HS 202: ECONOMIC DEVELOPMENT:PROBLEMS AND POLICY

Mrinal K. Dutta

, Dept. of Humanities and Social Sciences,

Development Economics

 Relatively new branch of economics  Development - Post World War II Phenomenon  Broader than traditional economics  Concerned with developing economies  Which are the developing countries?

Economic Development?

• Traditional economic measures – GNP (5%-7%) – PCI (Real)-> economic well being – Planned alteration of structure of production and employment – Casual reference to non-economic social indicators – Belief in “trickle down effect” 3

Economic Development?

 The new economic view of development  Mahbub ul Haq: “The problem of development must be defined as a selective attack on the worst forms of poverty. Development goals must be defined in terms of progressive reduction and eventual elimination of malnutrition, disease, illiteracy, squalor, unemployment and inequalities  Dudley Seers  Redistribution from growth – underdevelopment is more than just statistics – development is a multidimensional process 4

Economic Development?

• Three core values of development – sustenance: Ability to meet the basic needs – self-esteem: to be a person – freedom from servitude: to be able to choose 5

Economic Development?

• The three objectives of development – To increase availability and improvements in the distribution of food, shelter, health, protection, etc.

– To improve ‘levels of living,’ including higher incomes, more jobs, better education, etc.

– To expand the range of economic and social choices available to individuals and nations 6

Defining the Developing World • On the basis of PCI #The UN’s System #World Bank’s System -208 economies are ranked by GNI per capita -Low-Income countries (LIC), Lower-middle income (LMC), Upper-middle income (UMC), high income OECD and other high-income countries 7

Defining the Developing World -LIC (PCGNI in 2000): $755 or less LMC (do): $756-$2,995 UMC (do): $2,996-9,265 High Income (do): $ 9,266 or more • • The UNDP’s Human Development Index On the basis of degree of international indebtedness (WB) 8

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Figure 1.1

The Developed and Developing World, 2002 11

Figure 2.1

The Develop ed and Developi ng World, 2002 cont’d 12

The Structural Diversity of Developing Economies • Size and income level – Geographical Area, – Population, – National income per capita 13

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The Structural Diversity of Developing Economies • • • Size and income level Historical background -colonial past Physical (land, mineral and other raw materials) and human resources (no. of people and their level of skill) • • Relative importance of public and private sectors Industrial structure Farming not merely an occupation, but a way of life 15

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The Structural Diversity of Developing Economies • • • • Size and income level Historical background • • Physical and human resources Relative importance of public and private sectors • Industrial structure External dependence Economic, political and cultural (related with its size, resource and political history) Political structure, power, and interest groups Large landowners, urban industrialists, bankers, etc.

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Common Characteristics of Developing Nations • Low levels of living Manifested both quantitatively and qualitatively – Per capita national income • PPP method 18

Figure 1.2

Per Capita Gross National Product in Selected Countries, 1997 (in U.S. dollars at official exchange rates) 19

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Common Characteristics of Developing Nations • Low levels of living – Per capita national income – Relative growth rates of national and per capita income 21

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Common Characteristics of Developing Nations • Low levels of living – Per capita national income – Relative growth rates of national and per capita income – Distribution of national income • • • Income inequality very high and widening Poorest 40% vs. richest 20% Brazil, Columbia, Kenya, South Africa- High China, India Malaysia- Moderate Taiwan, Indonesia, South Korea- Low 23

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Common Characteristics of Developing Nations • Low levels of living – Per capita national income – Relative growth rates of national and per capita income – Distribution of national income – Extent of poverty • • Absolute poverty International Poverty Line (US $370) 25

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Common Characteristics of Developing Nations • Low levels of living – Per capita national income – Relative growth rates of national and per capita income – Distribution of national income – Extent of poverty – Health • Life expectancy (98): 48 yr. (Least Developed) 63 yr. (other developing) 75 yr. (developed) Infant Mortality Rate 27

Figure 1.3

Infant Mortality Rates in Selected Countries, 1998 (per 1,000 live births) 28

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Common Characteristics of Developing Nations • Low levels of living – Per capita national income – Relative growth rates of national and per capita income – Distribution of national income – Extent of poverty – Health – Education – The Human Development Index 30

