Chapter 16 - Understanding economic development
Terms in this set (57)
Economic growth versus economic
- Economic growth refers to increases in output and incomes over time, often measured on a per capita basis.
-Economic development refers to a process that leads to improved standards of living for a population as a whole
-Economic growth means more output/income and society can satisfy needs, improving standards of living
-However, while economic growth can make improved levels of living possible, this isnt guaranteed.
-Persisting poverty and lack of long-lasting improvements in the well-being of their populations, even if they have achieved respectable rates of growth over extended periods of time, have shown that economic development is a highly complex and sometimes elusive process.
The multidimensional nature of economic development - The many dimensions of economic development
increases in real per capita output and
incomes are accompanied by improvements in:
-Standards of living of the population and reductions in poverty
-Increased access to goods and services that satisfy basic needs (including food, shelter,
health care, education, sanitation and others)
-Increasing employment opportunities and reduction of unemployment
-Reductions of serious inequalities in incomes and wealth
The multidimensional nature of economic development - Human development
-Life sustenance - refers to access to basic services (merit goods) such as education and health care services, as well as satisfaction of basic needs like food, clothing and shelter
-Self-esteem - development is desirable because it provides individuals with dignity, honour and independence. involves the absence of exploitation and dominance associated with poverty and dependence
- Freedom - freedom from want, ignorance
and squalor; freedom to make choices that
are not available to people who are subjected to
conditions of poverty.
To be able to read, write and receive an appropriate education; to be knowledgeable; to be able to find work
To develop one's potential and lead a full and productive life.
To enjoy legal protection; to participate in social and political life
United Nations Development Programme (UNDP)
-Based on the concept of human development
-UNDP makes a distinction between income poverty and human poverty
-Income poverty occurs when income falls below a nationally or internationally determined poverty line - reduced through higher income
-Human poverty involves deprivations and the lack
of opportunities that allow individuals 'to lead a long, healthy, creative life and to enjoy a decent standard of living, freedom, dignity, self-esteem and the respect of others' - reduced through providing a broad range of social services to the entire population
e.g. a villager whose income increases, so that
now he or she is able to purchase more goods and
services. If there are no schools or health care services in the area, or if the village is infested with malaria, the higher income will be of little use in securing a higher standard of living.
Sources of economic growth in economically less developed countries
Increases in the quantity of physical capital -Developing countries tend to have relatively limited amounts of capital in relation to their large supplies of labour
Increases in the quantity of human capital -productivity of labour, education
Development and use of new appropriate technologies -quality of physical capital
Institutional changes - In depth on next car
-develop institutions relating to property rights (laws and regulations that define rights to ownership, use and transfer of property)
-a well-functioning legal system provides effective enforcement of laws, contracts and mechanisms for settling conflicts; an efficient, fair and transparent tax system
-banking and credit institutions that provide effective links between savers and investors, and broad access by the population (including the poor) to credit;
-institutions that protect against corruption; and more.
-The questionable role of commodity-type natural resources in economic growth
The World Bank defines institutions as 'the rules,
Organization and social norms that facilitate coordination of human action'.
The questionable role of commodity-type natural resources in economic growth
-Commodity-type natural resources can contribute to economic growth, but are not essential for growth
-'curse of natural resources' - resource rich countries have been experiencing less growth than resource poor countries
reasons behind resource rich countries experiencing less growth than resource poor countries
-Earlier diversification into manufacturing and industrialisation
-inability to rely on the production and export of commodities made them turn early on toward labour-intensive manufacturing (making good use of their large labour supplies)
-investments in human capital and appropriate technologies
-Resource-rich countries became heavily dependent on production and export of
primary commodities, which often led to short-term volatility of export revenues, long-term deteriorating terms of trade, poor fiscal performance (government spending that gets out of control), the need to resort to external borrowing and hence the accumulation
of large debts, and balance of payments difficulties.
-Also, the presence of precious natural resources
sometimes became a source of conflict because of
increasing income inequalities, as well as between
contending groups that would like to gain control
Relating economic growth to economic development
-Economic growth can occur without economic development and viceversa
-Development without growth can occur if appropriate policies are followed to provide access to basic social services for the poor.
