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Chapter poverty: A situation of being unable to meet the minimum levels of income, healthcare, shelter and other essentials. A situation that of the The aforementioned benefits are however, there as well, e. succeeding financially, the mental strain pressure of trying to provide for are sharp contra...

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Chapter 1 Absolute poverty: A situation of being unable to meet the minimum levels of income, food, clothing, healthcare, shelter and other essentials. A situation that 40% of the world experiences. The aforementioned benefits are ‘economic benefits’, however, there are always ‘noneconomic benefits’ as well, e.g. succeeding financially, the mental strain and physical pressure of trying to provide for families There are sharp contrasts throughout the world and in the many different countries and continents. A subsistence economy is 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, clothing, etc.). There is little money income here since the basic needs are made and consumed by the people themselves. There are little passable roads, schools, hospitals, electricity and water supplies. Once, for example, a new road, medical care and schools are brought to the country/town, the development process has started. This is 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 countries cannot be analysed realistically without also considering the role of economically developed nations in directly or indirectly promoting or retarding that development. The developing countries are presently characterised by low levels of living and other development deficits, also known as less developed countries. Traditional economics is an approach to economics that emphasises utility, profit maximisation, market efficiency and determination of equilibrium. Political economy, however, attempts to merge economic analysis with practical politics, to view economic activity in its political context. Development economics has an even greater scope as it is 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. It must deal with the economic, political, social and institutional mechanisms to bring about rapid and large-scale improvements. The less developed countries, as compared to more developed countries (MDCs) (the capitalist countries), commodity and resource markets are typically highly imperfect, consumers and producers have limited information, structural changes are taking place in both the society and economy and although there is a potential of multiple equilibria, disequilibrium situations often prevail. Economics and economic systems must be analysed within the context of the overall social system. This system consists of the organisational and institutional structure of a society, including the values, attitudes, power structure and traditions. Especially in poor countries, the roles of values, attitudes and institutions are crucial in the overall development process. Values are the principles, standards or qualities that a society considers worthwhile or desirable. Attitude is the state of mind or feelings of an individual or society regarding issues such as material gain, hard work and sharing wealth. Institutions are the norms, rules of conduct and generally accepted ways of doing things. The term ‘development’ may mean different things to different people. Traditionally, it meant achieving sustained growth rates of income per capita to enable a nation to expand

its output at a rate faster than the population growth rate. Income per capita is the total gross national income (GNI) of a country divided by its total population. The levels and rates of growth of ‘real’ per capita GNI is then used to measure the overall economic well-being of a population, or how much of real goods is available to the average citizen. GNI is the total domestic and foreign output claimed by residents of a country, comprising the gross domestic product (GDP) plus factor incomes accrued to residents from abroad, less the income earned in the domestic economy accrued to persons abroad. The emphasis of economic development often is on increased output, measured by the gross domestic product (GDP). This is the total final output of goods and services produced by the country’s economy and within its territory, by residents and non-residents, regardless of its allocation between domestic and foreign claims. Amartya Sen, perhaps the leading thinker on the meaning of development, argued that the ‘capability to function’ is what really matters for status as a poor or non-poor person. ‘The expansion of commodity productions are valued, ultimately, not for their own sake, but as means to human welfare and freedom.’ She argues that poverty cannot be properly measured by income, but by what a person is, does, or can be or do. She called it functionings, 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: 1. Personal heterogeneities: Those connected with disability, illness, age or gender 2. Environmental diversities: Heating, clothing requirements or infectious diseases 3. Variations in social climate: The prevalence of crime and violence, ‘social capital’ 4. Distribution within families: Girls getting less/equal medical attention or education 5. Differences in relational perspectives: Some goods are essential because of local customs or conventions Functioning also depends on 1. Social conventions in force in the society, 2. The position of the person in the family/society, 3. The presence/absence of festivities and 4. The physical distance from the homes of friends and relatives. The functioning of a person is an achievement. Sen defines capabilities as the freedoms that people have, given their personal features and their command over commodities. Real income is essential, but to convert the characteristics of commodities into functionings surely requires and education as well as income. Human well-being means being well (healthy, nourished, clothed, literate, long lived, etc.). Recent studies have shown that the average level of happiness or satisfaction increases with a country’s average income. Richard Layard identifies seven factors that surveys show affect average national happiness: 1. Family relationships 2. Financial situation 3. Work 4. Community and friends 5. Health 6. Personal freedom 7. Personal values

