© Natalya Brown 2008 ECON 3066 Economic Development Todaro dan Smith: Economic Development, 9 th edition, CHAPTERS 1-2; 4-10; 12; 14 Sadono Sukirno. Ekonomi Pembangunan: Proses, Masalah dan Dasar Kebijakan Mubyarto. Sistem dan Moral Ekonomi Indonesia Kindleberger, P. et al. Economic Development TOPICS 9/14/20151

© Natalya Brown 2008 ECON 3066 Economic Development TWO QUIZZES: 15% MID-TERM: 30% FINAL-TERM: 40% ASSIGNMENT: 15% RULES 9/14/20152

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development Overview – Global Differences in Standard of Living – Nature of Development Economics – What is Development Economics – Purpose of Development Economics – Values in Development Economics – Economies as social systems – The Meaning of Development – New Economic View of Development 9/14/20153

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development 9/14/20154 The majority of the 6.4 billion people in the world live in absolute poverty.

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development 9/14/20155 Part of the 6.4 billion people in the world live in luxury

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development Global Differences in Living Standards – Differences in: Household Size, Income and Property Educational Attainment and Opportunities Health and Nutrition – Access to basic necessities (e.g. clean water) – Life Expectancy 9/14/20156

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development 9/14/20157

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development 9/14/20158

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development Global Differences (Cont’d) Employment Opportunities Inequality within Countries/Cities – Interdependence: Economic and Environmental interdependence in an ever-shrinking world 9/14/20159

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development 9/14/201510

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development 9/14/ Average living condition, between countries VariableNorth AmericaRural Asia Nuclear family 4 persons 8 persons or more Yearly average income USD50,000,-USD Levels of livingReasonably goodBad EconomyDevelopedIn some parts: Subsistence

© Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development 9/14/ Average living condition, within country VariableDKIPapua

© Natalya Brown 2008 LECTURE 1: Introduction Development Measures by Country Standard MeasuresMalaysiaBrazilSudanCanada GDP per capita (PPP US$) 9,5127,7901,91030,677 Combined Primary, Secondary, Tertiary Gross Enrolment Ratio (%) Infant Mortality Rate (per 1000 live births) Life Expectancy at birth (years) Average Household Size Population Living below $2/day Source: UNDP Human Development Report, /14/201513

© Natalya Brown 2008 LECTURE 1: Introduction The Nature of Development Economics Traditional economics (neoclassical economics): concerned with the efficient allocation of scarce productive resources and optimal growth of these resources to achieve sustained growth deals with, e.g.: – an advanced capitalist world of perfect markets – consumer sovereignty – automatic price adjustments assumes: – economic rationality – a purely materialistic, individualistic, self-interested orientation toward economic decision-making 9/14/201514

© Natalya Brown 2008 LECTURE 1: Introduction The Nature of Development Economics (cont’d) – Political economy: analyzes how politics and economics are related; role of power in decision making studies the social and institutional mechanisms through which decisions about the allocation of scarce productive resources are made. 9/14/201515

© Natalya Brown 2008 LECTURE 1: Introduction The Nature of Development Economics (cont’d) – Development economics has a broader scope. – It deals with:  efficient allocation of scarce resources and sustained growth, and  the role of economic, social, political and institutional mechanisms in promoting/hindering rapid and large-scale improvements in the well being of the people in LDCs 9/14/201516

© Natalya Brown 2008 LECTURE 1: Introduction The Nature of Development Economics (cont’d) – Some characteristics of LDCs (challenges) Market imperfection: most commodity and resource markets are highly imperfect Informational asymmetry: consumers and producers have limited information Structural changes in the society and the economy 9/14/201517

© Natalya Brown 2008 LECTURE 1: Introduction The Nature of Development Economics (cont’d) – Some characteristics of LDCs (challenges) Political and social considerations: economic calculations dominated by political and social priorities; family, clan, religious, or tribal considerations may take precedence over private, self-interested utility or profit- maximizing calculations 9/14/201518

© Natalya Brown 2008 LECTURE 1: Introduction The Nature of Development Economics (cont’d) – Some characteristics of LDCs (challenges) Requires larger government role, wide scale planning and coordinated efforts 9/14/201519

© Natalya Brown 2008 LECTURE 1: Introduction What is Development Economics The economics of the contemporary poor, underdeveloped nations with varying ideological orientations, diverse cultural backgrounds, and very complex yet similar economic problems that usually demand new ideas and novel approaches. Neither the same with economics of advanced capitalist nations nor to centrally planned economies. 9/14/201520

© Natalya Brown 2008 LECTURE 1: Introduction Ultimate Purpose of Development Economics TO HELP US BETTER UNDERSTAND DEVELOPING ECONOMIES IN ORDER TO HELP IMPROVE THE MATERIAL LIVES OF THE MAJORITY OF GLOBAL POPULATION 9/14/201521

