1.

DEVELOPMENT IN HISTORICAL PERSPECTIVE

1.1 INTRODUCTION: DEVELOPMENT ECONOMICS

1.1.1 THE REPRESENTATION OF THE WORLD

Mercator projection:

- Main critique is the overrepresentation of the continents that are at the north of the
equator (where developed countries are located), at the expense of the southern
countries (where underdeveloped countries are located).
- The reason for this is attributed to be colonial reasons. However, the goal was to
make a projection that best shows the navigation rutes. If colonial goals were behind
these projection, the most overrepresented country would not be Greenland

Peter’s projection:
Better represents the size of continents. However, the form of continents is horrendous.

Robinsons:
Solves the problem of surface, with a better placement to countries relative to others

Winkel: Average of the to minimize the problems of each projection.

1.1.2. THE CONCEPTS OF DEVELOPMENT AND UNDERDEVELOPMENT

The terms first, second and third world, come from the Cold War.
- Firts: Capitalist countries
- Second: Communist countries
- Third: Non alignated countries

Delince in “terms of trade”: The deterioration of the general price of your exports in
comparison with the general price of your imports.
- If the cheepening is the result of a increasing productivity, is good, you are gonna sell
more without a decrease in benefit margins. However, it is bad if the reason was a
decrease in demand.

1.2. NORTH-SOUTH RELATIONS: FROM BRETTON-WOODS TO

GLOBALIZATION

Development economics as a discipline, starts after WW2, because

- The decolonization process starts and therefore the colonies become “the poor
countries”. Now that they are independent, how do they develop?
- Developed countries also cared about the development of these countries.
Economics as a science is more developed in developed countries. It was a
question that academics of developed countries also wanted to answer
- New "rules of the game" for trade and the financial system were established.
- The Bretton Woods institutions were created:
- The World Bank: for post-war reconstruction and development. Later, it would
become a Development Bank for the countries of the South.
- The International Monetary Fund:
- Ensuring exchange rate stability
- Harmonizing exchange rate policies
- Provide resources to countries with "temporary" liquidity problems

1.2.1. DECOLONIZATION

There was not a political dependency between Latin-Center America and Spain, they were
part of the empire. Therefore, we cannot talk propiamente about “decolonization” in Latin-
Center America. Whereas African and Asian countries were not part of the empire, they
were not considered part of the main territory.

1945-55: Increasingly deeper integration of Asian countries wanting to make a block against
developed countries. With Bretton Woods they saw developed countries were tryng to solve
the problems and not the general ones. Even if Asian countries did not have the same
interests, they had a common one -> Trade agreements & Afterwards Bandung conference
- Bandung conference (1955):
- Brings together independent Afro-Asian nations for the first time
- 23 Asian countries and 6 African countries
 - The origin of the Non-Aligned Movement (1961), a movement of 120 member
states that promotes the sovereignty and defends the interests of these
countries in the international economic order
- They created in 1964 the UNCTAD (United Nations Conference on
Trade and Development). Which created the Group of 77 (G-77), the
largest coalition of third world countries at the United Nations.

1.2.2. AN OVERVIEW OF THE INTERNATIONAL CONTEXT

1950-1960: The golden years

- Unprecedented economic growth (+5% GDP per capita in developed countries)

- Mass consumer society is born in developed countries
- Optimism: The era of limitless expectations
- Modernization is the desirable goal, an all countries can acces to it
- From this historical experience, it is necessary to understand the hegemonic
conception of development in the last 50 years.
- Development policy (development strategies have three elements):
- Mobilization of external capital
- Keynesian thinking: Leadership of the state if the market does not respond
- The national character of development processes
- International cooperation for development was conceived to promote this model
- Goals: reconstruction assistance & supply northern countries with raw
materials from Southern countries

- Non Aligned Movement & G-77

- Dissatisfaction with the paradigm of industrialized countries in the South:
- Difficulties in industrialization & social development does not occur
- Disillusionment with modernization theories as it is not possible to catch up
with the developed countries -> Heterodox critical theories emerge, such as
the dependency school, which stresses that Third World development is
dependent, distorted and blocked
- Dissatisfaction with the paradigm of industrialized countries in the North:
- Struggle for black civil rights: Martin Luther King, Malcolm X, Angela Davis,...
- Early concerns about pollution: harmful effects of pesticides
- Unrest among middle-class women in the U.S. emerges