Many opinion leaders in developing nations hope that their societies can gain the benefits of development without losing traditional strengths such as moral values and trust in others (social capital). At least three core values, sustenance, self-esteem and freedom, serve as a conceptual basis and practical guideline for understanding the inner meaning of development. Sustenance is the basic goods and services (food, health, shelter) that are necessary to sustain an average human being at the bare minimum level of living. Selfesteem is the feeling of worthiness that a society enjoys when it social, political and economic systems and institutions promote human values such as respect, dignity, integrity and self-determination. Freedom is the 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. To make the biggest impact on development, a society must empower and invest in women. Development must have at least the following three objectives: 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 economics and social choices In September 2000, the eight Millennium Development Goals (MDGs) were adopted, committing towards the eradication of poverty and achieving other human development goals by 2015. The eight goals are: 1. Eradicate extreme poverty and hunger 2. Achieve universal primary education 3. Promote gender equality and empower women 4. Reduce child mortality 5. Improve maternal health 6. Combat HIV/AIDS, malaria and other diseases 7. Ensure environmental sustainability 8. Develop a global partnership for development The MDGs faced some criticism, such as ‘not being ambitious enough, not prioritised, goals are not substitutes but complements’. Case Study Chapter 1 Extremely high economic inequality and social divisions do pose a serious threat to further progress in Brazil. There are growing reasons to hope that Brazil may overcome its legacy of inequality so that the country may yet join the ranks of the developed countries. Brazil has had an export policy stressing incentives for manufacturing exports as well as protection for domestic industries. The country is most constrained by a lack of savings to finance. Moreover, it has not had the technology transfer like the East Asian countries. High levels of corruption, the poor quality of primary schools and the highly concentrated income distribution are not helping either. A minimum wage nowadays has reduced inequality somewhat. If steady progress can be made in racial divide, physical security, environmental decay, poverty, inequality, high borrowing costs, needed diversification of exports and high and inefficient government spending, then the outlook for Brazil is bright.

Chapter 2 The most common way to define the developing world is by per capita income. The most commonly known is the World Bank. The Bank is an organisation known as an ‘international financial institution’ that provides development funds to developing countries in the form of interest-bearing loans, grants and technical assistance. 213 economies are ranked and classified as low-income countries (LICs) (GNI per capita x < 1.025), lower-middle-income countries (LMCs), upper-middle-income countries (UMCs), high income OECD countries and other high-income countries. The LMCs and UMCs are grouped as the middle-income countries (GNI per capita $1.025 < x < $12.475). Newly industrialising countries (NICs) are countries that are at a relatively advanced level of economic development with a substantial and dynamic industrial sector and with close links to the international trade, finance and investment system. Another classification is that of the least developed countries, those that have a low income, low human capital and high economic vulnerability. Human capital refers to the productive investments in people, such as skills, values and health resulting from expenditures on education, on-the-job training programmes and medical care. The GNI per capita is mostly used as a measure of the overall level of economic activity. The calculation is as follows: Total domestic and foreign value added claimed by a country’s residents without making deductions for depreciation of the domestic capital stock. The value added refers to the portion of a product’s final value that is added at each stage of production. Depreciation is the wearing out of equipment, buildings, etc. in write-offs to the value of the capital stock, the total amount of physical goods existing at a particular time that have been produced for use in the production of other goods and services. Bottom line is that GNI comprises GDP + the difference between the income residents receive from abroad less the payments made to non-residents who contribute to the domestic economy. Researches have tried to compare relative GNI and GDP by using purchasing power parity (PPP) instead of exchange rates as conversion factors. The PPP is defined as the number of units of a foreign country’s currency required to purchase the identical quantity of goods and services in the local market as $1 would buy in the U.S. Income gaps between developing and developed countries tend to be less when PPP is used. Besides average incomes, core capabilities need to be evaluated as well. Basic indicators are nutrition levels, educational level (primary completion rate) and under-5 mortality levels and life expectancy. The most widely used measure of the comparative status of socioeconomic development is the Human Development Index (HDI). It is an index measuring the national socioeconomic development, based on combining measures of education, health and adjusted real income per capita. The scale is from 0 to 1, respectively the lowest and the highest human development, based on three goals: 1. A long and healthy life: Life expectancy at birth 2. Knowledge: Measured by a combination of average schooling attained by adults and expected years of schooling for school-age children 3. Decent standard of living: Measured by the real per capita GDP, adjusted for the differing PPP to reflect the cost of living and for the assumption of diminishing

