Development Economics (Econ-3150)

Key Issues in this Chapter Introduction: Our 2 Contrasting Worlds Why Study Development Economics? Meaning Economic Development (Its Evolution)

Bono-U2 Lead Singer Bono's call to action | Video on TED.co http://www.ted.com/talks/bono_s_call_to_action_for_africa.html

“…where you live should not determine whether you live or die early” Bono-U2 Lead Singer “…where you live should not determine whether you live or die early”

One World-as we know it

Two Contrasting Features

The Contrast…

The Contrast…

The Contrast can also be seen in terms of numbers… Black Shaded: 15% of the World Population 50% of the World GDP White and Dark Grey: 50% of the World Population just 15% of the World GDP

The Contrast in numbers… The average person in a typical family living in those countries that account for 15% of the world population and 50% of the world income … Has and/or lives in a comfortable home; Has enough to eat, Is well clothed and healthy; Has financial security and/or a Prosperous Future.. “Developed Economies”

The Sharp Contrast… “Developing Countries” On the other hand, the average person from a family in those countries that account for 50% of the world Population and 15% of the world income Is much less fortunate; Has little or no shelter; Is illiterate, unemployed; Has inadequate food supply and uncertain future…. “Developing Countries”

The Contrast… Implication: We live in a world characterized by a SHARP CONTRAST Read Text Book Examples/Stories on Pages 2-5: The contrast between life in: North America and Rural Asia Big cities in South America and East Africa Where a person is born and lives actually determines whether that person dies early or lives longer.

The Sharp Contrast… ..and most of us know very little about the other half of the world. That is, how the other half lives; why people in the other half of the world do what they do; why they do it the way they do, and not in the ways we think they ought to do) This course is designed to expose you to what life looks like in the other half of the world, and why it is so; the rationales behind the decisions of people in the other half of the world?

2. Why Study Development Economics? The list of 27 issues that development economics specifically helps you to understand are provided on pages 9-11

2. Why Study Development Economics? It enables us to have a systematic understanding of the economic problems and issues facing people in the other half of the world, and formulate our judgment and conclusion about their activities on the basis of relevant facts and statistical information.

2. Why Study Development Economics? Enables us to NOT make simplistic conclusions (based on a snapshot of facts) but rather take into account the interdependence of factors (economic and non-economic variables such as institutions and social systems) in building our conclusions…..

2. Why Study Development Economics? 3. Enables us to re-evaluate the decisions we make in our individual quest for success, happiness, and security by allowing us to challenge the traditional wisdom

3. The Meaning of Economic Development (A historical Perspective)

3. The Meaning of Economic Development For it may refer to: material wants (Food Shelter, Clothing) and Nonmaterial Wants ( education, knowledge, fairness) and the crucial role that values, attitudes and institutions play in the decisions that people take, economic development may mean different things for different People

What Do we Mean by Development? Prior to 1970: Economic development meant the ability of a national economy (whose initial condition has been static for a long time) to grow and sustain a 5-7% annual increase in the per capita gross national income. a 5-7% increase in the value of all goods and services produced by national resources of a country Growth in per capita income levels was taken as a measure of economic development status of a country. That is, per capita income growth was taken as an indicator of the ability of a nation to expand its output at a rate faster than the rate of growth of its population.

What Do we Mean by Development? Prior to 1970: Economic development has also been taken as a planned alteration of the structure of production and employment of a country. Accordingly, a decline in the employment and output share of agriculture and a rise in the manufacturing and service sector share of the economy would indicate economic development.

What Do we Mean by Development? The premise for both of these approaches was that if the national output expanded faster than the growth of population: the benefits would eventually trickle down to the masses. “Trickle Down Approach” rapid expansion of the manufacturing and service sector would enables achieving such a goal faster and better than the expansion of agricultural sector In both cases, development was purely seen in economic terms (rapid growth output (GDP) per person)

What Do we Mean by Development? Thus many countries implemented programs that involved alternation of their national economies and projects that led to increased output levels. Consequently some were able to achieve the growth targets (5-7% annual growth); some economies were able to grow even faster. For example, there was faster economic growth in the industrialized countries, particularly in USA, Canada, Europe, and many other parts of the world (Specifically in some Asian Countries)

What Do we Mean by Development? However, the levels of living of the masses of people in many of these and other countries remained for most part unchanged; the living conditions of people particularly those in Africa, Latin America and South Asia worsened. This signaled that some thing is wrong with the existing “definition of development” where economic growth was being equated with economic development “It may be that growth is not the same as development”

What Do we Mean by Development? A modified view of development economics ( Late 1970s) Increase in per-capita income (i.e., growth) coupled with reduction or elimination of poverty, inequality and increased opportunities for employment.

What Do we Mean by Development? In the modified view, Economic Development = Growth in PCI + Reduction in Poverty, Inequality & Unemployment. According to this view, in the face of increasing poverty, inequality and unemployment, it would be strange to take (equate) even a doubling of per capita income (resulting from even more than 5-7% growth of GDP) levels as (to) an economic development.

