1. Reinert/Windows on the World Economy, 2005 Development Concepts CHAPTER 19

2. Reinert/Windows on the World Economy, 2005 2 Introduction Will gain some understanding of how the realms of international trade, international production, and international finance affect development processes around the world Primary goal of international economic development is the improvement of human well-being Difficult to isolate a universal conception of human well being  Without a universal conception, there can be no single concept and measure of economic development Many international economists claim that human well-being is best measured in terms of per capita income However many development economists argue that increases in per capita income is too narrow a definition of “development”  Offer a more inclusive approach, conceiving of development as human development

3. Reinert/Windows on the World Economy, 2005 3 Per Capita Income Early and persistent conception of international economic development  Economic development leads to increases in per capita income National income is a crucial variable  Divided by the total population to calculate GNP per capita GNP per capita is an important measure of level of economic development Growth rate of GNP per capita is an important measure of pace of economic development over time

4. Reinert/Windows on the World Economy, 2005 4 Table 19.1. Development Indicators for Selected Countries (2000 except where indicated)

5. Reinert/Windows on the World Economy, 2005 5 Per Capita Income Large range of per capita incomes among countries  Average per capita income in Japan and United States is over 300 times Ethiopia’s From the point of view of economic development as the level of per capita income, we would conclude that Japan and United States are over 300 times “more developed” than Ethiopia  Not necessarily a true statement, but an implication of the per capita income perspective

6. Reinert/Windows on the World Economy, 2005 6 Per Capita Income Limitations Per capita GNP  Only includes market activities Many activities in developing countries take place outside the market  For example, does not include farmers’ production of agricultural products for consumption within his or her family  Does not account for certain costs associated with development such as Use of nonrenewable resources Loss of biodiversity Pollution  Is an average measure that hides the distribution of income among the households of a country  Not always well correlated with indicators of human development such as levels of education and health

7. Reinert/Windows on the World Economy, 2005 7 Per Capita Income Limitations The nominal or currency exchange rates used to convert GNP into US dollars for comparison among countries are misleading  Large part of economies consist of non-traded goods Large part of non-traded goods consist of services— tend to be less expensive in developing countries  The solution lies in purchasing power parity methodology  Uses US dollar prices to value all goods in all countries

8. Reinert/Windows on the World Economy, 2005 8 Lorenz Curve and Gini Coefficient Measures the distribution of total income among the households of the economy Gini coefficient ranges from the extreme of zero (perfect equality) to unity (perfect inequality)  In practice, ranges from approximately 0.25 (relatively low inequality) to 0.60 (relatively high inequality) Gini coefficient index multiplies the Gini coefficient by 100 and therefore ranges from 0 to 100 Table 19.1 shows that income distribution is, to some extent, independent of the level of per capita income

9. Reinert/Windows on the World Economy, 2005 9 Human Development United Nations Development Program (UNDP) has been a leading advocate of human development In 1990, the UNDP published first of what was to be an annual Human Development Report which states that  People are the real wealth of a nation  Basic objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives Sees the growth of income per capita as an important but limited measure of the rate of economic development

10. Reinert/Windows on the World Economy, 2005 10 Human Development Index Measures development as reflecting three important components  Per capita income Calculated so that higher levels receive declining weights  Health Measured via life expectancy  Education More of an emphasis placed on educational outcomes than enrollment

11. Reinert/Windows on the World Economy, 2005 11 Human Development Index Although there appears to be a general positive correlation between GNP per capita and life expectancy and adult literacy, variation from this norm is possible  For example, Costa Rica has an average life expectancy and an adult literacy rate equivalent to that of the United States despite its GNP per capita being only slightly over one tenth of the US value Consequently, Costa Rica’s HDI is above that of many other countries in its income group  These kinds of variations are captured by the human development concept but not by the per capita income concept

12. Reinert/Windows on the World Economy, 2005 12 Figure 19.1. The Human Development Index

13. Reinert/Windows on the World Economy, 2005 13 Criticisms of the HDI Weighting scheme among per capita income, health, and education is arbitrary  Same could be said of the per capita income perspective “Too political” in assigning declining weights to higher per capita incomes Relies on measures for which data are unreliable Development economist Paul Streeten defends the HDI  An upward movement in HDI almost always reflects an improvement in human well-being Not always true of per capita income measures  Easier and possible to close gaps in HDIs versus reducing international income gaps  HDI registers (negatively) the potential impact of over-development in capturing the diseases of the rich (such as heart disease) that reduce the HDI through its health component  HDI is appropriately political as it focuses attention on important issues which are not captured by the income measure

14. Reinert/Windows on the World Economy, 2005 14 Supplemental Indices UNDP has introduced additional indices to supplement the HDI  Gender-related development index (GDI) Adjusts the HDI downward to account for levels of gender inequality  Gender-empowerment measure (GEM)  Human poverty indices 1 and 2 (HPI-1 and HPI-2) Focus on poverty in developing and developed countries, respectively HPI-1 is especially relevant in capturing basic deprivations in education and health

15. Reinert/Windows on the World Economy, 2005 15 Table 19.2. Additional Human Development Indices and Their Components