WHAT IS DEVELOPMENT?

Economic development Economic development is the major priority of the world’s nations. All nations are being challenged by the crucial task of improving income, well-being and economic capabilities of people. Every year aid is distributed, investments are made, policies are framed, and elaborated plans are hatched to achieve this goal.

Major issues What is development? How to measure development? What is the minimum requirement? Why is it so important? What are the indicators? Where is it occurring? Who is getting the benefits? How to distinguish economic growth and development?

Key elements to development People of the country must be major participants in the process Growth should not benefit only a tiny, wealthy minority,whether domestic or foreign Finally, no development can occur without economic growth

Economic growth and development Growth refers to rise in national or per capita income or product. Economic development implies more than increase in the production of goods and services Libya and South Korea since 1960 would be the best example

GNP and GDP The sum of the value of finished goods and services produced by a society during a given year. This excludes intermediate goods. Total national income and total output Per capita Difference between GNP and GDP

Limitations Poor quality statistics Definition - Goods and services that are sold in the market (unpaid work ????) Exchange rate problems To overcome this problem, common set of prices are used to measure output of every country (hair cut in India is priced the same as on in the US) This measure of average income is called Purchasing Power Parity (PPP)

Social indicators for the early 1990s (GDP per capita, PPP) <1000$ 1000-2000$ 2000-5000$ 5000-10,000$ >10,000$ Infant deaths/1000 live births 107 73 33 30 6 Life expectancy 49 57 68 69 76 Physicians per 1000 88 161 181 231 Energy consumption per capita 46 189 977 2029 4857 Adult literacy 52 60 85 83 96

Human development index Life expectancy at birth (this will indirectly reflect infant and child mortality) Educational attainment of the society which is a composite index (It takes weighted average of adult literacy (with weight of 2/3) and a combination of enrolment rates in primary, secondary and tertiary education (with weight of 1/3). Per capita income (adjusted) HDI is calculated using average of the above three indicators.

Comparison of per capita income and HDI, 1998 GDP per capita (PPP) HDI Sri Lanka 1,610 0.721 Ethiopia 500 0.298 China 3,220 0.701 Hungary 6,730 0.857 Sweden 19,480 0.923 USA 29,340 0.927

Development and human welfare Increase in per capita income during 1965 and 1998 in most developing countries raises many questions Inequality- relative welfare of different groups Poverty- number of poor and their state of well being What is the relevance of economic growth in the context of mass living standards and distribution of income ?

Reasons for failure For power and glory of the state (Ancient Egypt on Pyramids and some developing countries on ballistic missiles and nuclear weapons) Resources invested for the future growth Unequal distribution - The rich get richer and the poor get poorer ? (Karl Marx and Charles Dickens)

Income distribution and Lorenz curve Lorenz curve: We take income recipients from low to high on the x- axis and the resulting shape shows degree of inequality of income distribution A straight line with a 45 degree incline at the origin, or a slope of 1 is a Lorenz curve with perfect equality

Lorenz curve 100 80 Line of complete equality 60 national income (cumulative) Percentage share of 40 20 Lorenz curve O O 20 40 60 80 100 Percentage of population

A B Gini coefficient = A / (A + B) 100 80 Line of complete equality 60 national income (cumulative) Percentage share of A 40 B 20 Lorenz curve O O 20 40 60 80 100 Percentage of population

The Gini-Coefficient Divide A by the sum of A + B to get the Gini coefficient If the Lorenz curve is on the 45 deg. Line, the Gini coefficient would be 0 Range 0-1 Limitations For a numerical measurement of the inequity in the distribution of wealth, the Gini index (or Gini coefficient) is derived from the Lorenz curve. To calculate the Gini index, find the area between the 45 degree line of perfect equality and the Lorenz curve. Divide this quantity by the total area under the 45 degree line of perfect equality (this number is always 0.5 -- the area of 45-45-90 triangle with sides of length 1). If the Lorenz curve is the 45 degree line then the Gini index would be 0; there is no area between the Lorenz curve and the 45 degree line. If, however, the Lorenz curve is a backwards "L", then the Gini-Index would be 1 -- the area between the Lorenz curve and the 45 degree line is 0.5; this quantity divided by 0.5 is 1. Hence, equality in the distribution of wealth is measured on a scale of 0 to 1 -- more inequity as the one travels up the scale.

L1 L2 100 80 Line of complete equality 60 national income (cumulative) Percentage share of 40 L1 L2 20 O O 20 40 60 80 100 Percentage of population

Comparison of two hypothetical income distributions Income group Distribution 1 Distribution 2 Lowest 25 % 7.5 13.3 Next 25% 42.5 Highest 25% 60.0 Gini coefficient 0.35

Inequality scenario in the world Sri Lanka: Equal distribution of income South Korea and Taiwan: Equal distribution combined with rapid growth Latin America: High inequality Ethiopia, Kenya, Zambia, Philippines, Colombia, Peru, Thailand, Brazil, Malaysia, Venezuela and Mexico: Unusually high inequality Bulgaria, Poland and Hungary (transition economies) Australia, Singapore and USA (developed countries)

Equality and equity Equality: Every one gets the same income or owns the same wealth Equity: Ethical concept Basic human needs and social indicators

Poverty measures Poverty refers to low income received by certain households Both Absolute and relative income are important Measurement of poverty Poverty line Poverty head count

Strategies for growth with equity Redistribute and growth approach Redistribute and develop approach Redistribution with growth approach Basic Human Needs approach Structural adjustment approach