ECON2033
Development
Economics
AD6
Recommended
book:
Economic
Development 8th edition by Smith and Todaro
Instructor:
Muhammad Ilyas Siddiqui, MS Economics, IIIE, IIUI
Q1:
What is development economics? Describe traditional and modern views regarding
development economics.
Introduction
Economics as a subject is concerned with
allocation of scarce resources. The purpose of this allocation is to meet
maximum possible human needs and wants. The word “development” literally means
gradual growth in a thing until it reaches to its most advanced form. In economics,
development means the material well- being of people and nations; it is termed
as economic development and the subject that discusses the nature and causes of
economic development is known as development economics.
Traditional economics is primarily concerned with least cost or
optimum combination of productive resources to produce an ever expanding range
of goods and services. The traditional economics includes both classical and
neoclassical economics. Political
economy goes beyond traditional economics and also considers social and
institutional influences on resource allocation now and in future. It gives
special emphasis on role of power in economic decision making.
Economic development has become very broad term
showing political, social and institutional requirements for rapid economic
growth in the way that brings the fruit of economic development to all segments
of society. It focuses on mechanisms that keep families, regions and entire nation
in poverty traps and strategies to break out these traps.
Traditional view of development
According to this view ED is a capacity of national economy to generate
and sustain an annual increase in real gross national product – GNP at the rate
of 5% to 7% or more. An alternative
measure is per capita GNP that includes population factor; ability of a nation
to expand its output at a rate faster than its population rate. Development
strategies in past also focused on rapid industrialization at the expense of
agricultural and rural development. Finally,
these principal measures were supplemented by non-economic social indicators –
literacy, schooling, health and housing.
The new economic view of
development
In
1950s and 1960s many developing countries realized economic growth targets but
living standard of masses of people in these courtiers remained unchanged. The
focus of most economists switched from mere calculations of GNP to major
economic problems such as absolute and widespread poverty, income inequalities
and ever rising unemployment rate. Therefore, development was conceived as a multidimensional process involving major
changes in social structures, popular attitudes and national institutions along
with acceleration of economic growth.
Q2: What are the views
of Sen about development; enlist the core values and objectives of development
economics in the light of Sen’s thought.
Sen’s capabilities
approach
Income
and wealth are not ends in itself but are instruments to other purposes goes
back to Aristotle. Almost same thing was proposed by an Indian economist
Amertya Sen (1933) who got Nobel Prize in 1998. According to Sen “Economic
growth cannot be sensibly treated as an end in itself. Development has to be
more concerned with enhancing the lives we lead and the freedoms we enjoy”. He
argued that development cannot be measured properly through conventional
measures, rather what a person has does not matter; what a person is, can be or
“does” is matter of concern. Further, he argued that availability of
commodities would not solve the problem but it is “functioning” or “abilities”
that is freedom of choice and control of one’s own life along with the ability
of living at par with society is real requirements for economic developments.
Three core values of
development
1- Sustenance; the ability to meet the
basic needs
2- Self esteem; to be a person
3- Freedom from servitude; to be able to
choose
The three objectives of
development
1- To increase the availability and widen
the distribution of life-sustaining goods and services.
2- To raise level of living along with high
incomes, more jobs, better education and greater attention to human and
cultural values.
3- To expand the range of economic and
social choices available to individuals and nations.
Q3: Write a detailed
note on Millennium
Development Goals (MDGs). Also
mention the relevant targets.
Millennium Development
Goals (MDGs)
The internationally agreed framework of 8 goals and 18 targets was
complemented by 48 technical indicators to measure progress towards the
Millennium Development Goals. These were established following the Millennium Summit of the United Nations in September, 2000, following the adoption of the United Nations Millennium Declaration. All 189 United Nations member states at the time (there are 193 currently), and at least 23 international organizations, committed to help achieve the
following Millennium Development Goals by 2015 These indicators have since been adopted by a
consensus of experts from the United Nations, IMF, OECD and the World Bank.
1-
Eradicate extreme poverty and hunger
Target 1. Halve, between 1990 and 2015, the proportion of people whose
income is less than $1 a day
Target 2. Halve, between 1990 and 2015, the proportion of people who suffer
from hunger
2- Achieve
universal primary education
Target 3. Ensure that, by 2015, children everywhere, boys and girls alike,
will be able to complete a full course of primary schooling
3- Promote gender equality and empower women
Target 4. Eliminate gender disparity in primary and secondary education,
preferably by 2005, and in all levels of education no later than 2015
4- Reduce
child mortality [1]
Target 5. Reduce by two-thirds, between 1990 and 2015, the under-five
mortality rate
5- Improve maternal health
Target 6. Reduce by three-quarters, between 1990 and 2015, the maternal
mortality ratio.