-e.g. Merit goods include education, health care services, sanitation, and clean water supplies, made available to people on low incomes, who would not otherwise have access to them. An economy that does not experience growth can still achieve some economic development, by reallocating its resources. this would entail a movement along PPC1 from point A to a point like B.
Over long periods of time, the possibilities for improving the population's well-being by moving along the same PPC will be exhausted, and further improvements will depend on outward PPC shifts. Outward shifts, representing economic growth as an
increase in production possibilities are
therefore necessary for economic development to be maintained. Growing output per capita translates into
higher incomes and an improved ability to provide the goods and services needed by the population.
However, economic growth does not guarantee that economic development will occur. If an economy moves from point A to point C, for example, there is little if
any increase in merit good provision.
Distinguishing between economically more developed and less developed countries
The World Bank8 divides countries into four groups according to their level of GNI (GNP) per capita. These groups (based on 2008 GNI per capita) are:
• Economically less developed countries: (low, lower middle, upper middle income)
• Economically more developed countries:
-classifying countries by level of GNI (or any other output or income measure) does not accurately represent their level of development.
-a country's level of development varies widely depending upon what characteristic is used to measure development - a country may be developed in terms of one characteristic, but not another
-When measuring development, per
capita is important
• Economically less developed countries:
low income, with GNI per capita of US$975 or
lower middle income, with GNI per capita of
upper middle income, with GNI per capita of
• Economically more developed countries:
high income, with GNI per capita of $11 906 or
Common characteristics of developing countries
(these do not apply uniformly to all developing countries)
-Low levels of GDP/GNI per capita - according to the World Bank, economically less developed countries are those with GNI per capita levels below a certain level
-High levels of poverty
-Relatively large agricultural sector -Relatively low
income elasticities of demand for agricultural products play a role in reducing the relative size of the agriculture sector as countries grow and develop. As GNI lowers reliance on agriculture in GDP rises
-Large urban informal sector - formal sector refers to the part of an economy that is registered and legally regulated. Informal sector is the opposite
-High birth rates and population growth
-Low levels of health and education
-Low levels of productivity - scarcity of capital goods and appropriate technology
Large urban informal sector (1)
-Refers to the unregistered urban sector in developing countries
-Vast range of activities of a large and growing share of the urban population as a way of survival
-e.g. barbers, cobblers, carpenters, tricycle to working in restaurants, hotels and sweatshops
-Different definitions of informal sector for developing and developed nations
-In developing countries 'informal sector' has to
do with work that can make all the difference between physical survival and starvation for individuals and their family.
-informal sector activities in developing countries are not undertaken to avoid payment of taxes or bypass labour or other legislation as in developed countries
-In developed countries, the informal sector includes unregistered work resulting in tax evasion, as well as corruption, crime, etc., which are illegal.
-The informal sector is responsible for a large and
rising share of urban employment
-Employment in the informal sector is growing more rapidly than employment in the formal sector, especially during times of economic recession. As firms in the formal sector cut back on employment, all those who lose their jobs are forced to seek work in the informal sector.
Large urban informal sector (2)
The large size and growth of the urban informal
sector is due to several factors:
-Policy failures that focused on industrialisation and completely neglected the agricultural sector
-If rural incomes and rural employment possibilities had increased, the massive departure of the rural poor towards urban areas might have been avoided.
-Rapid population growth
-Cities still attract people from rural areas who are poor, landless and destitute, looking for work that will enable them to make a better living or simply to survive
-However, employment opportunities in the urban formal sector are limited, and the formal sector demands skills that rural migrants lack
-Problems of informal sector: no worker protection; workers vulnerable to exploitation; environmental and health hazards in slums with no basic services like water sanitation and sewerage; no access to credit for workers; limited possibilities for education and training, and many more.
-To take advantage of these opportunities, governments must adopt policies to assist the informal sector, such as access to credit to allow businesses to be set up or expanded; training and education for activities important in the informal sector; provision of necessary infrastructure (water, sanitation, etc.);
-Such measures would promote the creation of new jobs and improved standards of living for informal sector workers
High birth rates and population growth: The problem of high birth rates
-Higher population growth rates
-High 'dependency ratio' - percentage of economically dependent people, or people who must be supported by the working population.
