Fundamentals of economic development

Adam smith- first “development economist” and that his wealth of the nation, published in 1776

Economic development is like (Marxist and command economies) centralized socialist societies.

Development economics

- Concerned with the efficient allocation of existing scarce productive resources and
with their sustained growth over time

- It deals with economic, social, political, and institutional mechanisms.

- Unlike MDC’s (more developed countries), in LDCs (less Developed countries, most
commodities are highly imperfect, consumers and producers have limited information.

- Focuses on improving fiscal, economic and social conditions in developing

economies.

Why study Economic Development?

- Economic development is a social science. It is concerned with human beings and the
social system by which they organize their activities in material needs and non-material
things.

- Improve living standards and reduce poverty.

- Studying effective poverty alleviation strategies (process of making suffering less severe)
for achieving a more equitable and just society.

- Utilization of resources and investments

- Understand the social responsibility of the government in the economy.

Development means different things to different people; it is important at the outset that we
have some working definition and core perspective.
Economic development as a subject

Ww1 (1920) & Great Depression

- New interest among economists in the growth

- The Great Depression was a worldwide economic depression that lasted 10 years.

- There is no universally agreed-upon explanation for why the Great Depression happened,
but most theories cite the gold standard and the Federal Reserve's inadequate response as
contributing factors

- GDP during the Great Depression fell by nearly half.

The memory of the Depression also shaped modern theories of government and
economics and resulted in many changes in how the government dealt with economic
downturns, such as the use of stimulus packages, Keynesian economics, and Social
Security.

II. Measures For Development

Economic growth- refers to the increase of production of goods and services in the
economy. Usually measured by the rise of GDP. Therefore, it primarily focuses on the
quantitative aspect of the progress of the economy.

Economic development- it is a broader and more comprehensive concept. It encompasses

improvements in many aspects of well-being beyond GDP. It can also include several
factors such as distribution of income, accessibility of education. Healthcare, even the
infrastructure, and overall living standards. It aims to enhance the quality of life for a
population.

Economic growth vs. economic development

Economic growth Economic Development

refers to increases in a country’s production refers to economic growth accompanied by

(GDP; GDP) or income per capita. changes in output distribution and economic
structure.
BASIC TERMS

Gross Domestic Product (GDP): total output of goods and services produced in an economy
(or country) over a period of time.

GDP= C + I + G + (X-M)

Gross National Product (GNP): total output of goods and services produced by a country’s
resources over a period of time.

GDP= C + I + G + X + NFIA *Net Factor Income from Abroad.

GDP per capita: GDP divided by population

ECONOMIC CLASSIFICATION OF COUNTRIES

World bank classification

Developing Countries / Developed countries

Low income- less than $1,135

Lower middle income- less than $1,136- $4,465

Upper Middle Income- $4,466-$13,845

High Income- greater than $13,846

3rd world country- low- and middle-income economies

2nd world- socialists, centrally directed countries where the government owns the means of
production.

1st world- high income capitalist countries, where capital and land are owned by private entities.

Challenges in Comparing GNP of Developed and developing countries.

- GNP is understated for developing countries because a greater proportion of their goods
and services are produced within the home of a family.
- GNP may be understated for developing countries, where household size is substantially
larger than that in developed countries, resulting in household scale economies

Measures

1. Physical Quality of Life (PQLI)

Invented by M.D Morris in 1979

3 indicators

- Infant mortality

- Life expectancy (age one to not overlap with infant mortality)

- Adult literacy (the ability to read and write in any language)

The PLQI index is calculated by averaging the 3 indicators giving equal weight to each and
the index is also scaled from 0-100.
2. Human Development Index (HDI)

Invented by Lord Meghnad Desai and Nobel Laureate Amartya Sen. Incorporated it into its
first HDR in 1990.

UN development program defined as “a process of enlarging people’s choices. The most

critical ones are to lead a long and healthy life, to be educated and enjoy a decent
standard of living”.

3 indicators

- Longevity (measured by life expectancy as proxy for health and nutrition)

- Education (measured by adult literacy and combined primary, secondary and tertiary
enrollment ratio)

- Living standard (measured by GDP per capita

HDI was created to emphasize that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic alone.
3. “BASIC-NEEDS” attainment approach

Maximizing output to minimizing poverty. not only on how much is being produced but also on
what is being produced, in what ways, for whom, and with what impact.

