Economics of Development

1. Economics of Development ECON 370 Prof. G. Anderson/ CSUN/ Fall 2003 LECTURE NOTES 1

2. How to define a developing country • Developing countries. Countries with low or middle levels of GDP per capita as well as five high-income developing economies -China, Israel, Kuwait, Singapore, and the United Arab Emirates (World Bank classification). • Several countries with transition economies are sometimes grouped with developing countries based on their low or middle levels of per capita income, and sometimes with developed countries based on their high industrialization. • More than 80 percent of the world's population lives in the more than 100 developing countries

3. Why are some nations poor? • Problems of all developing countries can be understood with reference to issues that are internal to the structure of developing countries. • Approach: Markets are not intrinsically bad or intrinsically good. The point is to understand the conditions under which they fail or function at an inefficient level and to determine if appropriate policies can fix such inefficiencies. • Structures of incentives and property rights arrangement seem correlated with rates of development; institutions matter.

4. How do we measure the state of material well-being of a nation? • Per capita gross national product (GNP) has been used for many years to measure development performance • But economic development is not, in a definitional sense, identified with the level or growth of per capita income • Universally accepted that development is not just about income, although income or wealth has a great deal to do with it. • Development is also about the removal of poverty: an increase in life expectancy; access to sanitation, clean water and health services; reduction of infant mortality; increased access to knowledge and schooling, and literacy in particular

5. A (LIMITED) CONSENSUS HAS EMERGED. • Universal agreement that the major features of economic development – health, life expectancy, literacy – follow in some natural way from the growth of per capita GNP • Implicit belief in the power of aggregate economic forces to positively affect every other socio-economic outcome that we associate with development

6. How do we measure development? • Most would agree that a minimal requirement for a “developed” nation is that the physical quality of life be high, and be so uniformly, rather being restricted to an affluent minority. • But the notion of a good society goes further, Political rights and freedom, intellectual and cultural development, stability of family and a low crime rate etc. • A high and equally accessible level of material well-being is probably a prerequisite for most other kinds of advancements, quite apart from being a worthy goal in itself.

7. Income and Growth • Low per capita incomes are an important feature of economic underdevelopment and there is little doubt that the distribution of income across the world is extraordinarily skewed • How do we calculate per-capita incomes? • Exchange rate method • Purchasing Power Parity (PPP) method • Exchange rate method: Each country’s income converted into a common currency (typically U.S dollars) and divided by that country’s population.

8. Income and Growth • World Development Report: GDP of the world in 2002: $31 trillion. 20% from low and middle income countries with 85% of the world population. • Switzerland (richest in this study) has a per-capita income, which is close to 400 times higher than Tanzania.

9. Biased estimates • Underreporting of income is not uncommon in developing countries. Proportion of income that is generated for self-consumption is relatively high in developing countries • A more serious issue is the fact that prices for many goods in all countries are not appropriate reflected in exchange rates. • Conventional measures of GNP ignore costs that arise from externalities – cost of associated pollution, environmental damage, resource depletion, human suffering due to displacement caused by development projects.

10. Growth experiences • Per capita incomes in East Asian economies (Japan, Korea, Taiwan, Singapore, Hong Kong, Thailand, Malaysia, Indonesia, China) increased during 1965-90 at an annual rate of 5.5% • Per capita incomes in China increased during 1980-2002 at an annual rate of 8.1%. • Per capita incomes in Latin America and Africa declined during the 1980s, grew again in the 1990s. • Diverse growth experiences such as these can change the face of the world in a couple of decades

11. Doubling time • Number of years it takes for income to double at a given growth rate • Good approximation to the doubling time is seventy divided by the annual growth rate expressed in percentage terms. • For example, an East Asian country growing at 5 % per year will double its per-capita income every fourteen years • In contrast a country growing at 1 % per year will require 70 years. Percentage growth figures looks like small figures, but over time, they add up very fast

12. Global distribution of income - summary • Over the period 1960-2000, the relative distribution of world income appears to have been quite stable. • Huge movements within the distribution. • No ultimate traps to development. Mobility of countries highest among those in the middle of the wealth distribution • History of underdevelopment or extreme poverty appears to put countries at a disadvantage. • But poor countries have also some advantages

13. Income distribution • Distribution is not only unequal between countries but also highly unequal within each country, particular in developing countries • As economic growth proceeds it initially benefits the richest groups more than proportionately. At higher levels of per capita income economic gains tend to be distributed more equally. • But countries that pursue policies of broad-based access to infrastructure and resources such as health and services and education will have a more equal distribution of incomes

14. The many faces of under-development • GDP per capita cannot be used as a reliable indicator on overall development. Other important variables are: • literacy • access to drinking water • low rates of infant mortality • life expectancy • empowerment • Guatemala and Sri Lanka: Guatemala has a higher per capita income but performs worse on other important indicators such as life expectancy, infant mortality and adult literacy

15. Human development index • HDI takes into account three different indicators. • The first is life expectancy at birth, the second measure educational attainment and the third is per-capita income. • Advantages: Simple aggregate measure • Disadvantage: Ad hoc weighting scheme

16. GDP again • It seems reasonable to suppose GDP is a fairly good proxy for most aspects of development. • Compare per capita income and other variables and see how much explanatory power per capita GDP has over these other basic variables • By and large the relationship between per capita income alone and each of these variables is strikingly strong. • Per capita income is a powerful correlate of development no matter how broadly we conceive of it

17. Some structural features • Demographic characteristics: Very poor countries are characterised by both high birth rates and high death rates • Occupational and production structure: Agriculture is a very important sector in developing countries • Rapid rural-urban migration: There is a large movement of labour from rural to urban areas • International trade: All countries are significantly involved in international trade. Developing countries often exporters of primary products and light manufactured products