WHAT IS DEVELOPMENT?

1. WHAT IS DEVELOPMENT? Aravinda Meera Guntupalli

2. Economic development • Economic development is the major priority of the world’s nations. All nations are being challenged by the crucial task of improving income, well-being and economic capabilities of people. • Every year aid is distributed, investments are made, policies are framed, and elaborated plans are hatched to achieve this goal.

3. Major issues • What is development? • How to measure development? • What is the minimum requirement? • Why is it so important? • What are the indicators? • Where is it occurring? • Who is getting the benefits? • How to distinguish economic growth and development?

4. Topics of this lecture • Measurement of economic development • GNP and GDP • Human Development Index (HDI) • Inequality • Lorenz curve • Gini concentration ratio • Poverty

5. Classification of economies • 1996 World Bank income classification • Less than $785 per capita - Low income • $785-$3115 - Lower Middle income • $3115 to $9636 - Upper middle income • Over $9636 - High income economies Oman, Saudi Arabia and United Arab Emirates - outliers

6. Key elements to development • People of the country must be major participants in the process • Growth should not benefit only a tiny, wealthy minority,whether domestic or foreign • Finally, no development can occur without economic growth

7. Growth refers to rise in national or per capita income or product. Economic development implies more than increase in the production of goods and services Economic growth and development Libya and South Korea since 1960 would be the best example

8. GNP and GDP • The sum of the value of finished goods and services produced by a society during a given year. This excludes intermediate goods. • Total national income and total output • Per capita • Difference between GNP and GDP

9. Limitations • Poor quality statistics • Definition - Goods and services that are sold in the market (unpaid work ????) • Exchange rate problems • To overcome this problem, common set of prices are used to measure output of every country (hair cut in India is priced the same as on in the US) • This measure of average income is called Purchasing Power Parity (PPP)

10. Social indicators for the early 1990s (GDP per capita, PPP)

11. Human development index • Life expectancy at birth (this will indirectly reflect infant and child mortality) • Educational attainment of the society which is a composite index (It takes weighted average of adult literacy (with weight of 2/3) and a combination of enrolment rates in primary, secondary and tertiary education (with weight of 1/3). • Per capita income (adjusted) • HDI is calculated using average of the above three indicators.

12. Comparison of per capita income and HDI, 1998

13. Development and human welfare • Increase in per capita income during 1965 and 1998 in most developing countries raises many questions • Inequality- relative welfare of different groups • Poverty- number of poor and their state of well being • What is the relevance of economic growth in the context of mass living standards and distribution of income ?

14. Reasons for failure • For power and glory of the state (Ancient Egypt on Pyramids and some developing countries on ballistic missiles and nuclear weapons) • Resources invested for the future growth • Unequal distribution - The rich get richer and the poor get poorer ? (Karl Marx and Charles Dickens)

15. Income distribution and Lorenz curve • Lorenz curve: We take income recipients from low to high on the x- axis and the resulting shape shows degree of inequality of income distribution • A straight line with a 45 degree incline at the origin, or a slope of 1 is a Lorenz curve with perfect equality

16. Lorenz curve 100 80 Line of complete equality 60 Percentage share of national income (cumulative) 40 Lorenz curve 20 O O 100 60 80 20 40 Percentage of population

17. 100 Gini coefficient = A / (A + B) 80 Line of complete equality 60 Percentage share of national income (cumulative) A 40 B Lorenz curve 20 O O 100 60 80 20 40 Percentage of population

18. The Gini-Coefficient • Divide A by the sum of A + B to get the Gini coefficient • If the Lorenz curve is on the 45 deg. Line, the Gini coefficient would be 0 • Range 0-1 • Limitations

19. 100 80 Line of complete equality 60 Percentage share of national income (cumulative) 40 L1 L2 20 O O 100 60 80 20 40 Percentage of population

20. Comparison of two hypothetical income distributions

21. Inequality scenario in the world • Sri Lanka: Equal distribution of income • South Korea and Taiwan: Equal distribution combined with rapid growth • Latin America: High inequality • Ethiopia, Kenya, Zambia, Philippines, Colombia, Peru, Thailand, Brazil, Malaysia, Venezuela and Mexico: Unusually high inequality • Bulgaria, Poland and Hungary (transition economies) • Australia, Singapore and USA (developed countries)

22. Equality and equity • Equality: Every one gets the same income or owns the same wealth • Equity: Ethical concept • Basic human needs and social indicators

23. Poverty measures • Poverty refers to low income received by certain households • Both Absolute and relative income are important • Measurement of poverty • Poverty line • Poverty head count

24. Strategies for growth with equity • Redistribute and growth approach • Redistribute and develop approach • Redistribution with growth approach • Basic Human Needs approach • Structural adjustment approach

25. Important books • “Human development report” • “World development report” • “Economics of development” Perkins, Radelet et al • “Development economics” Debraj Ray • “Economics and development” Barbara Ingham • “Handbook of development economics” Chenery and Srinivasan • “Economic development” Michael Todaro