Worl Bank set indicators (Hicks and streeten 1979:567-580)

- Food

- Education

- Health

- Sanitation

- Water supply

- Housing

High basic-needs attainment is positively related to the rate of growth of per capita GNP, as
increased life expectancy and literacy, together with reduced infant mortality, are associated
with greater worker health and productivity
ALTERNATIVE MEASUREMENT FOR DEVELOPMENT

1. Sen’s Capability Approach

- The Nobel laureate Amartya Sen’s (1999) freedom is the ultimate goal of economic life
as well as the most efficient means of realizing general welfare.

- “unfreedom” include hunger, famine, ignorance, an unsustainable economic life,

unemployment, barriers to economic fulfillment by women or minority communities, death,
violation to political freedom and basic liberty.

- The Capability Approach is defined by its focus on the moral significance of individuals’
capability of achieving the kind of lives they have reason to value.

- “Capability to function” is what really matters for status as a poor or nonpoor person.

- He also argues that poverty cannot be measured by income: what matter is not the
things a person has, but what a person is or can do.

The concept of “functioning” reflects the various things a person may value doing or being.

The Capability Approach attempts to address various concerns that Sen had about
contemporary approaches to the evaluation of well-being,

(1) Individuals can differ greatly in their abilities to convert the same resources into valuable
functionings (‘beings’ and ‘doings’). For example, those with physical disabilities may need
specific goods to achieve mobility, and pregnant women have specific nutritional requirements
to achieve good health. Therefore, evaluation that focuses only on means, without considering
what particular people can do with them, is insufficient.

(2) People can internalize the harshness of their circumstances so that they do not desire what
they can never expect to achieve. This is the phenomenon of ‘adaptive preferences’ in which
people who are objectively very sick may, for example, still declare, and believe, that their health
is fine. Therefore, evaluation that focuses only on subjective mental metrics is insufficient
without considering whether that matches with what a neutral observer would perceive as their
objective circumstances,.

(3) Whether or not people take up the options they have, the fact that they do have valuable
options is significant. For example, even if the nutritional state of people who are fasting and
starving is the same, the fact that fasting is a choice not to eat should be recognized. Therefore
evaluation must be sensitive to both actual achievements (‘functionings’) and effective freedom
(‘capability’).
(4) Reality is complicated and evaluation should reflect that complexity rather than take a
short-cut by excluding all sorts of information from consideration in advance. For example,
although it may seem obvious that happiness matters for the evaluation of how well people are
doing, it is not all obvious that it should be the only aspect that ever matters and so nothing else
should be considered. Therefore, evaluation of how well people are doing must seek to be as
open-minded as possible.

2. Millennium Development Goals (2000-2015)

- 1. To eradicate extreme poverty and hunger

- 2. To achieve universal primary education

- 3. To promote gender equality and empower women

- 4. To reduce child mortality

- 5. To improve maternal health

- 6. To combat HIV/AIDS, malaria, and other diseases

- 7. To ensure environmental sustainability

- 8. To develop a global partnership for development

3. Sustainable Development Goals (2015-2030)

SDG 1: No Poverty

Eradicating extreme poverty for all people everywhere by 2030. Extreme poverty, defined as
surviving on less than $2.15 per person per day at 2017 purchasing power parity, has witnessed
remarkable declines over recent decades.

SDG 2: Zero Hunger

about creating a world free of hunger by 2030.The global issue of hunger and food insecurity
has shown an alarming increase since 2015, a trend exacerbated by a combination of factors
including the pandemic, conflict, climate change, and deepening inequalities.

SDG 3: Good Health and Well Being

Ensuring healthy lives for all requires a strong commitment, but the benefits outweigh the cost.
Healthy people are the foundation for healthy economies. Countries worldwide are urged to take
immediate and decisive actions to predict and counteract health challenges.

SDG 4: Quality Education

The aim is to provide equal access to affordable vocational training, eliminate gender and
wealth disparities, and achieve universal access to quality higher education.

SDG 5: Gender equality

necessary foundation for a peaceful, prosperous and sustainable world. Sexual violence and
exploitation, the unequal division of unpaid care and domestic work, and discrimination in public
office, all remain huge barriers. All these areas of inequality have been exacerbated, there has
been a surge in reports of sexual violence, women have taken on more care work due to school
closures, and 70% of health and social workers globally are women.

