth rate of X is the change in X from the first year to the second year, divided by the value of X in the first year. Let t designate the first year and t+1 the second year. Mathematically we can call the observations X t and Xt+1 , This gives us an equation of: How does growth correlate to some development indicators (illustrate graphically on Blackboard): Life expectancy and per capita Income Literacy rate and per capita income See programs like the Global Fund and America's emergency AIDS plan are providing life-saving AIDS drugs to 1.3 million people around the world, most of them in Africa. The US government $1.2 billion initiative targeting malaria in Africa These amounts were spent to improve education and health services delivery, speed up rural electrification, HIV/AIDS programs, enhance rural agriculture, feeder roads construction and rehabilitation, rural water and sanitation, among others

Growth Measurement: Growth Rate of an Economy growth rate (g) = (Xt+1 – X t )/ X t IN-CLASS-EXERCISE Using our example of year 1= 100 and year 2 = 105 calculate The annual growth rate!= [(105-100) /100 ]*100 = 0.05* 100 = 5% if year 1= 120 and year 2 = 135 calculate The annual growth rate! = [(135-120) /120 ]*100 = 0.125* 100 = 12.55% How does growth correlate to some development indicators (illustrate graphically on Blackboard): Life expectancy and per capita Income Literacy rate and per capita income See programs like the Global Fund and America's emergency AIDS plan are providing life-saving AIDS drugs to 1.3 million people around the world, most of them in Africa. The US government $1.2 billion initiative targeting malaria in Africa These amounts were spent to improve education and health services delivery, speed up rural electrification, HIV/AIDS programs, enhance rural agriculture, feeder roads construction and rehabilitation, rural water and sanitation, among others

Growth Measurement: Growth Rate of an Economy Compounding growth Rate: This helps us to determine that is an economy is growing at a certain average growth rate, then how long will it take that economy to double its growth. The mathematical approximation for dealing with growth rates is the RULE OF 72. THE RULE IS A FORMULA FOR ESTIMATING THE AMOUNT OF TIME IT TAKES SOMETHING TO GROWING AT A GIVEN RATE TO DOUBLE. FORMULA = doubling time = 72/g, Where g is the percentage annual growth rate. EXERCISE E.g. if an economy is growing at an annual rate of 2% it will double in approx. 36 years! What is Ghana’s current PPP adjusted GDP? Ghana’s growth rate from 2000-2010 was roughly 5.5%. Assuming Ghana is growing at 5.5% now, how long will it take for GDP to double How does growth correlate to some development indicators (illustrate graphically on Blackboard): Life expectancy and per capita Income Literacy rate and per capita income See programs like the Global Fund and America's emergency AIDS plan are providing life-saving AIDS drugs to 1.3 million people around the world, most of them in Africa. The US government $1.2 billion initiative targeting malaria in Africa These amounts were spent to improve education and health services delivery, speed up rural electrification, HIV/AIDS programs, enhance rural agriculture, feeder roads construction and rehabilitation, rural water and sanitation, among others

The Theories of Economic Development Here we would historicize the concept of development and explore the various theories propounded to explain how and why development does or does not take place There are 4 major competing theories: The Linear-stages of Growth theories Theories and patterns of structural change International dependency theory The Neoclassical, free market theory

The Linear-stages of Growth theories During the 1950’s and early 1960’s, Theorist viewed the process of development as a series of successive stages of economic growth through which all countries must pass This approach followed an economic theory of development where the right quantity and mixture of saving, investment, and foreign Aid were all that was needed to enable countries proceed along a growth path historically followed by the more developed economies Development is here synonymous with rapid aggregate economic growth!!!!

Economic Growth and Economic Development If growth benefits a small number of people within the economy it cannot be regarded as Development World Development Report: The challenge of Development is to improve the quality of life. A better quality of life encompasses as ends in themselves better education, higher standards of health and nutrition, less poverty, cleaner environment, more equality of opportunity (gender balance). Can there be development without growth? NO! Economic Growth is a necessary but not sufficient condition for development (improvement in welfare of people) Development Economics is therefore a unique branch of the broader discipline of Economics, with a broader scope. This includes being concerned with the efficient allocation of scarce resources as well as dealing with the economic, social, political and institutional mechanisms necessary to bring about rapid and large scale improvements in the levels of people

Theories and patterns of structural change This linear stages approach was strongly challenged in the 1970’s by structural change thinking This involved the use of modern economic theory and quantitative techniques to explain the internal processes of structural change that a typical developing country must undergo to sustain a process of rapid economic growth

The structural change model focuses on the mechanism by which underdeveloped economies transform their domestic economic structures from a heavy emphasis on traditional subsistence Agric to a more modern , urbanized and diversified economy Here the accumulation of capital both human and physical are deemed as important to the development process This approach was championed by Lewis, Chenery et al.

International dependency theory Another strong but highly ‘controversial’ theory of development which also evolved in the 1970’s was the Dependency Theory The theory is political in orientation and views development in terms of domestic and international power relationships, institutional and structural rigidities. Dependency theorist emphasized on external and internal institutional and political constraints on economic development Emphasis was placed on the need for new policies to provide for egalitarian objectives, e.g. employment for all, importantly economic growth is not given the exalted status as in the linear theory

In this theoretical conception the relationship between the developed countries (Centre) and the developing countries (periphery) is assigned as the main basis for underdevelopment In Ghana this still enjoys an unfavourably high air time (couched in the whole colonialism debate) Whilst not discounting this theory, it’s a dangerous way of explaining development since externalizes cause and effect Champions include A. Gunder Frank, Cardozo

The Neoclassical, free market theory In the 1980’s and the 1990’s the neoclassical/neoliberal thinking prevailed and reigned supreme Their ethos was rooted in free markets, open economies, the privatization of inefficient public enterprises Here slow or the lack of development is not due to exploitative external and internal forces but rather a case of excessive government intervention in the economic growth process Focus is to minimize the role of government in the economic process!!!

A middle Ground? It is important to note that to a certain degree there is some inherent wisdom in all theories discussed, however Analyzing contemporary economies of developing countries, one can find strands or elements of each theory in these countries