1970s: The limits of growth and debt

The ecological limits of growth

- Meadows Report: The Limits to Growth
- Main idea: If current trends of population growth, pollution and resource consumption
countinue, there will be a decline in population and industrial capacity
- Opiniñoi emotian galderak ahal dabenez ein, opiniñoi honei buruz:
- “The limits of resources”
 - The physical amount of resources does not matter. The amount
regarding productivity is what matters. If a machine needs half of its
resources, it is as if the amount of resources has doubled.
- The less available a resource is, the higher the price. Therefore
incentives to discover a new one are bigger.
- Therefore, there will not be a lack of resources, and if policies limit
their counsumption, the population will be empovrerished for no
reason. In the XIX century, the great economist W.S.Jevons, thought
coal was about to disappear. Therefore he proposed measures to limit
its use. If implemented, humanity would be poorer for no reason.
- Anyone who thinks that a given resource is going to almost disappear
in the future, should invest in it because he would become rich
because the price of that resource would be enormous.
- “Population is a problem”
- Lack of population growth is a problem, because innovation decreases
- The innovation is what ensures that resources are properly distributed,
better used and found

Debt-led growth in many countries of the South:

- During the 1970s, many developing countries experienced high growth rates, but this
was partly driven by borrowing from developed countries as a result of the
successive oil shocks (1973 and 1979).
- This would lead to major problems in the following decade.

1980s: The lost decade The growing heterogeneity of the Third World

Indebted countries bore the costs of northern restructuring. Due to the oil crisis, the north
increased interest rates to reduce inflation, which apreciated exchange rates, which made
the payment of the debt by the south more expensive.

Our Common Future (also known as the Brundtland Report) (by World Commission on
Environment and Development) (1987):
- Critical view of the development model.
- Incompatibility between the production and consumption models in industrialized
countries and natural resources and the carrying capacity of ecosystems.
- It incorporates a definition of sustainability that has become a benchmark: a
development model that meets the needs of the present without compromising the
ability of future generations to meet their own needs.

1990s: Adjustment

In 1989, the Berlin Wall fell and the USSR subsequently disintegrated: the Cold War ended
and international relations changed. Capitalism was asumed to be the only viable economic
system (Thatcher: "There is no alternative").

Consecuences of adjustment policies in the Third World:

 - The World Bank and the IMF set conditions in the indebted countries of the South for
obtaining new loans
- Social spending cuts (austerity)
- Currency devaluation
- Market opening: Liberalization of trade and foreign direct investment.
- Balanced budget
- Privatizations
These adjustment programs were criticized for their social repercussions (increased
poverty, inequality) and for the loss of national sovereignty

The failures of adjustment policies (Washington Consensus) and globalizing processes

opened up new debates and approaches less linked to the idea of growth:
- Different types of social concerns (poverty)
- Human development (linked to the basic needs of the '70s): “Well-being should relate
primarily to people's ability to live a dignified life and satisfy their needs”
- Recognition of the role of institutions
- Environmental Issues, sustaniable development
- Gender issues
2. THEORIES OF DEVELOPMENT

2.1. BASIC CHARACTERIS OF PARADIGMS OF DEVELOPMENT ECONOMICS

Eurocentrism: "Developed" Western societies are the model to imitate. Through a linear
process, which necessarily involved economic growth, "undeveloped" or "underdeveloped"
countries could achieve modernstandards of living and welfare.

Economicism: Economic growth would have positive spillovers on the entire social structure
and would determine transformations in the political and cultural order to enable enjoying
improvements in the quality of life.

2.2. THE ORIGINS: ACCUMULATION AND INDUSTRIALIZATION

2.2.1 PIONEERS IN DEVELOPMENT

- When: 40-70s (more 50-60s)

- Main authors: Rosenstein-Rodan, Nurkse, Hirschman, Myrdal
- Where focus of attention: East Europe, Asia, Latam
- Critiques to predecessors:
- Reject monoeconomics: there is no single economic theory valid for the
analysis of any kind of real situation. Therefore, they propose a different set of
instruments from those created for developed economies.
- Main ideas
- Vicious circle of undevelopment: Low level of savings and investment ->
slow/no capital accumulation -> low productivity -> low average income -> low
level of savings
- Development = economic growth. No other considerations
- Proposals:
- Capital accumulation (increasing national savings and investment or atracting
foreign one) via state intervention
- Industrialization (mobilize resources to modern sectors with high productivity)
- Protection of the domestic market, because international trade may lead in
exporting raw materials and due to the limited demand, in the long term
relative price of raw materials would decrease
- Criticism to pioneers
- Excessive emphasis on capital accumulation. Accumulation could lead to
huge inequalities (Kuznets' inverted U), but these are not considered
- They do not contemplate the role of agriculture.
- Export pessimism
- Overconfidence in the role of the State
- They follow the "modernizing theory", whereby the implicit objective is to
follow the guidelines of developed countries, even though developing
countries have particular circumstances.
2.2.1.1 Rostow and the stages of growth

