Lecture notes, lecture 1 - Economic Development - Econ 313 PDF

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Economic Development September 15, 2015 Economic development is said to come trough, if a large number if people become more and more included in the economy. This is mostly achieved by the penetration of MNCs. The currently developing economies are labor abundant à the current developed economies a...

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Economic Development September 15, 2015 • • • • • • • • • •

Economic development is said to come trough, if a large number if people become more and more included in the economy. This is mostly achieved by the penetration of MNCs. The currently developing economies are labor abundant à the current developed economies are capital abundant. In many developing economy, the gov. is confused whether to keep the interest rates high or low. Most of developing economies have the same problems, however, their causes are almost never the same; i.e. not the same solution à False paradigms models = misfitting policy recommendations. Population growth impedes growth; the greater the population the smaller is the GDP per capita. However, if GDP is growing faster or if the increase in population will increase or accelerates growth, then it will not impede. The larger number of population enlarges the problems; i.e. dividing the same quantity of resources à that is not the problem not the population growth in specific. What is development à it is not about purchasing power is the capability to do what you want giving your personal features. The problem is not to have command over commodities. What brings self worth and self-esteem differs from a society and a country to another.

Economic Development – Chapter I Introducing Economic Development: A Global Perspective • • •

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Over 40% of the world’s population lives on less than two dollar per day, part of condition of absolute poverty. Absolute poverty – a situation of being unable to meet the minimum levels of income, food, clothing, healthcare, shelter and other essentials. Against the economic benefits in the rich and developed countries, there are always “noneconomic costs”. The competitive pressures to succeed financially are very strong, and during inflationary or recessionary times, the mental strain and physical pressure of trying to provide for a family at levels that the community regards as desirable can take its toll on the health of both parents. In rural areas in Africa and Latin America subsistence economy seems to be dominant. That is an economy in which production is mainly for personal consumption and the standard of living yields little more than basic necessities of life. However, frustration in Africa seems to be more present, mainly because of the existence of a wide gap between the social classes, which is not very frequent in Africa. As soon as development start in these countries, quality of life will improve. Nevertheless, the exposure to the international world would also increase which will result in a higher frustration. Development – the process of improving the quality of all human lives and capabilities by raising people’s levels of living, self-esteem and freedom. The process in developing nations cannot be analysed realistically without also considering the role of economically developed nations in directly or indirectly promoting or retarding that development. Developing countries – countries that are presently characterized by low levels of living and other development deficits. Used in the development literature as a synonym for less developed nations. Traditional economics – an approach to economics that emphasizes utility, profit maximization, market efficiency, and determination of equilibrium. o Efficient resource allocation with optimal growth of these resources. o Perfect markets, automatic price adjustment, utility maximization, private profit and equilibrium outcomes in product and resource markets. o Economic ‘rationality’ of self-interested individuals. Political economy is concerned with the relationship between politics and economics, with a special emphasis on the role of power in economic decision-making. It studies the social and institutional processes through which certain groups of elites influence the allocation of scarce resources either for their own benefit or for the population as a whole. Development economics – the study of how economies are transformed from stagnation to growth and from low-income to high-income status, and overcome problems of absolute poverty. o Efficient allocation of scarce resources and their growth. o Economics, social, political and institutional mechanisms - Public and private required to bring about large-scale improvement in standards of living. o Economic, cultural and political requirements for effecting rapid structural and institutional transformations that will efficiently allocate the outcome of economic progress to the highest possible percentage of the population – role of government. o Focus on mechanisms that keep families, regions and nations in poverty traps and on the effective strategies for breaking out of these traps. o Includes a larger role of the government and a degree of coordinated decision making. o Combines theories from traditional economic analysis and new models along with case studies.