-A high dependency ratio means that the income of a family must be stretched to cover the needs of more family members.
High birth rates and population growth: The challenges of population growth
-As the population grows, more and more people will live in developing countries
-This places an enormous burden on the developing world in terms of abilities to absorb the growing numbers of people by creating employment opportunities, avoiding pressures on the environment, improving quality of health services, education, infrastructure and other services, and improving standards of living of
it is believed that high birth and population growth rates may slow down economic growth and development because:
-rapid population growth requires an even
more rapid output
-high dependency burden - more family members means more likely to be pushed into poverty
-Adverse effects on mothers frequently giving birth
two different and opposing sets of circumstances that exist simultaneously. e.g.
• wealthy, highly educated people and poor, illiterate people
• a formal and informal urban sector
• a high-productivity industrial sector and a low productivity traditional sector
• a low-productivity agricultural sector and a
high-productivity, urban industrial sector
• a 'modern' commercial agricultural sector and a
'traditional' subsistence agricultural sector.
dualism often characterise less developed countries. One of the challenges of economic development is to eliminate every aspect of
dualism and develop less polarised and more uniform economic and social structures.
The poverty cycle (trap)
When conditions of poverty feed on themselves and create more poverty, they give rise to the poverty cycle, also known as the poverty trap.
-Poor spend their entire incomes just on bare essentials
-Low physical and human capital (education and skills)
-Natural capital often becomes depleted as they destroy their natural environment in an effort to survive (depletion of minerals in the soils, cutting
of forests, overfishing of lakes, rives and oceans, etc.).
-since all their income is spent on necessities, there is nothing left over to save; therefore, they cannot make investments in the capital they need.
How poverty is transmitted across generations
-Low income people often unproductive due to low health, skill or physical capital
-Cant afford education and transport to education for kids, or kids need to work
-Cant afford food and health care, leading to malnourishment and disease - physically disadvantaged kids
-Large families - Income stretched over more people
-In these situations, children grow into adulthood lacking skills, often unable
to realise their full health potential, and condemned to low productivity and low incomes.
-Unable to invest in things, over use their land, depleted of nutrients thus lowering productivity/yeild
-Banks dont lend to the poor
Why do people in developing countries often have large families
kids are seen as additional income
support parents in old age
lack of family planning services.
health services, education, nutrition
infrastructure (sanitation, water
supplies, roads, power supplies and irrigation)
(conservation and regulation of the
environment to preserve environmental quality).
Breaking out of the poverty cycle
-Requires government intervention, investing in human capital, physical capital, and natural capital
-Government must take the necessary steps to ensure that poor people can participate in private sector activities, such as ensuring access to credit so that the poor can borrow to finance private investments.
-The public investments needed to break out of the poverty trap depend on the availability of government revenues. The whole country may be trapped in the cycle, e.g. sub-saharan africa
-Countries w no revenue may require foreign aid.
Diversity among economically less developed countries
Natural resource endowments: Countries differ in terms on natural resources (oil, natural gas, minerals, etc.) Some may have few or none. Some may be mountainous, some may be near the coast, some fertile, some deserts
Human and capital resource endowments: LEDC's tend to have more labour resources relative to capital. These factors affect their relative prices. Labour in LEDC's is cheaper than capital, and this is the opposite in developed countries. Also different qualities of resources.
-determining types and methods
of agricultural production, animal husbandry, and even labour productivity.
-For example, heat and humidity may reduce labour productivity, while tropical and subtropical
climates are known to reduce soil quality and negatively affect the health of both humans and animals
- Some acquired independence from colonies much later
-Difficult to reform
There is a very broad variety in types of political
systems, including monarchies, democracies, republics, oligarchies, and others, with varying forms of legal, constitutional and organisational arrangements.
-Elite groups within a society, whether these are landowners, industrialists or bankers, may
influence the kinds of development policies that
can be pursued, and these differ broadly among
-Refers to stable government and its ability to withstand forcible removal from power. The presence of political stability is associated with higher rates of growth and improved development outcomes for the following reasons:
-necessary for effective government decision-making and for implementing economic creating a stable economic environment.
-Political instability creates an environment of
uncertainty related to economic policy (tax property rights etc.), thereby reducing investments.