6- Combat
HIV/AIDS, malaria, and other diseases
Target 7. Have halted by 2015 and begun to reverse the spread of HIV/AIDS
Target 8. Have halted by 2015 and begun to reverse the incidence of malaria
and other major diseases
7- Ensure
environment sustainability
Target 9. Integrate the principles of sustainable development into country
policies and programs and reverse the loss of environmental resources
Target 10. Halve, by 2015, the proportion of people without sustainable access
to safe drinking water and basic sanitation
Target 11. Have achieved by 2020 a significant improvement in the lives of at
least 100 million slum dwellers
8- Develop
a global partnership for development
Target 12. Develop further an open,
rule-based, predictable, nondiscriminatory trading and financial system
(includes a commitment to good governance, development, and poverty reduction
both nationally and internationally.
|
Target 13. Address the special needs of the Least Developed Countries
(includes tariff- and quota-free
access for Least Developed Countries exports, enhanced program of debt relief
for heavily indebted poor countries [HIPCs] and cancellation of official
bilateral debt, and more generous official development assistance for
countries committed to poverty reduction)
|
Target 14. Address the special needs of landlocked developing countries and
small island developing states (through the Program of Action for the Sustainable
Development of Small Island Developing States and 22nd General Assembly
provisions)
|
Target 15. Deal comprehensively with the debt problems of developing
countries through national and international measures in order to make debt
sustainable in the long term
Target 16. In cooperation with developing countries, develop and implement
strategies for decent and productive work for youth
Target 17. In cooperation with pharmaceutical companies, provide access to
affordable essential drugs in developing countries
Target 18. In cooperation with the private sector, make available the
benefits of new technologies, especially information and communications
technologies.
Q4: What are the basic indicators of development.
Basic indicators of
development: Real income, health and education
Real income
Total market value of
all final goods and services produced in a country by all residents and
nonresidents is gross national product GNP. If the difference between income
received by residents from abroad for factor services (labor and capital) and
payments made to nonresidents who contribute the domestic economy is deduced
from GNP, we will be left with GDP, gross domestic product. GNP is the most
commonly used measure of overall economic activity.
One way to make
comparison between developed and less developed countries (LDCs) is per
capita real GNP. This is done by converting per capita real GNP of all
countries to single measure that is US dollar. This process involves official
foreign exchange rates and therefore, is exaggerated when the currencies of LDCs
is converted to US dollar. This problem is rectified by focusing on another
concept that is purchasing power parity (PPP). It 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 of LDC as $1 would buy in
the United States. Exchange rate will
adjust to equalize the purchasing power of a unit of a currency in all
countries. At PPP, buyers are indifferent to purchase among countries. PPP
is simply a mutual comparison of purchasing powers.
The concept of PPP has benefits over GNP at exchange
rate. For example, the income gap between the richest country, USA and the
poorest country, Ethiopia is 56 to 1 at PPP and 403 to 1 at exchange rate in
2000. One of major weaknesses of income at exchange rate is volatility of
exchange rate fluctuations that affects GNP and GDP comparisons badly. GNP
shows economic strength of a country whereas PPP shows cost of living or
quality of life (purchasing power) which is more reliable indicator.
Per capita GNP in 1997 – in USD at official exchange rates
Health
Life expectancy: there is also striking
difference between developed and least developed countries, for example, in
1960, it was 75 to 48 years.
Infant mortality rate- the number of babies
who die before their first birthday out of every 1,000 live births. It was
96, 48 and 8 in least developed, developing and developed countries
respectively in 1998.
Malnutrition; The even bigger
problem than poverty. According 2001 statistics; among the poor 1 billion do
not have access to safe drinking water; 2.4 billion – half the population –
live without sanitation facilities and 158 million children under age 5 are
underweight.
AIDS: there are 22 million
died of this fatal disease and 36 million got HIV up to 2001, 90% of all
these belong to least developed countries.
Education
It is also a major
indicator. In least developed countries 45% is average literacy rate; 325
million children have dropped out of primary and secondary school; 854
million illiterate adults out of which 60% are women (survey 2001)
Q5: What are the characters developing countries have in common?
Common characters of low living levels of developing countries
1-
Low as well as slow rates of income growth.
2-
Low as well as stagnating rates of real income per capita
growth.
3-
Highly skewed patterns of income distribution.
4-
Large segment of population is suffering from absolute poverty.
5-
Large segment of population is characterized with ill health,
malnutrition, high infant mortality rates.
6-
Low levels of literacy, significant dropout rates and inadequate
and irrelevant educational curricula and facilities.
Q6: What are primary
growth factors?
1- Capital accumulation including all new investments.
2- Population growth giving rise labor force.
3-
Technological progress.