SDG 6: Clean Water and Sanitation

Access to safe water, sanitation and hygiene is the most basic human need for health and
well-being. Billions of people will lack access to these basic services in 2030 unless progress
quadruples. Demand for water is rising owing to rapid population growth, urbanization and
increasing water needs from agriculture, industry, and energy sectors.

SDG 7: Affordable and Clean Energy

ensuring access to clean and affordable energy, which is key to the development of agriculture,
business, communications, education, healthcare and transportation. A well-established energy
system supports all sectors: from businesses, medicine and education to agriculture,
infrastructure, communications and high technology.
SDG 8: Decent Work and economic growth

promoting inclusive and sustainable economic growth, employment and decent work for all.
Achieving Goal 8 will require a wholesale reform of the financial system to tackle rising debts,
economic uncertainty and trade tensions, while promoting equitable pay and decent work for
young people.

SDG 9: industry, innovation and infrastructure

seeks to build resilient infrastructure, promote sustainable industrialization and foster innovation.
Inclusive and sustainable industrialization, together with innovation and infrastructure, can
unleash dynamic and competitive economic forces that generate employment and income.

SDG 10: reduced inequalities

Inequality threatens long-term social and economic development, harms poverty reduction and
destroys people’s sense of fulfillment and self-worth. We cannot achieve sustainable
development and make the planet better for all if people are excluded from the chance for a
better life.

SDG 11: sustainable cities and communities

making cities and human settlements inclusive, safe, resilient and sustainable. Sustainable
development cannot be achieved without significantly transforming the way urban spaces are
built and managed.

SDG 12: Responsible Consumption and Production

ensuring sustainable consumption and production patterns, which is key to sustain the
livelihoods of current and future generations. A successful transition will mean improvements in
resource efficiency, consideration of the entire life cycle of economic activities, and active
engagement in multilateral environmental agreements.

SDG 13: climate Action

Urgent and transformative going beyond mere plans and promises are crucial. It requires raising
ambition, covering entire economies and moving towards climate-resilient development, while
outlining a clear path to achieve net-zero emissions. Immediate measures are necessary to
avoid catastrophic consequences and secure a sustainable future for generations to come.

SDG 14: Life below water

conserving and sustainably using the oceans, seas and marine resources. Healthy oceans and
seas are essential to human existence and life on Earth.
SDG 15: Life on Land

conserving life on land. It is to protect and restore terrestrial ecosystems, sustainably manage
forests, combat desertification, and halt and reverse land degradation and stop biodiversity loss.

SDG 16: Peace, Justice, and strong institution

promoting peaceful and inclusive societies, providing access to justice for all and building
effective, accountable and inclusive institutions at all levels. People everywhere should be free
of fear from all forms of violence and feel safe as they go about their lives whatever their
ethnicity, faith or sexual orientation.

SDG 17: Partnership and Goals

revitalizing the global partnership for sustainable development. The 2030 Agenda is universal
and calls for action by all countries – developed and developing – to ensure no one is left
behind. It requires partnerships between governments, the private sector, and civil society.

4. Happiness and wellness as measure of socio-economic development

Gross national happiness index

- Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan,
Jigme Singye Wangchuck in 1972.

- The concept implies that sustainable development should take a holistic approach towards
notions of progress and give equal importance to non-economic aspects of wellbeing.

- single number index developed from 33 indicators categorized under nine domains.

III. Characteristics of Development

Varying Income Inequality

- income inequality frequently follows an inverted U-Shaped Curve, First Increasing (from
low-to middle-income countries), and decreasing (from middle-to high-income countries).

Political Framework

→ Varying Political Systems

- Political rights mean not just a formal electoral procedure but that “the voter [has] the
chance to make a free choice among candidates... and candidates are chosen
independently of the state.” Civil liberties implies having rights in practice, and not just a
written constitutional guarantee of human rights.
→ small political elite
- Political Control in LDCs tends to hold a relatively small political elite. Political leaders-
traditional princesses and chiefs, high ranking military- and leading professionals.
→ low political institution
- Economic modernization is an often problem/ dilemma for the political elite.
- the process of modernization breeds instability

An extended Family

- The extended family, including two or more nuclear families of parent(s) and children, is
a common institution in developing countries.