Common Characteristics of Developing Nations • Low levels of living: Low levels and slow growth rates of national income -Highly skewed patterns of income distribution. Top 20% receiving 5 to 10 times as much of the bottom 40% -Up to 1.3 billion people living on income less than $370per year -Low life expectancy, Ill health, malnutrition, diseases, high infant mortality rates -Low levels of literacy, high school dropout rate 31

Common Characteristics of Developing Nations • • Low levels of living Low levels of productivity -Labour productivity * Law of Diminishing Marginal Productivity * Lack of complementary factors such as physical capital or experienced management * Mobilisation of domestic savings and foreign finance * Institutional Changes * Attitude towards work 32

Common Characteristics of Developing Nations • • • Low levels of living Low levels of productivity High rates of population growth and dependency burdens – Natural growth and migration – Birth rate: 30-40/1000 (LDC) – Avge. rate of population growth: 1.6% (LDC) 33

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Common Characteristics of Developing Nations • • • • Low levels of living Low levels of productivity High rates of population growth and dependency burdens Substantial dependence on agricultural production and primary exports 35

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Figure 1.4

Composition of World Exports (percentages of primary and manufactured products) 37

Common Characteristics of Developing Nations • • • Low levels of living Low levels of productivity High rates of population growth and dependency burdens • Substantial dependence on agricultural production and primary-product exports 38

Common Characteristics of Developing Nations • • • • • Low levels of living Low levels of productivity High rates of population growth and dependency burdens Substantial dependence on agricultural production and primary-product exports Technological Backwardness – Lack of R&D institutions, weak communication system, lack of capital – Technological choice dictated by poverty 39

Common Characteristics of Developing Nations • • • • Low levels of living Low levels of productivity High rates of population growth and dependency burdens Substantial dependence on agricultural production and primary-product exports • • Technological Backwardness Prevalence of imperfect markets 40

Prevalence of imperfect markets • • Move towards market economies in 1980s and 90s Market economies and market friendly policies depend heavily on existence of institutional, legal and cultural prerequisites – Legal system, stable and trustworthy currency, infrastructure of roads and utilities, developed system of banking and insurance, formal credit markets, market information for consumers and producers, and norms of behaviour that facilitate long term trade 41

Common Characteristics of Developing Nations • • • • Low levels of living Low levels of productivity High rates of population growth and dependency burdens Substantial dependence on agricultural production and primary-product exports • • • • Technological Backwardness Prevalence of imperfect markets Dependence Others – Social life – Transfer of values, Demonstration Effect Brain Drain 42

Human Development Index (HDI) • • • United Nations Development Programme. Initiated in 1990 Range: 0 to 1 Three goals of development: -Longevity: measured by life expectancy at birth -knowledge: measured by weighted average of adult literacy and mean years of schooling, -standard of living: measured by real per capita income adjusted for PPP. 43

Human Development Index (HDI) • HDI ═ 1/3(Income index)+ 1/3 (Life expectancy index) + 1/3 (Education index) • Education index ═ 2/3 (adult literacy index)+ 1/3 (gross enrolment index) • HDI reveals that a country can do much better than might be expected at a low level of income, and that substantial income gains can still accomplish relatively little in human development 44

Human Development Index (HDI) • Some criticisms: – Gross enrolment (No dropout) – Equal weight to all three variables – Role of quality. Healthy extra year of life – Quality of schooling 45

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Concepts for Review • • • • • • • • Absolute poverty Brain drain Crude birthrate Death rate Dependency burden Developed world Foreign exchange Gross domestic product (GDP) • • • • • • Gross national product (GNP) Human Development Index (HDI) Imperfect markets Income gap Income inequality Incomplete information 48

Concepts for Review, cont’d • • • • • Infant mortality rate International poverty line Labor productivity Least developed countries (LLDCs) Levels of living • • • • Low income countries (LICs) Malnutrition Mixed economic systems Physical resources 49

Concepts for Review, cont’d • • • • Production function Purchasing power parity (PPP) Resource endowment World Bank 50