-Political instability often leads to an outflow of
financial capital as people seek safety for their
financial assets, depriving the country of its
scarce financial resources and contributing to
balance of payments deficits.
-Political instability increases vulnerability to
hunger and famine, as it deprives governments of
the capacity to provide relief, while resources are diverted to military or police activities.
leads to lo incomes
International development goals: Millennium Development Goals
-a global statement of commitment to eliminating extreme poverty, hunger, disease and environmental damage, through development
strategies based on the needs of the poor, human rights and sustainable development.
-targets to be achieved within a period of 15 years
Measuring economic development: The complexities of measuring economic development
-Not accurately reflected in any single measure
-Indicators: a measurable variable that indicates the state or level of something being measured
-Each indicator measures only one aspect
of development yet development is a multidimensional process - does not show overall progress
• Indicators are based on statistical information, and this poses a distinct set of problems:
-Some countries have a limited capacity for
collection of statistical data.
-Data are not fully available in many countries.
-Definitions of variables and methods used by
statistical services vary from country to country
-Indicators cannot always be precise and should be used as rough guides of trends over time or differences between countries, rather than as very precise measures.
a summary measure of several dimensions or goals of development.
Indicators are extremely useful for:
• monitoring how a country changes (develops) over time with respect to the attribute measured by the indicator
• making comparisons between countries with respect to the attribute
• assessing how well a country is performing with
respect to particular goals or targets of development (for example, an increase in the literacy rate indicates an improvement in educational level)
• devising appropriate policy measures to deal with
Single indicators: Comparing and contrasting GDP per capita and GNI per capita
-GDP is an indicator of the value of output produced within a country
-GNI is an indicator of the income (or value of output) received by the residents of a country, usually within a year
-For some countries the difference in the sizes of
GDP per capita and GNI per capita is not very large. This happens when inflows of income into a country are roughly balanced by income outflows, or if most of the production in a country is by factors of production owned by its residents
-When a country has many workers from other
countries (labour) who send part of their wages back home, or foreign corporations (capital) that send their
-GNI per capita is a better indicator of the
standards of living of a country, because it represents income per person received by the residents. GDP per capita is a better indicator of the level of output per person produced in a country.
-In most high-income countries, the difference
between the two measures is roughly plus or minus
-In middle and low income countries, the differences between GNI and GDP are often relatively small
why is LEDC GNI lower than GDP
In less developed countries, we often see greater differences between the two measures. Usually, these are due to multinational corporations sending their profits back home ('profit
repatriation'), thus making GNI smaller than GDP;
Define PPP's (purchasing power parities)
the amount of a country's currency that is needed to buy the same quantity of local goods and services that can by bought with US$1 in the United States.
Reason it is used: prices of goods and
services on average tend to be lower in countries with low per capita GDPs, and higher in countries with high per capita GDPs
Comparing and contrasting GDP per capita and GDP per capita in terms of PPPs
-GDP is not comparable between countries due to different price levels. Purchasing power of a specific amount is different in different countries
-They can be made comparable through PPP's (purchasing power parities) which are special exchange rates
-When the value of output is calculated in terms of US$ using exchange rates, it appears lower in the lower price country than in the higher price country, even though the quantity of output is the same.
How are GDP's compare
Comparisons of GDP per capita (or GNI per capita)
across countries require measures of per capita output or income based on conversions of national
currencies into US$ by use of purchasing power
parities (PPPs), to eliminate the influence of price
differences on the value of output or income.
-GNI per capita (or any other income or output
measure) is an insufficient indicator of health
-Limited resources, due to low GNI per capita, are
not always the most important cause of poor
health outcomes - resources can usually be reallocated to social services and merit goods to improve development
Comparing and contrasting health indicators
-Measure characteristics of populations related to health
-3 main health indicators: expectancy at birth, infant mortality and maternal mortality
-higher levels of GDP per capita (US$ PPP) tend to be linked with higher life expectancies, and lower infant and maternal mortalities. This is expected since higher income countries have more resources to provide the necessary services and appropriate living conditions for their populations.