Peasant Agricultural Societies

- Peasant agricultural societies are mostly low-income countries. They are rural
cultivators. Also, they do not run business enterprises but , rather, a household whose
main concern is survival.

Inadequate technology and capital

- Lack of equipment, machinery, and other such capital and low levels of technology, at
least throughout most of the economy, hinder production.
- Production methods in most sectors are traditional.

A Dual Economy
- Virtually all low-income countries and middle-income countries are Dual Economies.
These economies have a traditional , peasant, agricultural sector, producing primarily for
family or village subsistence.
- According to the Lewis model, the dual economy grows only when the modern
sector increases its output share relative to the traditional sector (Lewis
1954:139–191).

According to Nobel Laureate Douglass C. North, “institutions are the rules of the game of a
society composed of the formal rules (constitutions, statute and common law, regulations),
the informal constraints (norms, conventions, and internally devised codes of conduct)
and the enforcement characteristics of each. Together they define the way the game is played.”

Many low-income countries, especially in Africa, are characterized by predatory rule, involving
a personalistic regime ruling through coercion, material inducement, and personality politics,
which degrades the institutional foundations of the economy and state.). Examples of predatory
regimes include Congo’s and Nigeria’s Sani Abacha, whose predation was limited because
federalism enabled states to provide public services separate from his patronage.
Neopatrimonial or predatory rulers may not be interested in reform emphasizing rule of
law, as it would eliminate an important source of patronage (Sandbrook 2002:166). But a
political elite interested in accelerating growth should put a priority on legal and bureaucratic
reform.

Insufficient State Tax collection and Provision of Basic Services

- One important institutional capability is the capacity to raise revenue and provide basic
services.

POOR GOVERNANCE: DEMOCRATIC AND AUTHORITARIAN REGIMES

- Democracy enhances and authoritarianism reduces openness and accountability.

Democratization includes the growth of civil society – institutions independent of the state,
such as private and nongovernmental entities such as labor unions, religious organizations,
educational and scientific communities, and the media. Social capital includes tools and
training that, similar to other forms of capital, enhance individual productivity.

Rent seeking
- an unproductive activity to obtain private benefit from public action and resources. This
activity ranges from legal activity, such as lobbying and advertising, to illegal bribes or
coercion.

Clientelism or patrimonialism
- the dominant pattern in many LDCs is a personalized relationship between patrons and
clients, commanding unequal wealth, status, or influence, based on conditional loyalties
and involving mutual benefits.

Patrimonialism
- associated with the power of government used to reward the rent-seeking behavior of
political insiders, the ruler’s acquiescence in the misappropriation of state funds and the
nonpayment of taxes by political cronies

INSECURE PROPERTY RIGHTS

- A major institution associated with development is laws and mores pertaining to the
rights of property owners and users.

Inadequate property and use rights for traditional systems.

- Property rights usually assign the rights to and rewards from using resources to
individuals, thus providing incentives to invest in resources and use them efficiently
COMMON CHARACTERISTICS OF DEVELOPING COUNTRIES

Developing Country
- A developing country, in the simplest terms, is a nation working towards improved
industrialization, economic stability, and enhanced living standards for its
populace.
- A developing country, often referred to as a less low-income country or an emerging
market, is a nation that is in the process of strengthening its economic, political, and
social structures.

1. Lower per Capita

- It refers to the average income per person in a given country. For instance, in countries
like Nepal or Malawi, the GDP per capita is significantly lower than in high-income
countries, such as Switzerland or Norway. This gap in income levels is often a result
of a variety of factors, including lower levels of industrialization, technological
advancement, and human capital.

2. Poverty rate
- A substantial portion of the population in these nations lives below the international
poverty line. Take, for example, Zambia, where over 50% of the population is considered
to be living in poverty. This poverty can often be traced back to systemic issues like
unequal wealth distribution and limited access to quality education and healthcare.

3. High dependence on Agriculture

- Developing nations often exhibit a higher reliance on the agricultural sector for their
economic output and employment. For example, in Bangladesh, a significant proportion
of the population is engaged in farming, contributing to a large share of the
country's GDP. However, this dependence can expose these economies to risks
such as volatile global commodity prices and climatic uncertainties.

