Economic Development

Lecture 1
Introducing Economic Development:
A Global Perspective
 How the Other Half Live
When one is poor, she has no say in public, she feels inferior. She has no food, so there is
famine in her house; no clothing, and no progress in her family. —A poor woman from Uganda

For a poor person everything is terrible—illness, humiliation, shame. We are cripples; we are
afraid of everything; we depend on everyone. No one needs us. We are like garbage that
everyone wants to get rid of. —A blind woman from Tiraspol, Moldova

Life in the area is so precarious that the youth and every able person have to migrate to the
towns or join the army at the war front in order to escape the hazards of hunger escalating
over here. —Participant in a discussion group in rural
Ethiopia

We have to line up for hours before it is our turn to draw water. —Village (Mangochi),
Malawi

Don’t ask me what poverty is because you have met it outside my house. Look at the house and count
the number of holes. Look at the utensils and the clothes I am wearing. Look at everything and write
what you see. What you see is poverty. —Poor man in Kenya

A universal theme reflected in these quotes is that poverty is more than lack of income – it
is inherently multidimensional, as is economic development.
What is economics?
What is economics?
➢ As a social science, it seeks to
understand how choices are made.
➢ As an applied science, it studies how
societies manage their scarce
resources to satisfy unlimited wants.
What is economics?
➢ It is the study of the production
and consumption of goods and
the transfer of wealth to
produce and obtain those
goods.
What is economics?

➢ Explains how people interact

within the market to get what
they want or accomplish certain
goals.
What can you tell about the photos?

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 Economics and Development Studies
The study of economic development is one of the newest, most
exciting, and most challenging branches of the broader
disciplines of economics and political economy.
Traditional Political Development
Economics Economy Economics
An approach to The attempt to merge The study of how
economics that economic analysis economies are
emphasizes utility, with practical transformed from
profit maximization, politics—to view stagnation to growth
market efficiency, and economic activity in and from low income
determination of its political context. to high-income status,
equilibrium. and overcome
problems of absolute
poverty.

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Traditional Economics
Concerned primarily with the efficient, least-cost
allocation of scarce productive resources and
with the optimal growth of these resources over
time to produce an ever-expanding range of
goods and services.
Political Economy
the social and institutional processes through
which certain groups of economic and political
elites influence the allocation of scarce
productive resources now and in the future,
either for their own benefit exclusively or for
that of the larger population as well.
Imagine a bakery sells bread for P70.

Traditional economics will ask:

• How many loaves of bread will people
buy at this price?
• What happens if the price changes?"

Political economy will ask:

• Why is the price of bread P70?
• Who sets that price?
• Can everyone afford it?
• Should the government subsidize bread
for the poor?"
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 What is Development Economics?

• Use of economic analysis, methods and tools to understand the

problems, constraints and opportunities facing developing
countries

– Causes of poverty
– Roads to escape poverty
– Development and growth over time

• We study the economic, social, political and institutional

mechanisms that lead to development and transformation of
the economies

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 What is Development Economics? continued

In most less developed countries, commodity and resource markets are typically
highly imperfect, consumers and producers have limited information, major
structural changes are taking place in both the society and the economy, the
potential for multiple equilibria rather than a single equilibrium is more common,
and disequilibrium situations often prevail (prices do not equate supply and
demand).
In many cases, economic calculations are heavily influenced by political and social
priorities such as unifying the nation, replacing foreign advisers with local decision
makers, resolving tribal or ethnic conflicts, or preserving religious and cultural
traditions. At the individual level, family, clan, religious, or tribal considerations may
take precedence over private, self-interested utility or profit-maximizing
calculations.

