Summary Book TS Ch1 - 7 - Samenvatting Economic Development PDF

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Summary Book Growth and Development Economics Chapters 1 (week 1) – Introducing Economic Development: A GlobaAbsolute poverty = a situation of being unable to meet the minimum levl Perspectiveels of income, food, clothing, health care, shelter, and other essentials Subsistence economy = an economy i...

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Summary Book Growth and Development Economics Chapters 1 (week 1) – Introducing Economic Development: A Global Perspective Absolute poverty = a situation of being unable to meet the minimum levels of income, food, clothing, health care, shelter, and other essentials Subsistence economy = an economy in which production is mainly for personal consumption and the standard of living yields little more than basic necessities of life –– food, shelter, and clothing e.g. a rural area in Eastern Africa Development = the process of improving the quality of all human lives and capabilities by raising people’s levels of living, self-esteem, and freedom Developing countries = countries of Asia, Africa, the Middle East, Latin America, eastern Europe, and the former Soviet Union that are presently characterized by low levels of living and other development deficits Traditional economies = an approach to economics that emphasizes utility, profit maximization, market efficiency, and determination of an equilibrium Political economy = to view economic activity in its political context -> 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 own benefit exclusively or for that of the larger population 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 -> concerned with the efficient allocation of existing scarce productive resources and their sustained growth over time, and also with the economic, social, political, and institutional mechanisms necessary to bring about rapid and large-scale improvements in levels of living Social system = the organizational and institutional structure of a society, including its values, attitudes, power, structure and traditions Development -> achieving sustained rates of growth of income per capita to enable a nation to expand its output rate faster than the growth rate of its population -> must be conceived as a multidimensional process involving major changes in social structures, popular attitudes, and national institutions as well as the acceleration of economic growth, reduction of inequality, and the eradication of poverty Income per capita = total gross national income of a country divided by its total population Gross national income = the total domestic and foreign output claimed by residents of a country Gross domestic product = the total final output of goods and services produced by the country’s economy, within the territory, by residents and non-residents, regardless of its allocation between domestic and foreign claims

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The core values of development: - Sustenance -> the ability to meet basic needs: food, shelter, health and protection - Self-esteem -> to be a person - Freedom -> to be able to choose The three objectives of development: 1. To increase the availability and widen the distribution of basic life-sustaining goods 2. To raise levels of living 3. To expand the range of economic and social choices Millennium Development Goals (MDGs) = a set of eight goals adopted by the United Nations; - to eradicate extreme poverty and hunger - to achieve universal primary education - to promote gender equality and empower women - to reduce child mortality - to improve maternal health - to combat HIV/AIDS, malaria, and other diseases - to ensure environmental sustainability - to develop a global partnership for development Criticism on MDGs: The MDG targets were not ambitious enough; the goals were not prioritized; goals are presented and treated as stand-alone objectives; setting 2015 as end date could discourage further development

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Chapter 2 (week 1) – Comparative Economic Development We consider 10 important features that developing countries tend to have in common, in comparison with the developed world: 1. Lower levels of living and productivity 2. Lower levels of human capital 3. Higher levels of inequality and absolute poverty 4. Higher population growth rates 5. Greater social fractionalization 6. Larger rural populations but rapid rural-to-urban migration 7. Lower levels of industrialization 8. Adverse geography 9. Underdeveloped financial and other markets 10. Lingering colonial impacts such as poor institutions and often external dependence World Bank = an organization known as an ‘international financial institution’ that provides development funds to developing countries in the form of interest-bearing loans, grants, and technical assistance Basic indicators of development: 1. Real income per capita adjusted for purchasing power 2. Health measured by life expectancy, undernourishment, and child mortality 3. Educational attainments as measured by literacy and schooling GNI comprises GDP plus the difference between the income residents receive from abroad for factor services less payment made to non-residents who contribute to the domestic economy Purchasing Power Parity (PPP) = a calculation of GNI using a common set of international prices for all goods and services, to provide more accurate comparisons of living standards = the number of units of a foreign country’s currency required to purchase the identical quantity of goods and services in the local developing country market as $1 would buy in the United States Human Development Index (HDI) = an index measuring national socioeconomic development, based on combining measures of education, health, and adjusted real income per capita The New HDI ranks each country on a scale of 0 (lowest human development) to 1 (highest human development) based on three goals or end products of development: -> a long and healthy life, knowledge, and a decent standard of living Diminishing marginal utility = the concept that the subjective value of additional consumption lessens as the total consumption becomes higher Calculating the New HDI: 1. Create the three ‘dimension indices’

Dimension Index=

Actual Value−Minimum Value MaximumValue−Minimum Value

2. Aggregate the resulting indices to produce the overall New HDI NHDI=H 1/3 E1 /3 I 1 /3 where H = health index; E = education index; I = income index 3