4. High Population Growth Rate

- Rapid population growth can strain public services like education and healthcare,
thereby posing challenges to sustainable development.

5. Lower level of human capital

- Limited human capital can be attributed to various factors, including inadequate
education systems, lack of investment in skills training, and limited access to
quality health care, which affects the population's overall well-being and capacity to
contribute productively to society.
Diversity of developing country
1. Resource endowment/ natural resources and economic development
- its rate of growth is determined by human behavior and human institutions: by such
things as energy of mind, the attitude towards material things, willingness to save and
invest productively or the freedom and flexibility of institutions.”
- There is tendency to assume that LDC must be poorly endowed with resources both
physical and human.
- Endowment in terms of physical resources can vary immensely developing countries

2. Historical background
- The historical development of political and economic institutions has a profound impact
on economic development. For example, nations with a history of stable and inclusive
institutions tend to experience more sustained economic growth, as they provide a
conducive environment for investment, property rights, and economic activity.
- Historical cultural norms and social structures can influence economic development.
Values, beliefs, and traditions can shape economic behaviors, such as entrepreneurship,
work ethic, and attitudes toward risk, all of which have.
- history and economic development are deeply intertwined, with the past influencing the
present and shaping the path to the future. A comprehensive understanding of this
connection is vital for addressing the complexities of economic development, promoting
sustainable growth, and fostering social well-being

3. Geographical and demographic factors

- Geography significantly impacts economic development by influencing resource
availability, transportation networks, market access, and the types of industries that can
thrive in a region.
- It allows governments and businesses to make informed decisions on resource
allocation and economic strategies, enhancing the overall development of economies.
- Geography decides where resources like minerals and fertile land are. Nations with
these resources often grow economically by using them for industries.
- Geography can impact the economy in various ways, this includes access to natural
resources, location and accessibility, climate and agriculture, tourism, urbanization and
infrastructure, and political stability.

4. Religion and ethnic background

- High levels of ethnic and religious diversity within a country make it more likely that there
will be political unrest and internal conflict.
- When religion shapes social change, the effect of development transcends the physical
and material by reaching what is more important to people.

5. Industrial structure
- Economically, industrialization strengthened capitalism and shifted the world from an
agrarian economy to a manufacturing economy, where specialization and division of
labor played an integral part.
 - The increase in productivity and efficiency allows for mass production which lessen cost
and increases accessibility.
- Wages for the industrial sector are typically higher than the traditional sector, people
have access to more income which increases their standards of living.
-
6. Social structure
- is the organized set of institutions and patterns of institutionalized relationships that
together composed society
- Social structure is the concrete relations among concrete individuals and concrete
groups
7. Political structure
- The framework for economic activity is provided by the political structure. An
environment conducive to economic development is created by a stable, well-governed
political system that fosters the rule of law, type of system, political stability,
regulation and bureaucracy, and quality of an institution. On the other hand, it can
stifle economic progress and discourage investment. As a result, the relationship
between a country's political system and economic development is critical to its
prosperity and well-being.

IV. Theories of Economic Development

1. Classical Development Theories

David Ricardo - According to David Ricardo, The

classical theory, in Principle of
economy and taxation, it was
pessimistic about the possibility of
sustained economic growth.
- He also assumed little continuing
technical progress, growth was limited
by land scarcity.
- A major tenet of Ricardo was the law
of diminishing returns, referring to
successively lower extra outputs from
adding an equal extra input to fixed
land. For him, diminishing returns
from population growth and a
constant amount of land threatened
economic growth.
-
Adam Smith - In the late 18th century, Smith argued
that in a competitive economy, with
no collusion or monopoly, each
individual, by acting in his or her
own interest, promoted the public
interest.

- It was as if an invisible hand were

behind the self-interest of
capitalists, merchants, landlords,
and workers, directing their actions
toward maximum economic growth

- Smith advocated a laissez-faire

(governmental noninterference) and
free-trade policy except where labor,
capital, and product markets are
monopolistic, a proviso some
present-day disciples of Smith
overlook.

Thomas Malthus - The Malthusian theory explained

that the human population grows
more rapidly than the food supply
until famines, war or disease
reduces the population.