Capital accumulation
Capital is that part of
wealth which is used to generate further income. There are two major kinds of
capital; human capital and non-human or physical capital. Human capital
consists of education, skills, capabilities, etc. Examples of non- human
capital are machines, buildings, infrastructure - roads, water, electricity,
sanitation, communications, etc. physical capital stock of a nation is the
total net real value of all physically productive capital goods.
Capital accumulation is
the process of adding more capital to existing capital stock. Capital
accumulation is the result of investment that is in turn result of saving.
Saving shows that the society is willing to sacrifice today consumption to
get more in future.
Capital accumulation
cycle
E → Y S → I → K → E → Y → S → I → K → E → Y →S → I →K → E → Y → S → I → K
E = Employment, Y=
income, S= saving, I= investment, K= capital accumulation
Population growth giving rise labor force.
Second major factor that
guarantees development is population growth. An increase in population growth
obviously results in more labor force. But, both positive and negative
impacts of population growth are likely. Least developed and developing
countries are rich in population still they are not developed. It depends on
the economic system of a country how it utilizes its labor. Population growth
is also necessary to develop markets that are very important factor in free
market economy.
More population → more
labor force → bigger markets both for labor and output
Technological progress
Technology is new and
improved ways of doing things such as growing crops, making clothing or
building a house. There are three categories of technological progress:
1-
Neutral technological progress
It takes place when
higher output is achieved with same quantity and combination of factors of
production. Division of labor is only possible innovation that can be
expected in this type. Production possibility front will simply shift outward
2-
Laborsaving technological progress
It is due to use of
advanced machines such as computers, automated looms, high speed electric
drills, tractors, etc. The fastest technological progress since last century
is also due to laborsaving technology. It is also known as capital intensive
technology and common in developed countries because these countries are rich
enough to launch heavy research.
3-
Capital saving technological progress
It is common in developing
countries where labor force is abundant and heavy machinery and research is
out of reach. It is also known as labor intensive technology. Only small and
limited machines are used.
4-
Labor augmenting technological progress
It occurs when quality
or skills of labor force are upgraded such as use of multimedia and other
communication media for class room instructions.
5-
capital augmenting technological progress
It occurs when quality
and productivity of capital goods is improved such as substitution of threshers
for simple machines.
Q7 How production possibility front technique is helpful in
growth analysis
Production possibility
function (PPF) analysis
PPF shows the maximum
attainable output of two commodities, for example rice and computer, that a country
can produce potentially when all factors are fully and efficiently employed.
If a country is not on
PPF, it means the country is underproduction and input factors are lying
idle, for instance, at point k. In the case of neutral technological progress
the whole front shifts out.
In case of agricultural
progress (rice), the portion PPF on x-axis will come out in proportion with
the development in the agricultural sector.
Development in
industrial segment (computer) of economy will be indicated by outward shift
of PPF on y-axis in proportion with the development in the industrial sector.
-----------------------------------------------------------------------------------------------------------
Q8 How low income countries today differ from developed
countries in their earlier stages
1.
Physical and human
resource endowments.
2.
Per capita incomes and
levels of GNP in relation to the rest of world.
3.
Climate
4.
Population size,
distribution and growth.
5.
Historical rate of international
migration.
6.
International trade
benefits.
7.
Basic scientific and
technological research and development capabilities.
8.
Stability and
flexibility of political and social institutions
Physical and human resource endowments
By physical and human resource
endowment we mean economic benefits that a country has over other countries.
Examples are fertile lands, petroleum, mines and healthy, skilled and
satisfied labor force. One of the reasons of long run growth of today
developed is that these countries were rich in such endowments. A few
developing nations have been supplied with abundant supply of petroleum,
other minerals and raw materials. In Asia where almost half of the world
population resides is poorly endowed with natural resources. In contrary, the
countries where natural resources are in plenty such as Latin America and
Africa heavy investment of capital is needed to exploit them.
Human resources is also a big
difference between developing and developed nations. The developing nations lack
skilled labors though their labor force is much larger as compared to the
developed nations. According to Paul Romer “ today developing nations are
poor because their people do not have access to the ideas that are necessary
to generate value by industrialization.”
Per capita incomes and levels of GNP in relation to the rest of
world
The four fifths of the
world population at present living in developing countries have on average a
lower level of real per capita income than their counterparts had in nineteenth
century. Especially, at the beginning of modern growth era today developed
countries were economically in advance of the rest of the world. Therefore,
they were in strong position to expand financially and economically.
Climate
Almost all developing
countries are located in tropical or sub tropical (most heated) zones. On the
other hand most economically successful countries located in the temperate
zones. The difference of climate is not by chance. The heat and humidity in
most countries contribute bad soil quality and rapid losses to many natural
goods. Extreme climate has also affected badly the thickness of forests, bad
health of animals and productivity of certain crops. Bad weather also causes
discomforts and diseases among works making them less productive.