Characteristics of the developing world; the 10 major areas of ‘diversity within commonality’: 1. Lower levels of living and productivity Poverty trap = when at very low levels of income, a vicious circle may set in, whereby low income leads to low investment in education and health as well as plant and equipment in infrastructure, which in turn leads to low productivity and economic stagnation 2. Lower levels of human capital Human capital – health, education and skills – is vital to economic growth and human development -> there are strong synergies between progress in health and education 3. Higher levels of inequality and absolute poverty Necessary to look at the gap between rich and poor between, but also within individual developing countries Absolute poverty = the situation of being unable or only barely able to meet the subsistence essentials of food, clothing, shelter and basic health care Not only do poverty and inequality result from distorted growth, but they can also cause it 4. Higher population growth rates Crude birth rate = the number of children born alive each year per 1000 population A major implication of high birth rates is that the active labour force has to support proportionally almost twice as many children as it does in richer countries Dependency burden = the proportion of the total population aged 0 to 15 and 65+, which is considered economically unproductive and therefore not counted in the labour force Not only are developing countries characterized by higher rates of population growth, they must also contend with greater dependency burdens than rich nations 5. Greater social fractionalization Fractionalization = significant ethnic, linguistic, and other social divisions within a country There is some evidence that many of the factors associated with poor economic growth performance in sub-Saharan Africa, e.g. low schooling, political instability, underdeveloped financial systems, and insufficient infrastructure, can be statistically explained by high ethnic fragmentation 6. Larger rural populations but rapid rural-to-urban migration Although modernizing in many regions, rural areas are poorer and tend to suffer from missing markets, limited information, and social stratification. However people are moving from rural to urban areas, fuelling rapid urbanization 7. Lower levels of industrialization Industrialization is associated with high productivity and incomes and has been a hallmark of modernization and national economic power Process of structural transformation of employment Along with lower industrialization, developing nations tended to have a higher dependence on primary exports 8. Adverse geography Landlocked economies often have lower incomes than coastal economies Resource endowment = a nation’s supply of usable factors of production, including mineral deposits, raw material and labour (e.g. the oil-rich Persian Gulf states) 9. Underdeveloped financial and other markets Some aspects of market underdevelopment are that they often lack a legal system that enforces contracts and validates property rights, a stable and trustworthy currency, an infrastructure of roads and utilities, a well-developed and efficiently regulates system of banking and insurance, substantial market information for consumers and producers, and 4

social norms that facilitate long-term business relationships Infrastructure = facilities that enable economic activity and markets, such as transportation, communication and distribution networks, utilities, water, sewer, and energy supply systems 10. Lingering colonial impacts such as poor institutions and often external dependence a) Colonial Legacy Colonial era institutions often favoured extractors of wealth rather than creators of wealth Property rights = the acknowledged right to use and benefit from a tangible or intangible entity that may include owning, using, deriving income from, selling and disposing European colonization often created or reinforced differing degrees of inequality, often correlated with ethnicity b) External Dependence Developing countries have also been less well organized and influential in international relations, with sometimes adverse consequences for development Developing nations often have weaker bargaining positions than developed nations in international economic relations How low- income countries today differ from developed countries in their early stages: - Physical and human resource endowments -> technology gap: physical object and idea gap - Per capita incomes and levels of GDP in relation to the rest of the world - Climate -> almost all developing countries are situated in (sub)tropical climate zones - Population size, distribution, and growth -> many developing countries have considerably higher person-to-land ratios - Historical role of international migration -> many of the people who migrate from poor to richer lands are the very ones that developing countries can least afford to lose Brain drain = the emigration of highly educated and skilled professionals and technicians from the developing countries to the developed world - International trade benefits -> international free trade has been called the ‘engine of growth’ -> rapidly expanding export markets provide an additional stimulus to growing local demands -> lead to an establishment of large-scale manufacturing industries - Basic scientific and technological research and development capabilities Research and development = scientific investigation with a view toward improving the existing quality of human life, products, profits, factors of production, or knowledge - Efficacy of domestic institutions -> developed countries enjoyed relatively stronger political stability and more flexible social institutions with broader access to mobility Divergence = a tendency for per capita income (or output) to grow faster in higher-income countries than in lower-income countries so that the income gap widens across countries over time Convergence = the tendency for per capita income to grow faster in lower-income countries than in higher-income countries so that the lower-income countries are ‘catching up’ over time Relative country convergence -> examine whether poorer countries are growing faster than richer countries -> the relative gap in incomes would be shrinking, as the income of richer countries would become a smaller multiple of income of poorer countries Absolute country convergence -> even when the average income of a developing country is becoming a larger fraction of developed country average incomes, the difference in incomes can still