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 What Do We Mean by Development?
• Traditional Economic Measures
Development has traditionally meant achieving sustained rates of growth of income
per capita to enable a nation to expand its output at a rate faster than the growth rate of
its population.
– Gross National Income (GNI)
– Income per capita
– Utility of that income?
GDP (Gross Domestic Product) GNI (Gross National Income)
Total value of goods and services produced Total income earned by a country’s residents,
What it measures
within a country both at home and abroad
Domestic production by local and foreign GDP + income earned by residents abroad –
Includes
companies income earned by foreigners locally
Location-based: Where the production
Focus Ownership-based: Who earns the income
happens
Measuring a country’s economic activity within Measuring the actual income of the country’s
Useful for
borders people
A foreign company producing in the A Filipino working abroad sends money home
Example
Philippines adds to Philippine GDP, not GNI — it adds to Philippine GNI, not GDP
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 What Do We Mean by Development?
• The New Economic View of Development (1970s)
• Economists began calling for direct efforts to:
✓Reduce poverty, Lower unemployment, Fix income inequality
• The idea of “redistribution from growth” became popular.
• Dudley Seers emphasized that real development must be judged by:
✓What’s happening to poverty
✓What’s happening to unemployment
✓What’s happening to inequality

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According to Amartya
Sen,
“Economic growth is one
aspect of the process of
economic development.”
 Amartya Sen’s Capability Approach

What Are “Capabilities”?

• Capabilities: the real freedom people have to live the kind of life they
value.

• Functionings: the things a person actually does or achieves (e.g., being

healthy, educated, respected).

Example: Owning a bike is different from being able to ride it

(functioning).

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 Amartya Sen’s Capability Approach
Some Important “Beings” and “Doings” in Capability to
Function:

– Being able to live long

– Being well-nourished
– Being healthy
– Being literate
– Being well-clothed
– Being mobile
– Being able to take part in the life of the community
– Being happy – as a state of being - may be valued
as a functioning

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 Amartya Sen’s Capability Approach
Sen identifies five sources of disparity between (measured) real incomes and actual
advantages
• Personal heterogeneities (disability, illness, age, or gender)
• Environmental diversities (heating and clothing requirements in the cold or
infectious diseases in the tropics, or the impact of pollution)
• Variations in social climate (prevalence of crime and violence, and “social capital”)
• Distribution within the family (girls may get less food/education)
• Differences in relational perspectives (some goods are essential because of local
customs and conventions)

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Development as Freedom (Amartya Sen)
• Development can be seen, it is argued, as a
process of expanding the real freedoms that
people enjoy

• Development: enhancing the capability to lead the

kind of lives we have reason to value.

• True well-being means:

✓ Being healthy, educated, and mobile
✓ Having a say in your life
✓ Living with dignity and choice

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Utility vs. Capability

Utility (happiness/pleasure) can be misleading — poor

people may still feel happy out of necessity or limited
expectations. But that doesn’t mean their life isn’t
deprived.

Capabilities look at actual opportunities and

achievements, not just feelings.

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 Happiness and Development
• There is not a perfect correlation between happiness and per capita
income: people could be poor, but happy; or rich, but unhappy

• Once per capita income increases above $10,000 to $20,000, the

percentage of people who say they are happy tends to increase

Factors affecting happiness:

Family relationships
Financial conditions
Work satisfaction
Community and friends
Health and health-care services
Personal freedom
Personal values

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Three Core Values of Development
Sustenance: The Ability to Meet Basic Needs

Self-Esteem: To Be a Person

Freedom from Servitude: To Be Able to Choose

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 What Do We Mean by Development?
• The Central Role of Women

– Women are often poorer than men worldwide. They face greater
deprivation in health, education, and freedom. Women usually have
the main responsibility for raising children. A child’s future
depends greatly on the mother’s access to resources: Health,
Education, Income

– To make the biggest impact on development, societies must empower and

invest in women

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 What Are the Objectives of Development?
• We can list three objectives of development
– increases in availability and improvements in the
distribution of food, shelter, health, protection, etc.
– improvements in ‘levels of living,’ including higher incomes,
more jobs, better education, etc.
– expansions in the range of economic and social choices
available to individuals and nations

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Important Factors to be Understood
When Studying Development

• Economics is important
• Non-economic variables are also
important
• Values, attitudes, and institutions must
be understood

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 The Structural Diversity of
Developing Economies
• Size and income level
• Historical background
• Physical and human resources
• Ethnic and religious composition
• Relative importance of public and private sectors
• Industrial structure
• External dependence
• Political structure, power, and interest groups

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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
• High and rising levels of unemployment and
underemployment
• Substantial dependence on agricultural
production and primary-product exports
• Prevalence of imperfect markets
• Dependence and vulnerability

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