© Natalya Brown 2008 LECTURE 1: Introduction Questions asked in Development Economics: 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? 9/14/201522

© Natalya Brown 2008 LECTURE 1: Introduction 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? 9/14/201523

© Natalya Brown 2008 LECTURE 1: Introduction 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? 9/14/201524

© Natalya Brown 2008 LECTURE 1: Introduction Values in Development Economics The goals of this discipline are derived from subjective value judgments about what is good and desirable. The goals are: – Economic and Social Equality – Elimination of Poverty – Universal Education – Higher Living Standards 9/14/201525

© Natalya Brown 2008 LECTURE 1: Introduction Values (cont’d) – National independence – Institutional Modernization – Political and Economic Participation – Grassroots democracy – Self-reliance – Personal Fulfillment 9/14/201526

© Natalya Brown 2008 LECTURE 1: Introduction Economies as Social Systems Social system: interdependent relationship between economic and noneconomic factors. Noneconomic factors: attitudes toward life, work, and authority; patterns and kinship and religion; cultural traditions; the authority and integrity of government agencies; levels of political participation; public and private bureaucratic, legal, and administrative structures; systems of land tenure; flexibility/rigidity of economic and social classes. 9/14/201527

© Natalya Brown 2008 LECTURE 1: Introduction 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) 9/14/201528

© Natalya Brown 2008 LECTURE 1: Introduction The Meaning of Development Traditional Measures – Trickle down – Little attention paid to eradicating poverty, unemployment, inequality, and discrimination 9/14/201529

© Natalya Brown 2008 LECTURE 1: Introduction New Economic View of Development Contemporary Measures – Broader: include the reduction of poverty, unemployment and inequality within the context of a growing economy – Multidimensional: No longer be just higher incomes, must also include e.g., better education, health and nutrition, equal opportunities, individual rights and freedoms, and clean environment 9/14/201530

© Natalya Brown 2008 LECTURE 1: Introduction 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 9/14/201531

© Natalya Brown 2008 LECTURE 1: Introduction Sen’s Functionings and Capabilities What matters is: what a person is, or can be, and does or can do What matters for well-being is ‘functioning’: not the characteristics of commodities consumed, as in the utility approach, but what use the consumer can and does make of commodities e.g. a book is of little value to an illiterate person (except as cooking fuel or a status symbol) 9/14/201532

© Natalya Brown 2008 LECTURE 1: Introduction Five Sources of Disparity between (measured) real incomes and actual advantages Sen’s Five Sources : – 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 9/14/201533

© Natalya Brown 2008 LECTURE 1: Introduction Sen’s Functionings and Capabilities Capabilities: “the freedom an individual possesses with respect to choice of functionings, given his/her personal features/traits (conversion of characteristics into functionings) and his command/control over commodities” 9/14/201534

© Natalya Brown 2008 LECTURE 1: Introduction Three Core Values of Development Common goals: 1. Sustenance : the ability to meet basic needs life-sustaining basic needs – food, shelter, health and protection. “absolute underdevelopment” describes the absence or critical supply of these basic needs. Rising per capita incomes, elimination of absolute poverty, greater employment opportunities, and lessening income inequalities, necessary but not sufficient conditions for development 9/14/201535

© Natalya Brown 2008 LECTURE 1: Introduction Three Core Values of Development Common goals : 2. Self-Esteem: to be a person a sense of worth and self-respect (i.e. identity, respect, honor, recognition, dignity). a sense of not being used as a tool by others for their own end ‘development is legitimized as a goal because it is an important, perhaps even an indispensable, way of gaining esteem. 9/14/201536

© Natalya Brown 2008 LECTURE 1: Introduction Three Core Values of Development Common goals : 3. Freedom from Servitude: to be able to choose human freedom; emancipation from alienating material conditions of life and from social servitude to nature, ignorance, other people, misery, institutions, dogmatic beliefs, especially that poverty is predestination. ‘the advantage of economic growth is not that wealth increases happiness, but that it increases the range of human choice” (W.A. Lewis). 9/14/201537

© Natalya Brown 2008 LECTURE 1: Introduction Three Objectives of Development 1)The improvement in the availability and distribution of basic life-sustaining goods 2)The improvement of living standards 3)The expansion of the range of economic and social choices 9/14/201538

© Natalya Brown 2008 LECTURE 1: Introduction United Nations’ Millennium Development Goals 1.Eradicate Extreme Hunger and Poverty 2.Achieve Universal Primary Education 3.Promote Gender Equality and Empower Women 4.Reduce Child Mortality 5.Improve Maternal Health 6.Combat HIV/AIDS, Malaria and other diseases 7.Ensure Environmental Stability 8.Develop a Global Partnership for Development 9/14/201539

© Natalya Brown 2008 LECTURE 1 Next topic: Comparative Development: Differences and Commonalities among Developing Countries 9/14/201540