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Growth, Development, Distribution and Poverty This week we will focus on the issue of economic development, the world distribution of income, and finally world poverty
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Growth, Development, Distribution and Poverty • This week we will focus on the issue of economic development, the world distribution of income, and finally world poverty • In the last several lectures most of themes have been related to the economic performance of countries, and mostly those with well developed market economies • For a large part of the world’s population however these conditions are for the most part irrelevant—the industrial revolution which began over 200 years ago in Western Europe has yet to touch a large part of the globe
Development and Growth • The fact that a large part of the world population is very poor remains probably the most significant global social issue of the 21st century • Promoting economic development remains a contentious and unresolved issue • While globalization has helped in part for some regions and countries it does not seemed to have had much impact on others, and according to some has actually hindered development • The World Bank is the primary international institution whose mandate it is to address the development problem on the part of the major world economies (the IMF does not deal with development issues per se—we will talk about it later)
Economic Development • Bringing countries up the ladder of social and economic development is very much an economic issue—how to foster economic growth • Typically discussed in terms of a sequence or stages of development: • Subsistence agriculture->agriculture and basic industry->industrialization with heavy industry->high tech and service sector • Views on how to get off the bottom of this ladder have shifted over time (recall Commanding Heights) • It is now thought that the issue of raising income levels per capita (economic development) cannot be separated from the issue of ‘human development’ • Latter refers to conditions relating to health, education, democracy, and environmental conditions
Growth versus levels • From an economic standpoint we compare different levels of economic development at a point in time using various economic indicators on wages, income, productivity—level variables • However a level of income today reflects past growth, and if levels are to rise growth rates must rise • Hence the economic development problem is the same as the problem of creating economic growth in lower income countries
GNP per capita is the most widely used index of economic development: the units are standardized US dollar measures of purchasing power: the most striking fact is the fast difference across countries in these income measures
Chapter IV. Economic Growth Rates As a result the gulf between
Convergence or divergence? • Some parts of the world have been catching up to the developed economies—particularly in parts of Asia and Latin America—we call this CONVERGENCE • Other regions are falling behind –or divergence • Next chart shows how dramatic this difference is for example East Asia relative to Africa
What causes economic growth? • This is an old question and one for which we have some good answers for the industrial countries • Various theories of growth have been developed • A) factor driven growth—this is economic growth driven by increases in the supply of important inputs to production such as capital and natural resources—most countries go through some phase in which their growth is driven by rapid accumulation of capital (machines) per worker
More on growth • B) innovation or technological change—this is growth driven by new inventions, technologies, and methods of production—very important for countries close to the frontiers of technological and economic development • C) political-institutional theories: these all emphasize factors such as the rule of law, social cohesion, democracy or its absence, global control of resources, the power of special interest groups
Growth from economic development perspective of low income countries • All factors important but the failure over last several decades to ignite growth in many countries has led to much greater weight being placed on institutional/political factors and the soft factors of human development • Most recent World Bank research emphasizes the importance of the right human development factors as necessary for economic growth to occur.
Income Distribution • In any economy we are interested in what the distribution of income is—that is how many people there are in each income category from high to low • Eg. 100 people; 50 people earn from between $100 to $1000; 35 people earn from between $1000 to $2000 and 15 people earn between $2000 and $5000. • Use these data to construct a histogram of the income distribution—on horizontal axis level of income and on vertical different bars with respective percentages of population in each income group
More general income distributions • Usually put log (logarithm of income on the horizontal scale and approx the histogram with a smooth curve which summarizes the DISTRIBUTION of income in an economy • Use of log is so that a given scale increment conforms to constant percentage change • Income in advanced economies very close to LOG NORMAL—ie. Log of income is normally distributed or has the shape of the BELL CURVE
Why is this is the case? • Income distribution reflects the complex interaction of many factors: wages, education levels, taxes, social policy etc. and LUCK! • But Bell Curve tells you bulk of income concentrated in the middle with relative fewer very rich and very poor people (we say the TAILS of the distribution are thin) • But in case of poor countries there are a lot of people who are in the lower end of the distribution—use poverty measures to get at this
World Income Distribution:The ‘Twin Peaks’ • The world distribution of income must account for the fact that the bulk of the world’s population live in low income countries • When you look at world distribution of income you get what is called the “Twin Peaks” picture (see next slide From “ONE WORLD OR TWO? A SNAPSHOT OF THE GLOBAL INCOMEDISTRIBUTION “Salvatore J. Babones based on 1995 data) • This reflects the fact that the bulk of the world’s population can be divided into two groups of low and high incomes with a signifcant valley between the two peaks • The valley corresponds to the global division of countries into the two groups—thus on average the people on the right are in the industrial countries and the people on the left are in the poor countries—the gap between the peaks –around 23, 000 11995 USD is a statement about the average difference . • There is lot of debate about how this distribution over time. Recently given the very rapid growth in China and India it appears that the two peaks are getting closer to each other and some even claim the valley as of 2003 has disappeared.
The shifting of the twin peaks over time: from YURI DIKHANOV AND MICHAEL WARD World Bank Economists. Is the valley between the peaks going to disappear?
Tables on Global Distribution of Income and Economic Activity Table 1: Global income distribution, 1960–91.