Rostow understands development as a linear historical process

- Traditional society: No savings (what is saved is consumed, at most in few months),
Dominated by bug land propietarios
- Preconditions for take-off: Start of the financinantial system (the banking system and
therefore some saving), new entrepreneurs,...
- Take-off (20-25 years): the conditions for growth have apeared: productive
investment (saving and investment of it, from 5% of the national wealth to the 10%),
fast development of a few sectors, social and institutional development and
consolidation that renforces this growth
- Road to maturity: increase of the GDP per capita, diversificarion of the national
industry, upgrade of national technology
- Mass consumptipn: enough production for mass consumptipn and new needs apear
(enviroment, free time, sports, mental health,...) (which may have been forgotten in
the process form traditional to mass consumptipn)

2.2.2 LATIN AMERCIAN STRUCTURALISM

- When: 40-70s
- Main authors: Prebisch, Singer, Sunkel
- Where focus of attention: Latam (& Asia)
- Critiques to predecessors (pioneers):
- It is not only about capital accumulation
- Main ideas
- Skepticism about beneficial market effects
- Emphasis on structural change
- Concerns about resource ownership and control
- Emphasis on the dynamic aspects of technology
- Central role for capital accumulation
- Proposals:
- Import Substitution Industrialization (ISI): Promoting (via state) domestic
manufacturing of industrial consumer goods instead of importing them.
- Did not end up succeeding
- Too narrow domestic markets
- Borrowing on international markets
- Inefficient techniques
- Savings rates too low
- Increasing inequalities

Prebisch-Singer thesis: Prices of manufactured goods are more elastic to wage whereas
prices of primary ones are more rigid. Therefore in the long term (where income increases)
relative prices of manufactured goods will decrease
- Critique:
- Modern reality shows the contrary, labour intensive manufactured goods have
become cheaper and global commodity prices increase
- Especially since globalization, terms of trade improved for commodity exporte
"Dutch disease" is an economic term that describes the negative consequences that can
arise from a spike in revenue from natural resources:
1. Appreciation of the Currency: A surge in revenue from natural resources leads to an
influx of foreign currency, which causes the domestic currency to appreciate making
it less competitive in the global market.
2. Decline in Manufacturing and Other Sectors: As the currency appreciates, industries
such as manufacturing and agriculture, which are not benefiting from the resource
boom, become less competitive. This often leads to a decline in these sectors, as
they struggle to compete with cheaper foreign goods and services.
3. Economic Dependence on Natural Resources: The economy becomes increasingly
dependent on the natural resource sector, which can be problematic if the resource
prices fall or the resources are depleted. This can lead to economic instability and
reduced long-term growth prospects.
4. Inflation and Wage Increases: The resource boom can lead to higher inflation, as the
increased wealth and demand for goods and services push up prices. Additionally,
wages may rise in the booming sector, attracting labor away from other sectors and
causing labor shortages and increased costs there.
5. Structural Imbalances: The economy can develop structural imbalances, with an
over-reliance on the resource sector and underinvestment in other areas, leading to a
less diversified and more vulnerable economy.

2.2.3. DEPENDENCY THEORY

- When: 60-70s
- Main authors: Baran, Sweezy, Gunder Frank, Wallerstein
- Where focus of attention: Global perspective
- Critiques to predecessors (latam structuralism & pioneers):
- National strategy is not enough for development
- Main ideas
- Rejects that underdevelopment is a phase prior to to development
- Capitalism has become an obstacle to the progress of the Third World.
- International economic relations have given rise to the dependence of
underdeveloped capitalist countries
- Proposals:
- Anticapitalism

2.2.4. BASIC NEEDS

- When: 70s
- Critiques to predecessors:
- Output level is not enough to capture the level of development
- Growth in aggregate output does not reduce poverty and inequality
- Main ideas:
- The goal is the real satisfaction of some material needs (food, education…),
not production. The people are in the center, not production.
- Proposals:
- Redistributive policies to ensure the satisfaction of basic needs of everyone
- Set less abstract objectives
- Criticism to the Basic Needs school
 - The objectives that were set were sometimes unrealistic
- It was unclear how the adoption of a basic needs strategy would affect growth
and structural change if countries specialize in labor-intensive sectors.
- This strategy deviates from the objective of fighting for a New International
Economic Order.
- Development is approached by focusing on the production of consume goods