marginal utility. This is the concept that the subjective value of additional consumption lessons as total consumption becomes higher. The dimension index is calculated as: (Actual value – Minimum value)/(Maximum valueMinimum value). After calculating the dimension index for all three goals, the overall HDI can be calculated as HDI = H1/3E1/3I1/3, where H is the health, E is education and I is income index. There are several historical and economic commonalities that have been studied within a common analytical framework in development economics: 1. Lower levels of living and productivity: 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, equipment and infrastructure, which in turn leads to low productivity and economic stagnation. This is known as the poverty trap 2. Lower levels of human capital: Human capital is vital to economic growth and human development. Much of the developing world has lagged in its average levels of nutrition, health and education compared with the developed countries. Student attendance and completion, teacher truancy and other problems are recurring themes. Moreover, there are strong synergies between progress in health and education 3. Higher levels of inequality and absolute poverty: The scale of global inequality is immense. However, this gap between poor and rich is not only the manifestation of the huge global economic disparities. There is more to find within countries, especially in those rich in resources. Extreme poverty is partly due to low human capital, social and political exclusion and other deprivations. Development economists use the concept of absolute poverty to represent a specific minimum level of income needed to satisfy the basic physical needs to survive. Extreme poverty represents great human misery. 4. Higher population growth rates: Whereas the developed countries nowadays have birth rates close to zero, in developing countries these rates are very high. There is a wide range in crude birth rates, the number of children born alive each year per 1.000 persons. 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. Older people and children are often referred to as an economic dependency burden. This burden is the proportion of the total population below 15 or above 65 years old, which is considered economically unproductive and therefore not counted in the labour force 5. Greater social fractionalisation: Low-income countries have ethnic, linguistic and other forms of social divisions, also known as fractionalisation. This may be associated with civil strife and violent conflict, leading to developing societies to divert considerable energies to working for political accommodations if not national consolidation. The greater these differences, the more likely it is that a strife or conflict occurs 6. Larger rural populations but rapid rural-to-urban migration: In developing countries, a much higher share of the population lives in rural areas. These areas tend to suffer from missing markets, limited information and social stratification. Hence, a massive population shift is also under way as people are moving from rural to urban areas, fuelling rapid urbanisation

7. Lower levels of industrialisation and manufactured exports: Industrialisation is associated with high productivity and incomes and has been a hallmark of modernisation and national economic power. Therefore, developing countries have made industrialisation a high national priority. The share of employment in industry in many developed countries is smaller than in some developing countries as developed countries continue their secular trend of switching to service sector employment. Furthermore, developing nations relied heavily on primary exports 8. Adverse geography: Landlocked economies often have lower incomes than coastal economies. Developing countries are typically tropical or subtropical, meaning that they suffer more from tropical pests and parasites, endemic diseases, water resource constraints and extremes of heat. Moreover, global warming is seemingly going to have to greatest negative impact on Africa and South Asia. The extreme case of favourable physical resource endowment is the oil-rich Persian Gulf states. Resource endowment is a nation’s supply of usable factors of production, including mineral deposits, raw materials and labour. Conflict over the profits of these industries has often led to a focus on the distribution of wealth rather than its creation and to social strife, undemocratic governance, high inequality and even armed conflicts. This is referred to as the ‘curse of natural resources’ 9. Underdeveloped markets: Imperfect markets (small number of buyers, barriers to entry) and incomplete information (lacking information to make efficient decisions resulting in underperforming markets) are more prevalent in developing countries. Small externalities can interact in ways that add up and present the possibility of an underdevelopment trap. Some aspects are: a. A legal system enforcing contracts and validating property rights b. A stable and trustworthy currency c. An infrastructure of roads and utilities that results in low transport and communication costs as to facilitate interregional trade d. A well developed and efficiently regulated system of banking and insurance e. Substantial market information for consumers and producers f. Social norms that facilitate successful long-term business relationships 10. Lingering colonial impacts and unequal international relations a. Colonial legacy: Most developing countries were dominated by or colonies of Europe and had pernicious effects on them. Colonial era institutions often favoured extractors of wealth rather than creators of wealth, harming development then and now. Domestically, property rights, the acknowledge right to use and benefit from a tangible or intangible entity that may include owning, using, deriving income from, selling and disposing, have been less secure, constraints have been weak on elites and only a small segment of society was able to benefit from economic opportunities. Where inequality was extreme, the result was less movement toward democratic institutions, less investment in public goods and less widespread investment in human capital b. External dependence: Developing countries have been less well organised and influential in international relations. These nations often voice great concern over various forms of cultural dependence. Global warming is projected to harm developing regions more than developed ones. The developing world endures what may be called environmental dependence, in which it must rely on the

developed world to cease aggravating the problem and to develop solutions such as mitigation at home and assistance in developing countries Case Study Chapter 2 Pakistan and Bangladesh were once one country, however, nowadays have taken different paths. Bangladesh has made relatively better progress than Pakistan, particularly on social development indicators: 1. Growth: PPP-adjusted income estimates vary, however, income remains higher in Pakistan than in Bangladesh. From 2000 to 2011, Bangladesh outpaced Pakistan in terms of population and GDP per capita growth 2. Poverty: Although more Bangladeshi’s live in poverty compared with Pakistani’s, poverty progress has been impressive in the ‘basket case’ of Bangladesh and incomes of the poorest people are rising. Early and quickly diss...