What Do we Mean by Development? Even with the modified approach to of viewing economic development, there were economists who argued that: Development is not merely a question of economics and/or a quantitative measurement of income, poverty and inequality. For example, according to Denis Goulet (1971), it is not possible to define economic development (and therefore, how it should be achieved) without understanding “Economic underdevelopment”

What Do we Mean by Development? Denis Goulet (1971): Underdevelopment …A sense of personal and societal impotence in the face of disease and death, confusion and ignorance.. … Hopelessness when faced with hunger and natural catastrophe

What Do we Mean by Development? Denis Goulet (1971): Underdevelopment …living in a chronic poverty, which is a cruel kind of hell…one you can’t understand how cruel it is merely by gazing up on it as an object…

What Do we Mean by Development? Denis Goulet (1971): Underdevelopment …is one you can speak about it objectively ONLY after undergoing personally or vicariously through its shock… http://www.encyclopedia.com/video/526BTs_DRoE-poverty.aspx

What Do we Mean by Development? These and related arguments that prevailed in the 1980s led to the rethinking economic development as something completely different. Consequently….

What Do we Mean by Development? A further modified view of development appeared in the early 90s (1991, World Bank). “A multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality and the eradication of poverty.” In this view, the emphasis is not only growth but also the improvement in the quality of life

What Do we Mean by Development? Quality of life as depicted by better education, higher standards of health and nutrition, less poverty, clean environment, more equality and greater freedom… This meant that economic development has to be understood as a process that involves moving people from a condition of life perceived as unsatisfactory to one that is materialistically and spiritually better…

What Do we Mean by Development? Taking this into account, Amrtya Sen, a leading thinker of the meaning of economic development, provided a new definition in 1998 ..Development is a process that involves improvements in the “capability to function”… One that enhances the lives we lead and the freedoms we enjoy….

What Do we Mean by Development? Amrtya Sen (1998),….. Growth in income levels is not the end but the means to an end. Hence, whether a person is poor/non-poor can’t and should not be measured by his/ her income or utility Whether a person is poor/non-poor should rather be measured based on the capability of the person to function: What a person is …, What a person can be…, What a person does…, and What a person can do…

What Do we Mean by Development? The new definition of economic development emphasized human “well-being”—which is to be well in the basic sense of: being healthy, well nourished, being highly literate, and having the freedom of choice in what one can become and can do

What Do we Mean by Development? The new approach of describing development “improving the capability of individuals” also has implications for policy formulation: Economists and policy makers now place more weight on: Health, education and social inclusion and empowerment in describing the economic development status of a country than income growth. Growth without development is possible —a situation where a country achieves (has) high income levels, but most of its population has poor health and low education standards.

What Do we Mean by Development? Adopting Sen’s capability approach, we can take the following as a working definition of economic development Economic development is a sustained improvement of the entire society toward a “better” and “more humane” life (a process that involves not only increased income but also improvement in the capability of individuals to function (hence, better life and expanded opportunities).

What Do we Mean by Development? What constitutes “good life” may be different at different times and for different countries. However, the following three basic components/values may serve as a conceptual basis and practical guideline for understanding the inner meaning of economic development, and hence better life:

What Do we Mean by Development? These core elements (components of good life) are: Sustenance: the ability to meet basic needs (food, shelter, health and protection). When these are in critically short supply, the nation is in a condition of “underdevelopment” Self Esteem: To be a person with dignity, respect, honor and recognition. A sense of worth and self-respect, of not being used as a tool by others for their own ends. Freedom from Servitude: Freedom from ignorance, misery, institutions, and dogmatic beliefs). I.e., to be able to choose.

What Do we Mean by Development? As a result, in all societies, today economic development is being conceived as a process with the following three objectives: Increasing the availability and distribution of basic life sustaining goods and services Improving the levels of living (jobs, education, better health, and the cultural and human values) Expanding the range of economic and social choices to available to individuals

What Do we Mean by Development? To meet these objectives, in September 2000, about 189 member countries of the United Nations gathered in New York and adopted: The MILLENIUM DEVELOPMENT GOALS (MDGs) These goals were set to be achieved by 2015. Read the list of eight MDGS on page 24 and the progress made to that end on page 25.

Development and Happiness: Three questions The goal of economic development is to make all people to be well-off. That is, to improve human well-being. Important questions, thus arise: Is happiness part of human well-being? Does greater happiness expand an individual’s capability to function? (Can we include happiness in the list of functioning's that describe how well we are?)

Development and Happiness: Three questions Is there a relationship between income and level of satisfaction (happiness)? The average level of happiness (satisfaction) increases with a country’s average income level (per capita income) Example: About 4X the percentage of people in low income countries report that they are not as happy as those in high income countries.

Development and Happiness: Three questions Is there a relationship between income and level of satisfaction (happiness)? The positive relationship between income and happiness is, however, seen only up to certain level of income: 10,000 -$20,000. Beyond that we do not see a positive correlation between income levels and happiness

Development and Happiness: Three questions Is there a relationship between income and level of satisfaction (happiness)? Implication: PCI level of 10,000 -$20,000 is a level at which we can say most people in a country escape from extreme poverty. Have Financial security and hence are happy.