2.3. BEYOND GROWTH: HUMAN DEVELOPMENT

- When: 90s-On
- Main authors: Amatya Sen, Mabub UI Haq, Nussbaum
- Critiques to predecessors:
- Development is not about material consumption or production, but about
capabilities
- Main ideas:
- The process of achieving wellness involves a series of phases:
- Availability of goods and services
- Capabilities of individuals (freedom): outcomes should be freely
chosen by the individual according to what he/she believes are best
for his/her wellbeing
- Functionings of people (achievements): the results achieved in
people; having assets is not the same as achieving well-being.
- Human development is: The expansion of the real freedoms that people enjoy
to choose the things they consider valuable or to eliminate sources of
deprivation (economic poverty, lack of services, violation of freedom).
- Creating an environment in which people can fully realize their
potential and live productively and creatively in accordance with their
needs and interests -> Definition of welfare
- People are the true wealth of nations. Development consists in
expanding the options they have to live according to their values.
- Proposals:
- United Nations Development Programme (Human Development Reports)
- Annually adresses key development issues, provides indicators and
proposes policies
- The main indicator is Human Development Index
- Policies to develop capabilities, i.e democracy

2.4. FACTORS FOR DEVELOPMENT

2.4.1 INSTITUTIONS

Institutions: rules that are commonly agreed and govern behavior (family, money,...). They
provide a framework of security and reliability regarding and to individuals and organizations,
reducing uncertainty (i.e. “school starts at 8:30”).
- Formal: laws, regulations, policies
- Informal: generally shared unwritten social rules, i.e traditions, conventions
Their role in development:
- They favor long-term development
- They affect the conditions under which economic activity takes place (in a
market economy, though companies, market laws,...)
- They affect the economy through political issues of redistribution and "state
effectiveness"
- Institutions condition our life choices, they favour certan actions and discoura others

Institutions ≠ Organizations
- Institutions: the rules of the game
- Organizations: the players

Institutional change: Institutions dont change radically but progressively. Instituions are not
only oficial rules, also traditions and expectations.
- Three impirtant ways institutions change (all must be present) (Ha-Joon Chang)
- Imitation. Advantage: no need to wait years/decades to verify that they work,
as you imitate only the good ones
- Adaptation. i.e. Japan imitated western institutions with local adjustments
- Innovation
+
Democracy would be a macroinstition for development if we accept the definition of amatya
sen of liberty as capabilities: its rules allow citizens to take actions in favor of the extension
and expansion of instrumental freedoms

Varaieties of Capitalism (Hall-Soskice) due to different institutions:

- Coordinated market economies: Firms coordinate with each other and other agents
via non market mechanisms (industrial relationships, interfirm relations,
education/training corporate governance)
- Higher amount of trade union membership, as they act to solve
- Firms implement their own upgrading educational system
- Firms invest with their own funds and if is not enough go to the banking
system
- Liberal market economies: Firms coordinate with each other and other agents via
market mechanisms
3. POVERTY & INEQUALITY

3.1 CONCEPS

- Inequality: refers to the distribution within a population group.

- Poverty: the different forms of deprivation that can be expressed in many ways.
- Inequality is often a root cause of poverty -> Poverty analysis uses inequality
indicators because of the close relationshipbetween the two processes.

Kuznets curve: graphical representation of how "economic inequality increases over time
when a country has economic growth up to a certain level of income, after which it begins to
decrease".

Palma Index: The ratio between the total income of the richest 10 percent of the population
and the total income of the poorest 40 percent of the population. It is proposed as more
appropriate than the Gini index, because it highlights the differences between the extremes
of the distribution, since in the 50th percentile thereis hardly any change

Measures the statistical dispersion of income

- The Lorenz curve: Graphical representation of cumulative frequencies that allows
comparing the observed distribution of a variable with the uniform distribution.
- The GINI coefficient is defined as twice the area between the Lorenz curve and the
diagonal of the uniform (income) distribution.
It ranges between 0 and 1: 0 = perfect equality / 1 = maximum inequality

3.2 MILANOVIC CONCEPS

Concept1: International inequality between countries, not adjusted by population

- Remained stable between 1960-80, increased between 1980-2000 and decreased
again after 2000

Concept2: International inequality between countries adjusted by population

- Was clearly higher than type1 until 1990
- But there was a tendency to decrease and fell rapidly since 2000, due to the
economic growth of China and India
Concept3: International inequality between individuals (regardless of their nationality)
- It is higher than the one observed in the most unequal countries and observed in the
other to types, but it’s been decreasing
- Poorest people in developed countries are among the richest of the world, and are
richer than some of the richest from poor countries.
- Milanovic elephant comes from thes -> The distribution of income growth between
1988-2008 among the world population. Shows that the poorest did not benefit from
globalization, nor the medium clases of western countries. Only the richest people
and the emerging countries population.