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continue to widen for some time before they finally begin to shrink Population-weighted relative country convergence -> to weight the importance of a country’s per capita income growth rate proportionately to the size of its population World-as-one-country convergence -> takes into account changes in inequality within countries as well as between them Sectoral convergence -> there can be cross-national convergence of economic sectors, which in turn may signal the potential for future convergence The schematic representation of leading theories (of long-run causes) of comparative development:

(see pages 86 – 93 for further elaboration on each cause)

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Chapters 3 (except 3.3) (week 2) – Classic Theories Of Economic Growth and Development Four major classic theories of economic development: 1. The linear-stages-of-growth model 2. Theories and patterns of structural change 3. The international-dependence revolution 4. The neoclassical, free-market counterrevolution Rostow’s stages-of-growth model of development = a theory of economic development according to which a country passes through sequential stages in achieving development Harrod-Domar growth model = a functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (c) Capital-output ratio = a ratio that shows the units of capital required to produce a unit of output over a given period of time Net savings ratio = savings expressed as a proportion of disposable income over some period of time The identity of saving equalling investment:

S=sY =c ∆ Y =∆ K = I

∆Y s = c Y

-> the rate of growth of GDP ( ∆ Y / Y ) is

determined jointly by the net national savings ratio, s, and the national capital-output ratio, c International-dependence models view developing countries as beset by institutional, political, and economic rigidities, both domestic and international, and caught up in a dependence and dominance relationship with rich countries Dependence = the reliance of developing countries on developed-country economic policies to stimulate their own economic growth Dominance = a situation in which the developed countries have much greater power than the less developed countries in decisions affecting important international economic issues such as the prices of agricultural commodities and raw materials in world markets Within the international-dependence models there are three streams of thought: 1. The neo-colonial dependence model 2. The false-paradigm model 3. The dualistic-development thesis (= dualism) Neo-colonial dependence model = a model whose main proposition is that underdevelopment exists in developing countries because of continuing exploitative economic, political, and cultural policies of former colonial rulers towards less developed countries -> unequal power relationships between the center (developed countries) and the periphery (developing countries)

False-paradigm model = the proposition that developing countries have failed to develop because 7

their development strategies have been based on an incorrect model of development, one that, for example, over stresses capital accumulation or market liberalization without giving due consideration to needed social and institutional change Dualism = the existence and persistence of substantial and even increasing divergences between rich and poor nations and rich and poor people on various levels -> the coexistence of two situations or phenomena (one desirable and the other not) that are mutually exclusive to different groups of society Two weaknesses of dependence theories: 1. They give no insight into how countries initiate and sustain development 2. The actual economic experience of developing countries that have pursued revolutionary campaigns of industrial nationalization and state-run production has been mostly negative Neoclassical counterrevolution = the 1980s resurgence of neoclassical free-market orientation toward development problems and policies, counter to the interventionist dependence revolution -> central argument: underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention by overly active developingnation governments -> what is needed is simply a matter of promoting free markets and laissez-faire economics, and the allowance of the ‘invisible hand’ of market prices to guide resource allocation and stimulate economic development The neoclassical counterrevolution can be divided into three component approaches: 1. The free-market approach -> argues that markets alone are efficient: an unregulated market performs better than one with government regulation -> any government intervention in the economy is by definition distortionary and counterproductive 2. The public-choice approach -> also known as the new political economy approach -> self-interest guides all individual behaviour and governments are inefficient and corrupt because people use government to pursue their own agendas 3. The ‘market-friendly’ approach -> successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy in areas where the market is inefficient -> differs from the other approaches by accepting the notion that market failures are more widespread in developing countries Market failure = a market’s inability to deliver its theoretical benefits due to the existence of market imperfections such as monopoly power, lack of factor mobility, significant externalities, or lack of knowledge Capital-labour ratio = the number of units of capital needed per unit of labour

Solow neoclassical growth model = growth models in which there are diminishing returns to each 8

factor of production but constant returns to scale -> exogenous technological change generates longterm economic growth

Y =K α ( AL)1−α where Y = gross domestic product; K = stock of capital; L = labour; and A = productivity of labour The Solow neoclassical growth model implies that economies will converge to the same level of income per worker ‘conditionally’ –– that is, other things equal, particularly savings rates, depreciation, labour force growth, and productivity According to the traditional neoclassical growth theory, output growth results from one or more of three factors: a) increases in labour quantity and quality, b) increases in capital, and c) improvements in technology Whereas dependence theories saw underdevelopment as an externally induced phenomenon, neoclassical revisions saw the problem as an internally induced phenomenon of developing countries, caused by too much government intervention and bad economic policies Possible sources of differences in output per worker:

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Chapter 6 (week 2) – Population Growth and Economic Development Doubling time = the period that a given population or other quantity takes to increase its size by its present size Population growth today is primarily the result of a rapid transition from a long historical era characterized by high birth and death rates to one in which death rates have fallen sharply but birth rates, especially in the least deve...