There are exceptions to this, suggesting that income per capita is not the only factor that
high expectancy at birth, low infant mortality and low maternal mortality occur when
• adequate public health services
• adequate health care services with broad access by the entire population
• a healthy environment, including safe drinking
water, sewerage and sanitation, and low levels of
• an adequate diet and avoidance of malnutrition
• a high level of education of the entire population
• absence of serious income inequalities and poverty.
Health outcomes depend a lot on how well
countries achieve these objectives. (related to previous card) For example
• Low health outcomes in the United States may be due to inequalities in income and education resulting in pockets of poverty, connected to poor housing and living conditions, poor nutrition and health, and insufficient access to medical care (due to lack of medical coverage). Some people in america are deprived of the same things that people in developing countries do not have .
• Hight health outcomes in countries like Moldova and Sri Lanka (and many others) are due to government policies placing a high priority on public health and the provision of health care services for low-income groups, as well as on education.
• Low health outcomes in sub-Saharan African countries are due to a very large extent to the disastrous impacts of HIV/AIDS, as well as problems with sanitation, safe drinking water, lack of education and information, poor public health and health care services, and premature deaths due to diseases that are both preventable and treatable (such as malaria).
Life expectancy at birth
Number of years one can expect to live, calculated as the average number of years of life in a population
number of infant deaths from the time of birth until the age of one, per 1000 live births.
number of women who die per year as a result of pregnancy-related causes, per 100 000 live births
Comparing and contrasting education
-Measure levels of educational attainment
-Adult literacy rate: percentage of people aged 15 or more in the population who can read and write
-Primary school enrolment - measures the percentage of school-age children who are enrolled in primary school
-Secondary school enrolment- percentage of children enrolled in secondary school
-As income per capita increases, all three indicators tend to increase. There are many exceptions.
Why do some low income countries have high education ? (particularly with literacy rate and primary education)
-One reason: countries of the former Soviet Union and other former communist countries have very good education outcomes because historically, communist governments placed a high priority on education
-Primary education is prioritised to raise literacy rate, but they may not be able to promote secondary education due to resource/ fund scarcity
Countries can achieve universal literacy and universal primary education even if they have relatively low per capita incomes, provided their governments allocate enough resources to education services, and ensure that all children have access to these.
World Development Indicators (WDI)
(the World Bank)
The World Bank compiles a set of indicators known as the 'World Development Indicators' (WDI). As of 2011, there were over 900 indicators for 210 countries
-Summary measures of more than one dimension of development
-More accurate measures of development
-Carried out at the United Nations Development Programme (UNDP)
-Attempt to measure aspects
of human development
-Usually expressed as an 'index', or a set of numbers showing the relative position of a variable in a list
The Human Development Index (HDI)
-The best known and most widely used index of the UNDP
- measures average achievement in three dimensions measured by the following indicators:
• A long and healthy life is measured by life
expectancy at birth
• Access to knowledge is measured by mean years of schooling and expected years of schooling
• A decent standard of living is measured by GNI per capita (US$ PPP).
-Each dimension is expressed as a value between 0
and 1. The composite index is the average over the three dimensions.
-Each country receives an HDI value from 0 to 1, and the countries are ranked according to their HDI values.
example of countries have similar levels of human development with very different levels of GNI per capita
e.g. Norway and Australia have similar HDIs yet Australia has achieved this with a much lower GNI per capita.
Economic and human development issues
apply not only to developing countries, but to
developed countries as well.
pros and cons of governments using HDI to devise policies focusing on economic and human development
Pro's: far superior to single indicators as a measure of development
Con's: economic and human development are
much broader concepts with more dimensions
than are reflected in the HDI. The HDI does
not provide us with information about income
distribution, malnutrition, demographic trends,
unemployment, gender inequalities, political
- Inequality-adjusted Human Development Index:
measures human development in the same three dimensions as the HDI adjusted for inequality in each dimension. The IHDI attempts to measure losses in human development that arise from inequality.
Gender Inequality Index (GII)
measures inequalities between the genders in three dimensions: reproductive health, empowerment and in the labour market. It measures the loss in human development of women due to inequalities in these areas.
Multidimensional Poverty Index (MPI)
measures multiple deprivations in the areas of health, education and standard of living. It is a measure of human poverty, to be contrasted with income poverty, occurring when income falls below a nationally or internationally determined level