3.3 MEASURING INEQUALITY

Sala i Martin: In the last 20 years, growth of the average income has come along with
substantial reductions in world income inequality

Milanovic response: Used assumptions bias to the results (decrease in world income
inequality)

Wade response: Inequality of the world as a whole has decreased (i.e. measured by GINI).
But taking out China, inequality has grown. Therefore, the decrease in inequality is not a
generalized feature of the world.

3.3.2 INEQUALITY WITHIN COUNTRIES

In recent decades, a number of trends have been repeated in several countries:

- The richest 10% of the population is capturing a greater share of income, although
the rate at which this is happening varies between countries.
- The richest 1% are increasingly hoarding more and the poorest 50% less, although
there are different patterns so we cannot say that globalization is the only cause:
- US vs. EU: similar levels of development, openness and technological
development in 1980, but different trajectories due to different institutional
frameworks and policy choices (less progressive tax system, unequal access
to education, minimum wages, etc.).
- China vs. India: Rising inequality in both, but more in India. In China higher
investments in education, healthcare and infrastructure for the bottom 50%

Forces that reduce inequality

- Economic forces: urbanization (reduction of the rural/urban gap), education
(reduction of the wage gap), demographics (increase in life expectancy), demand for
social protection
- Political forces: The "threat" of communism (welfare state, unionization, etc.); War
(which destroys fortunes, and increases wages due to labor shortages)
Forces that increase inequality
- The technological revolution (based on ICTs):
- It substitutes labor for capital
 - It creates revenues in new sectors (telecommunications, finance,..)
- From manufacturing to services (in the North), but services are
heterogeneous (very well and very poorly paid).
- Labor is dispersed and participation in unions is reduced
- The opening of economies (globalization): increases the market and makes it
possible to extract higher incomes from labour
- Political aspects
- The conservative revolution of the 1980s, the collapse of communism (and
the failure of social democracy) and the development of a new neo-
proprietary ideology
- Although the poorest have improved their position, the large fortunes
have grown much more than the economy and, in addition, wealth has
become concentrated, making the middle classes the forgotten ones.
- Profits grow at a higher rate than the economy, so inequality tends to grow.
- A caste appears that consolidates itself through inheritance.
- Taxes and the state play a key role in mitigating inequality, especially wealth
inequality (more than income ineuqality)
Milanovic: The distribution of income (therefore, shape of the kuznets curve) is not given by
market forces but by regulation framework and technology advances

CONCLUSIONS:
- Greater inequality within nations
- Greater inequality between nations
- Decrease in global inequality, measured by population, even if it remains very high

3.4 POVERTY

There are two fundamental methods of measuring poverty

- Indirect method: Theoretical income necessary to cover the minimum quality of life
requirements of a person/household in a country.
- Poverty line: A constant amount of income below which a person o household
is considered to be poor. Determines the theoretical income necessary to
cover the minimum quality of life requirements in a given country.
- Absolute poverty: An absolute income is established for all countries.
- Relative poverty: An income is established for each country, based on
the determination of a basic reference of real needs (basic basket)
- Poverty gap (MOBIDA RARU)
- Direct method: It determines actual levels of deprivation, or actual levels of
satisfaction by directly addressing the study of people's needs, or the fulfillment of
their needs. The definition of basic needs becomes the fundamental issue.

3.5 MEASURES AGAINST INEQUALITY

1. Pro-poor technological progress that improves the productivity of unskilled workers

 - Hypothesis: if technological innovation makes skilled workers increasingly expensive,
there will be incentives to innovate in technologies that improve the productivity of the
less skilled.
- Counter-argument: Today, skilled workers are available at low cost.

2. Education: It was one of the determinants of the reduction of inequality in the first wave,
but what is the margin today? In countries of the Global South, education can play the role of
a social elevator, but in the North the margin is much smaller.

3. More progressive tax schemes:

- Neoliberalism has eliminated the progressivity of taxes in different ways
- But progressive taxation remains key to reducing inequality. Taxation is not a
technical issue, it is pre-eminently a political and philosophical issue