Population size, distribution and growth
One more striking
difference between the poor and the rich world is population growth and
distribution. In the beginning the Western nations had very slow population
rates. It increased during industrialization era due to falling death rates,
however birthrates remained slow. The average population growth rate was 2%
per annum and even much less of it.
The population of
developing countries increased at higher average that is 2.5% and even faster.
Further population is concentrated in few areas and person to land ratios are
higher than the developed countries had in the start. In the term of absolute
size the developing countries have also grown larger such as India, Egypt,
Pakistan, Indonesia, etc.
Historical rate of international migration
In the early twentieth
centuries there was a great movement of rural population in Europe giving
rise large scale international migration. It was due to famine and less
economic opportunities in rural areas. Especially, after World War a huge
number of unskilled labors Europe rushed to labor shortage areas of North
America and Australia.
This international
migration can be divided into two major types: distant (remote) and long run;
short distance and temporary. The first types includes migration from Europe
to America (the new world) whereas the second includes migration within the
Europe. It took place after World Wars; however, the reasons of migration
were almost same in both the types.
One of the major
consequences of international migration is brain drain. It means the migration of highly skilled
professionals from developing countries to developed countries in search of
better livelihood. The brain drain during 1960 to 1990 was more than one
million from developing countries to Canada, USA and UK. Further,
international migration affects wage rates, remittances and cultural values.
International trade benefits
International free trade
is known as “growth engine” which
caused all advancements in today developed countries. Free trade helped
expansion of exports markets which further provided international stimulus to
growing local demands. This caused establishment of manufacturing industries
and enabled developing countries to borrow funds from international capital
markets and speed up the process of capital accumulation.
Free trade and prosperity cycle
More international free
trade → more expanded exports markets → more earnings → more
manufacturing industries → more borrowable funds for developing countries →
more capital accumulation with developing countries → more development in
developing countries.
Unfortunately,
the developing countries have benefited less out of free trade due to their
poor terms of trade (value of
exports to value of imports).
Basic scientific and
technological research and development capabilities
Research and development
(R& D) has played very crucial role in development of today developed
countries. This is why 90% of world research is being done in developed
countries. These countries can afford scientific research because they
allocate heavy funds for this purpose in their budgets. Scientific research
and development has been in the top priorities of developed countries whereas
the developing countries neither can afford nor they have such priorities;
instead they depend on the developed countries for research projects if they
have them at all.
Stability and flexibility of political and social institutions
Finally, today developed
nations had in beginning established political and flexible social
institutions. Therefore, they could pursue national policies independently on
basis of consensus toward modernization. According to Gunnar Myrdal, the
Nobel Prize laureate:
“….the today developed countries had a small
world of broadly similar cultures where person and ideas moved freely. Modern
scientific thought developed in these countries long before industrialization
revolution and modernized technology was introduced earlier in their
agriculture and industries in small scale.”
The political stability
had been also a problem for developing countries; they lacked national
policies consistency and sustainability. On the other hand, the developed
nations showed themselves more mature in their political temperament. The
continuity of economic policies through years and years is salient feature of
developed countries.
…………………………………………………………………………………………………….
Q9 How can we measure inequality and poverty
1-
Size distribution method
The personal or size
distribution of income is most commonly used measure of inequality used by
economist. It simply deals with individual persons or households and the
total income they receive regardless the source of income.
1.
Write the individuals and their income in ascending order.
2.
Divide the population in quintile and deciles
3.
Divide top 20% by bottom 40%: the greater the difference; the
greater the inequality.
2-
Lorenz curve
The Lorenz
curve is a graphical
representation of the distribution of income or of wealth. It was developed
by Max O. Lorenz in 1905 for representing inequality
of the wealth distribution.
1. The
numbers of income recipients are plotted on x-axis in cumulative percentage.
2. The vertical axis shows
share of income received by each percentage of population, it is also in
cumulative up to 100.
3. The diagonal shows
equality- at every point the percentage of income is equal to percentage of
population.
4. The Lorenz curve shows
the actual income received by each group of population. The more away the
Lorenz curve from diagonal, the more is inequality.
3-
Gini coefficient
It is the area covered
by Lorenz curve divided by the total area on the right side of diagonal:
Lorenz curve area / Area
of triangle on right side of diagonal
If it is
1.
=0, perfect equality
2.
=1, perfect inequality
3.
Generally it is between 0 and 1
4.
For more equitable countries, it is 0.20 to 0.35 and for less
equitable countries it is 0.50 to 0.70
-------------------------------------------------------------------------------------------
|
[1] Child
mortality, also known as under-5mortality or child
death, refers to the deathof
infants and children under the age of five or between the
age of one month to four years depending on the definition.
The maternal
mortality ratio (MMR) is the ratio of the number of maternal deaths during a given time period per 100,000
live births during the same time-period.
No comments:
Post a Comment