1. © Natalya Brown 2008 ECON 3066 Economic Development INTRODUCTION Lecture 1: Economics, Institutions and Development

2. © Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development Overview – Global Differences in Standard of Living – Purpose of Development Studies: Values and Objectives – The Meaning of Development

3. © Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development Global Differences in Living Standards – The majority of the 6.4 billion people in the world live in relative poverty. – Differences in: Household Size, Income and Property Educational Attainment and Opportunities Health and Nutrition – Access to basic necessities (e.g. clean water) – Life Expectancy

4. © 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

5. © Natalya Brown 2008 LECTURE 1: Introduction Development Measures by Country Standard Measures MalaysiaBrazilSudanCanada GDP per capita (PPP US$) 9,5127,7901,91030,677 Unemployment Rate (%) 3.412.218.77.6 Combined Primary, Secondary, Tertiary Gross Enrolment Ratio (%) 71913894 Life Expectancy at birth (years) 73.270.556.480.0 Average Household Size 5.62.6 Source: UNDP Human Development Report, 2005

6. © Natalya Brown 2008 LECTURE 1 Standard Measures MalaysiaBrazilSudanCanada HIV Prevalence (% age 15-49) 0.40.72.30.3 Income Inequality (Gini) 49.259.333.1 Debt Service as % of GDP 9.111.50.2 Infant Mortality Rate (per 1000 live births) 733635 Population Living below $2/day 9.322.4

7. © Natalya Brown 2008 LECTURE 1: Introduction The Purpose of Development Studies Although development economics often draws on the principles and concepts of other branches of economics, it differs from traditional economics and political economy. Traditional economics (neoclassical economics) is concerned with the efficient allocation of scarce productive resources and sustained optimal growth of production possibilities over time. This is appropriate for studying advanced capitalist economies – Perfect and Complete Markets – Purely Capitalist Incentives in Decision-making – Economic Rationality

8. © Natalya Brown 2008 LECTURE 1: Introduction The Purpose of Development Studies (cont’d) – Political economy analyzes how politics and economics are related. It studies the social and institutional mechanisms through which decisions about the allocation of scarce productive resources are made. – Development economics has a broader scope. – The focus is not just on efficient allocation of scarce resources and sustained growth but also analyzing the role of economic, social, political and institutional mechanisms that exist in promoting/hindering the well being of the people in less developed countries.

9. © Natalya Brown 2008 LECTURE 1: Introduction The Purpose of Development Studies (cont’d) It is the economics of the contemporary poor, underdeveloped nations with varying ideological orientations, diverse cultural backgrounds, and very complex yet similar economic problems. – These problems demand a different approach than those of advanced capitalist and centrally planned economies.

10. © Natalya Brown 2008 LECTURE 1: Introduction The Purpose of Development Studies (cont’d) Additional Challenges – Market Imperfections Informational Asymmetries Structural Transitions Multiple Equilibria and Disequilibrium – Political and Social Considerations Attitudes toward life, work and authority, cultural traditions, integrity of government agencies, levels of political participation, bureaucratic, legal and administrative structures, level of political participation, systems of land tenure, flexibility/rigidity of economic and social classes. – Requires larger government role, wide scale planning and coordinated efforts

11. © Natalya Brown 2008 LECTURE 1: Introduction Questions asked in Development Studies: 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?

12. © 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?

13. © 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?

14. © 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. – Economic and Social Equality – Elimination of Poverty – Universal Education – Higher Living Standards

15. © Natalya Brown 2008 LECTURE 1: Introduction Values (cont’d) – Political and Economic Freedom and Participation – Self-reliance – National Independence – Institutional Modernization – Personal Fulfillment

16. © Natalya Brown 2008 LECTURE 1: Introduction Core Values of Development Common goals sought by all individuals and societies – Sustenance: ability to meet basic needs – food, shelter, health and protection. “Absolute underdevelopment” describes the absence of these basic needs. – Self-Esteem: to achieve a sense of worth and self-respect (i.e. dignity) – Freedom from Servitude: emancipation from alienating material conditions of life, from social servitude to nature, ignorance, other people, misery, institutions, and dogmatic beliefs.

17. © 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

18. © Natalya Brown 2008 LECTURE 1: Introduction Core Objectives of Development The improvement in the access and distribution of basic necessities The improvement of living standards The expansion economic and social opportunities

19. © 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) – Little attention paid to eradicating poverty, unemployment, inequality and discrimination.

20. © Natalya Brown 2008 LECTURE 1: Introduction Economics, Institutions and Development Contemporary Measures – Broader definition of development to include the reduction of poverty, unemployment and inequality within the context of a growing economy. – The goal can no longer be just higher incomes. The objectives of development must also include better education, health and nutrition, equal opportunities, individual rights and freedoms, clean environment etc.

21. © 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

22. © Natalya Brown 2008 LECTURE 1: Introduction Sen’s Functionings and Capabilities Functionings: what an individual does (or can do) with the commodities of given characteristics that are in his/her possession or control. This reflects the various things an individual may value doing or being. Capabilities: the freedom an individual possesses with respect to choice of functionings, given his/her personal traits and his control over commodities.

23. © Natalya Brown 2008 LECTURE 1: Introduction Limitations of Traditional Measures Sen points to the limitations of traditional measures of real income in defining well being. These measures fail to include: – 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

24. © Natalya Brown 2008 LECTURE 1 Next topic: Differences and Commonalities among Developing Countries