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More developed countries (MDCs) – the now economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand and Japan. According to the traditional economic measures, development was the capacity of a national economy to generate and sustain an annual increase in the GNI at rates between 5%-7% or more. Alternatively, the rate of growth of per capita income. However, the new economic view redefined development as the reduction or elimination of poverty, inequality and unemployment within a growing economy. The development economics must be concerned with the economic, cultural, and political requirements for effecting rapid structural and institutional transformations of entire societies in a manner that will most efficiently bring the fruits of economic progress to the broadest segments of their populations. Traditional measures of development include: o Rates of growth of income per capita. o Levels and rates of growth of real per capita GNI viz. monetary value of GNI – rate of inflation o GDP o Planned alteration of the structure of the economy from a primarily agricultural economy to one with a growing manufacturing and service sector. o Economic phenomenon in which rapid gains in overall growth would trickle down to the masses in the form of jobs and other economic opportunities. The ultimate purpose of development economics is to help us understand developing economies in order to help improve the material lives of the majority of the global population. Social system – the organizational and institutional structure of a society, including its values, attitudes, power structure and traditions. Values – principles, standards, or qualities that a society or groups within it considers worthwhile or desirable. Attitudes – the states of mind or feelings that an individual, group, or society regarding issues such as material gain, hard work, saving for the future, and sharing wealth. Institutions – norms, rules of conduct, and generally accepted ways of doing things. Economic institutions are humanly devised constraints that shape human interactions including both informal and formal “rules of the game” of economic life in the widely used framework of Douglass North. Gross national income (GNI) – the total domestic and foreign output claimed by citizens of a country, irrespective of where they reside. A number of developing countries experienced high growth numbers, however, no improvements in the qualities of life. Development must be conceived of as a multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty. Amartya Sen argues that poverty cannot be properly measured by income or even by utility as conventionally understood; what matters fundamentally is not the things a person has – or feelings these provide – but what a person is, or can be, and does, or can do. For Sen the utility of the commodity is a crucial point; this is what he explains it by “functionings” notion. The latter terminology is what people do or can do with the commodities of given characteristics that they come to possess or control. Sen identifies five sources of disparity between real incomes and actual advantages: o Personal heterogeneities, such as those connected with disability, illness, age, or gender. o Environmental diversities, such as heating and clothing requirements in the cold, infectious diseases in the tropics, or the impact of pollution.

Economic Development – Chapter I Introducing Economic Development: A Global Perspective

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o Variations in social climate, such as the prevalence of crime and violence, and social capital. o Distribution within the family, such as the inequality in the distribution between boys and girls. o The difference in relational perspectives, that is the commodity requirements of established patterns of behaviour may vary between communities, depending on conventions and customs (you dress to suit the place your going to). Thus, looking at real income levels or even the levels of consumption of specific commodities cannot suffice as a measure of well-being. Capabilities – the freedoms that people have, given their personal features and their command over commodities. According to Sen, human well-being means being will, in the basic sense of being healthy, well nourished, well clothed, literate, and long-lived and more broadly, being able to take part in the life of the community, being mobile, and having freedom of choice on what one can become and can do. Richard Layard has argued that there are seven factors that can affect the level of happiness: family relationships, financial situation, work, community and friends, health, personal freedom and personal values. Many opinion leaders hope that their societies can gain the benefits of development without losing traditional strengths such as moral values, and trust in others—sometime called social capital. There are three core value that serve as a conceptual basis and practical guideline for understanding the inner meaning of development: o Sustenance – the basic goods and services, such as food, clothing, and shelter, that are necessary to sustain an average human being at the bare minimum level of living. o Self-esteem – the feeling of worthiness that a society enjoys when its social, political, and economic systems and institutions promote human values such as respect, dignity, integrity, and self-determination. o Freedom – a situation in which a society has at its disposal a variety of alternatives from which to satisfy its wants and individuals enjoy real choices according to their preferences. Globally, women tend to be poorer than men. Whatever the specific components of a better life, development in all societies must have at least the following three objectives: o To increase the availability and widen the distribution of basic life-sustaining goods , such as food, shelter, health, and protection. o To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education, and greater attention to cultural and human values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem. o To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nation-states but also to the forces of ignorance and human misery. Millennium development goals (MDGs) – a set of eight goals adopted by the United Nations in 2000: to eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainability; and develop a global partnership for development. MDGs assign specific responsibilities to rich countries, including increased aid, removal of trade and investment barriers, and eliminating unsustainable debts of the poorest nations....