is What Development Economics? What is Economics? The study of how scarce resources should be allocated among competing wants. Development Economics is A comparatively young area of inquiry. It was born just about a generation ago, as a subdiscipline of economics. Many ideas go back further into economic history however. Sen argues there were four main themes in the first generation of development economics. 1) Industrialization (move from agrarian to industrial) 2) Rapid capital accumulation (savings and investment) 3) Mobilization of underemployed labor (move rural to urban) 4) Planning and an economically active state (coordinated planning and state intervention) Sen argues that the empirical evidence suggests these four themes were not wrong so much as they were themes about income growth. What we have learned is that income growth and economic development are not necessarily the same thing. Sen argues that we should view income growth as a means to other objectives and those objectives characterize development. [p. 17-20]
Development needs to add in concern not only about growth of income, but also concern about the entitlements of people and capabilities these entitlements generate. Entitlements the set of alternative commodity bundles that a person can command in a society using the totality of rights and opportunities that he or she faces. Note famine work by Sen: food availability crisis vs. food entitlement crisis. Capabilities the freedoms a person has in terms of the choices of what to do with the bundles under his or her control. What good is more food if you have parasites? What good is more income if you are not free to choose how to use it? Income growth is a means to more freedom, rather than an end in and of itself. Greater freedom is the goal (political participation / income growth tradeoff issue).
Todaro lists three goals of development. (p. 20-21) 1) Provision of basic needs. 2) Self Esteem [ both material as a way to gain self esteem and the way income is gained if it respects culture and tradition] 3) Enhanced ability to choose. Increasingly common is reference to the Millennium Development Goals. (p.22-26) Adopted in September 2000, development goals by 2015. Goal 1: Eradicate extreme poverty and hunger. Goal 2: Achieve universal primary education. Goal 3: Promote gender equality and empower women. Goal 4: Reduce child mortality. Goal 5: Improve maternal health. Goal 6: Combat HIV/AIDS, malaria & other diseases. Goal 7: Ensure environmental sustainability. Goal 8: Develop a global partnership for development. 18 specific targets and 48 indicators are associated with these goals.
http://unstats.un.org/unsd/mdg/default.aspx
What is a developing economy? (p. 38 - 41) To get some kind of hard and fast categorization, we can go to the World Bank for their take on the definition of a developing country. First we need to get a few definitions sorted out. Gross domestic product is the total value for final use of output produced by an economy, both by residents and nonresidents. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources (more on the latter later in the semester). Gross national income is the sum of the gross value added by all resident producers plus any product taxes (less subsidies) that are not included in the valuation of output plus the net receipts of income from abroad. Roughly speaking, GNI=GDP + income residents receive from abroad for factor services (as in payments for use of labor and capital) minus payments made to nonresidents for factor services to the national economy. The World Bank classifies countries based on GNI per capita, and as expressed in US Dollars. Two main alternative approaches to expressing these figures in USD. 1) Exchange rate conversion. (see description of Atlas method for details).
http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:2045200 9~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html
2) Purchasing power parity. Use a common set of international prices for all goods and services produced in a given country, valuing all goods and services in USD. PPP is defined as the number of units of a foreign countrys currency required to purchase the identical quantity of goods and services in the local market as $1 would buy in the US. (see the Economist Big Mac example) a. Intuition how much does a haircut or a shoeshine cost? Classify countries using GNI per capita as converted to USD by the exchange rate / atlas method. Classifications (changing, these are currently applicable, the book has the ones used until July 2004). You can find these on the World Bank home page
http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:2042045 8~menuPK:64133156~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html
Low income: $905 or less Lower middle income: $906 to $3,595. Upper middle income: $3,596, below $11,115. High income: over $11,116. Developing is defined as low and middle (both upper middle and lower middle) income.
By the latest ranking, 84% of the worlds population lives in developing countries. 75% of countries. Note also that the World Bank categorizes countries based on geographical area. They also have categorized by degree of indebtedness but have recently stopped. Current table listing a variety of classifications is an appendix to these notes. An alternative approach is to use the Human Development Index. (p. 59-64) UNDP has published Human Development Reports, starting in the early 90s. The HDI ranks countries on a scale of 0 (low human development) to 1 (high human development). There are three components that to some degree reflect the objectives of development in the sense argued by Sen. 1) Life expectancy 2) Education (composed of adult literacy and gross enrollment index for primary, secondary and tertiary education). 3) Income index.
Life expectancy is based on a low of 25 and a high of 85.
Adult literacy and enrollment are based on 100% standard. Education index gives 2/3 weight to literacy and 1/3 to enrollment. Income is based on a low of 100 and a high of 40,000. Note that income is logged to reflect the diminishing marginal utility of income.
HDI 1 1 1 (income index ) (education index ) (life exp ec tan cy index ) 3 3 3
According to this, the best place to live is Iceland, the worst is Sierra Leone. High human development is 0.8 or above, medium human development is 0.5 to 0.8, and low human development is below 0.5. Development is the process that leads to improvement in this measure.