- Population growth continues to

reduce wages until they reach the
subsistence level once again. On
the other hand, a wage below
subsistence increases deaths and
eventually contributes to a labor
shortage, which raises the wage.

- Population decline increases wages

once again to the subsistence level.
Historical Materialism By Karl Marx
- He wanted to replace the unhistorical approach of the classicists with a historical
dialectic. Marxists consider classical and later orthodox economic analysis as a still
photograph, which describes reality at a certain time.
- In contrast, Dialectical approach, looks at a social phenomenon by examining where
it was and is going and its process of change

History moves from one stage to another, say, from feudalism to capitalism to socialism,
on the basis of changes in ruling and oppressed classes and their relationship to each
other.

- The interaction between forces and relations of production shapes politics, law,
morality, religion, culture, and ideas.

Marx’s main analysis was of capitalism, but his discussions of socialism and communism were
not well developed. Even his analysis of capitalism, and the transition to socialism, had a
number of flaws. He had theorized worker revolt in the industrialized West, but the revolution
occurred first in Russia, one of the least developed capitalist countries in Europe.

Rostow’s Stages of Economic Growth

Rostow’s economic stages are
1. the traditional society
- It is based on attitudes and technology prominent before the turn of the 18th century.

2. the preconditions for takeoff,

- includes radical changes in three nonindustrial sectors:
- (1) increased transport investment to enlarge the market and production specialization
- (2) a revolution in agriculture, so that a growing urban population can be fed
- (3) an expansion of imports, including capital, financed perhaps by exporting some
natural resources.

3. the takeoff
- During this stage, barriers to steady growth are finally overcome, while forces
making for widespread economic progress dominate the society, so that growth
becomes the normal condition.

4. the drive to maturity

- The drive to maturity, a period of growth that is regular, expected, and
self-sustained, follows takeoff. A labor force that is predominantly urban, increasingly
skilled, less individualistic, and more bureaucratic and looks increasingly to the state to
provide economic security characterizes this stage.
 5. the age of high mass consumption
- e the automobile, suburbanization, and innumerable durable consumer goods and
gadgets. In Rostow’s view, other societies may choose a welfare state or international
military and political power.
-
Unlike Marx’s dialectical materialism, Rostow’s approach does not show how the
characteristics and processes of one stage move a society to the next stage.

Rostow is ethnocentric when he chooses a high mass consumption society,

characterized by automobiles, suburbanization, and consumer gadgets, as the
culminating stage of economic growth.

VICIOUS CYCLE THEORY

- indicates that poverty perpetuates itself in mutually reinforcing vicious circles on both
the supply and demand sides.

Supply Side
- consumption cannot be diverted to saving for capital formation because the incomes are
low.
- Lack of capital results in low productivity per person, which perpetuates low levels of
income. Thus, the circle is complete. A country is poor because it was previously too
poor to save and invest.
Demand Side
- Because incomes are low, market size is too small to encourage potential investors.
- Lack of investment means low productivity and continued low income.
- A country is poor because it was previously too poor to provide the market to spur
investment.

BALANCED VERSUS UNBALANCED GROWTH

Balanced
- It can vary from the absurd requirement that all sectors grow at the rate to the more
sensible plea.
- However, absurdities aside, the discussion raised some important issues.
- According to Ragnar Nurkse, he considers this strategy the only way of escaping from
the vicious circle of poverty. He does not consider the expansion of exports promising,
because of the price elasticity of demand for LDCs.

BIG PUSH THESIS

- Those advocating this synchronized application of capital to all major sectors support the
big push thesis, arguing that a strategy of gradualism is doomed to failure.
- A substantial effort is essential to overcome the inertia inherent in a stagnant economy.
The Lewis–Fei–Ranis Model
- It explains how economic growth gets started in a less-developed country with a
traditional agricultural sector and an industrial capitalist sector.

- In the Lewis–Fei–Ranis model, economic growth occurs because of the increase in

the size of the industrial sector, which accumulates capital, relative to the
subsistence agricultural sectors, which amasses no capital at all.

- The source of capital in the industrial sector is profits from the low wages paid an
unlimited supply of surplus labor from traditional agriculture

He believed in zero marginal productivity of labor in subsistence agriculture, virtually without

capital and technological progress. Also, he elaborates on this explanation in his explanation of
labor transfer from agriculture to industry in a newly industrializing country.