The correlation between HDI rankings and GNI per capita rankings is 0.76, the HDI index and the GNP index is 0.92.
http://hdr.undp.org/en/statistics/indices/hdi/
2007/2008 Human Development Index rankings High Human Development
1. Iceland 2. Norway 3. Australia 4. Canada 5. Ireland 6. Sweden 7. Switzerland 8. Japan 9. Netherlands 10. France 11. Finland 12. United States 13. Spain 14. Denmark 15. Austria 16. United Kingdom 17. Belgium 18. Luxembourg 19. New Zealand 20. Italy 21. Hong Kong, China (SAR) 22. Germany 23. Israel 24. Greece 25. Singapore 26. Korea (Rep. of) 27. Slovenia 28. Cyprus 29. Portugal 30. Brunei Darussalam 31. Barbados 32. Czech Republic 33. Kuwait 34. Malta 35. Qatar 36. Hungary 37. Poland 38. Argentina 39. United Arab Emirates
Medium Human Development
71. Dominica 72. Saint Lucia 73. Kazakhstan 74. Venezuela, RB 75. Colombia 76. Ukraine 77. Samoa (Western) 78. Thailand 79. Dominican Republic 80. Belize 81. China 82. Grenada 83. Armenia 84. Turkey 85. Suriname 86. Jordan 87. Peru 88. Lebanon 89. Ecuador 90. Philippines 91. Tunisia 92. Saint Vincent and the Grenadines 93. Fiji 94. Iran, Islamic Rep. of 95. Paraguay 96. Georgia 97. Guyana 98. Azerbaijan 99. Sri Lanka 100. Maldives 101. Jamaica 102. Cape Verde 103. El Salvador 104. Algeria 105. Viet Nam 106. Occupied Palestinian Territories 107. Indonesia Syrian 108. Arab
Low Human Development
156. Senegal 157. Eritrea 158. Nigeria 159. Tanzania (U. Rep. of) 160. Guinea 161. Rwanda 162. Angola 163. Benin 164. Malawi 165. Zambia 166. Cte d'Ivoire> 167. Burundi 168. Congo (Dem. Rep. of the) 169. Ethiopia 170. Chad 171. Central African Republic 172. Mozambique 173. Mali 174. Niger 175. Guinea-Bissau 176. Burkina Faso 177. Sierra Leone
40. Chile 41. Bahrain 42. Slovakia 43. Lithuania 44. Estonia 45. Latvia 46. Uruguay 47. Croatia 48. Costa Rica 49. Bahamas 50. Seychelles 51. Cuba 52. Mexico 53. Bulgaria 54. Saint Kitts and Nevis 55. Tonga 56. Libyan Arab Jamahiriya 57. Antigua and Barbuda 58. Oman 59. Trinidad and Tobago 60. Romania 61. Saudi Arabia 62. Panama 63. Malaysia 64. Belarus 65. Mauritius 66. Bosnia and Herzegovina 67. Russian Federation 68. Albania 69. Macedonia, TFYR 70. Brazil
Republic 109. Turkmenistan 110. Nicaragua 111. Moldova 112. Egypt 113. Uzbekistan 114. Mongolia 115. Honduras 116. Kyrgyzstan 117. Bolivia 118. Guatemala 119. Gabon 120. Vanuatu 121. South Africa 122. Tajikistan 123. So Tom and Principe 124. Botswana 125. Namibia 126. Morocco 127. Equatorial Guinea 128. India 129. Solomon Islands 130. Lao People's Dem. Rep. 131. Cambodia 132. Myanmar 133. Bhutan 134. Comoros 135. Ghana 136. Pakistan 137. Mauritania 138. Lesotho 139. Congo 140. Bangladesh 141. Swaziland 142. Nepal 143. Madagascar 144. Cameroon 145. Papua New Guinea 146. Haiti 147. Sudan 148. Kenya 149. Djibouti 150. Timor-Leste
151. 152. 153. 154. 155.
Zimbabwe Togo Yemen Uganda Gambia
When comparing GNI per capita and HDI, a few interesting results come out; South Africa drops 49 places, Tanzania goes up 21 places for example.
http://hdr.undp.org/external/flash/hdi_gdp/
Lets you play around some with the data. There is some interesting research on HDI ranking by gender, race, ethnicity, and region within countries as well. (See gender related development index on the UNDP site for example, where the gender measure makes Saudi Arabia and Yemen drop 6 places but Philippines increases 6 places). Also to preview a topic we will get to later, there is a Human Poverty Index that focuses on depravations. This takes the same basic insight (development is not just higher income) to poverty (poverty is not just less income). We will talk more about this when we consider poverty as a specific topic.
What characteristics were common to the growth process of most developed countries? Kuznets identified characteristics of developing economies by looking at the history of developed countries. 1) High rates of growth of per capita output and population. Total output growing at about 3%, per capita output 2%, population at about 1% during period of rapid growth. 2) High rates of total factor productivity increase. The output per unit of input. The efficiency with which inputs are used in the production function. Appears to be more important than factor accumulation (more on this in growth theory). 3) Structural economic transformation. Ag to industry to services, larger scale of production, rural to urban / suburban. 4) Transformation in attitudes, institutions, ideologies. Rationality: science and technology and the approach they engender. Planning: thought out coordination of a strategy. Equality as a goal: promoting actively equality. Institutions: land tenure reform, change in education and religions role, administration approaches. 5) International economic involvement. Reach out for raw materials, cheap labor and lucrative markets. 6) Reaching out and economic growth were not contagious growth occurred in a particular nation while others the interacted with did not always grow.
But is the history of how currently developed countries developed the appropriate model? (p. 71-78) There are some reasons why the historical growth patterns may not be applicable to situation for current LDCs. 1) The current natural and human resource endowments in developing countries are not like developed countries when the developed countries commenced rapid growth. a. In some cases they just dont have these resources b. In others, they do, but the extraction requires capital, and the capital comes from outside, so you lose control c. Technical skills of the population not equivalent to that of DCs in their early growth phase d. Technical skills exist outside, so tempting to import rather than develop.
2)Per capita income and GNP are less than DCs when they entered rapid growth phase in real terms. Also, back then they were top of the heap with lower GNPs, now there is this other group already there.
GDP per Capita in England Relative to Modern Economies.
Country Income Per Capita (1992$) UK 1992 16,302 Mexico 1992 7,867 Bulgaria 1992 6,774 Iran 1992 4,161 South Africa 1992...