ECONOMIC DEVELOPMENT What is DEVELOPMENT? 5.

Less Developed Countries (LDCs)

Lesson 1: Introducing Economic Development – The process of improving the quality of all human – Refers to developing nations working to improve
Relative and Absolute Poverty lives and capabilities by raising people’s levels of their economic, social, and political systems to
1. Absolute Poverty living, self-esteem, and freedom. reach higher levels of development.
- A condition where individuals lack the basic
necessities of life, such as food, clean water, shelter, CLASSIFICATION OF THE COUNTRIES The Important Role of Values in Development
clothing, and healthcare. ECONOMICALLY – Economics is a social science. It is concerned with
- Defined by a fixed standard, typically an income 1. DEVELOPED COUNTRIES – high-income human beings and the social systems by which they
level below which people cannot meet basic survival 2. ECONOMIES IN TRANSITION – upper-middle organize their activities to satisfy basic material
needs. income needs (e.g., food, shelter, clothing) and nonmaterial
- Universal and does not change based on societal 3. DEVELOPING ECONOMIES – middle-income wants (e.g., education, knowledge, spiritual
or economic context. 4. LEAST-DEVELOPED COUNTRIES– low income fulfillment). It is necessary to recognize from the
- A family that cannot afford enough food to meet outset that ethical or normative value premises
basic nutritional requirements or secure safe THE NATURE OF DEVELOPMENT ECONOMICS about what is or is not desirable are central features
drinking water. 1. Traditional Economics of the economic discipline in general and of
– Focuses on core principles such as utility development economics in particular. The very
2. Relative Poverty maximization, profit maximization, market efficiency, concepts of economic development and
– A condition where individuals lack the resources to and equilibrium, providing a foundation for modernization represent implicit as well as explicit
meet the average standard of living in a specific understanding economic behavior in a theoretical value premises about desirable goals for achieving
society. and mathematical context. what Mahatma Gandhi once called the “realization
– Defined in comparison to others within the same of the human potential.”
society, usually as a percentage of median 2. Political Economy
household income – Blends economic theory with political analysis, Systems: The Need to Go Beyond Simple
– Context-specific and varies across countries or exploring how political structures, institutions, and Economics
communities, reflecting differences in societal norms policies influence economic activities. Social system
and expectations. – The organizational and institutional structure of a
– A person in a wealthy country may have shelter 3. Development Economics society, including its values, attitudes, power
and food but is considered poor if they cannot afford – Examines the transition of economies from structure, and traditions.
internet access, transportation, or education that stagnation to growth, emphasizing strategies to
others consider basic. reduce poverty and achieve higher income levels. What do we mean by DEVELOPMENT?
1. Traditional Economic Measures – through GNI,
4. More Developed Countries (MDCs) GDP, Per Capita Income, and GNP.
– Economically advanced nations with established 2. The New Economic View of Development – an
capitalist systems, including countries in Western approach where the poverty rate has been involved
Europe, North America, Australia, New Zealand, in the analysis of a country’s development.
and Japan. 3. Amartya Sen's capability theory – a theoretical
framework that involves two core normative claims.
First, the assumption that freedom to achieve
well-being is of primary moral importance. And
second, the freedom to achieve well-being must be to create are economic stimulus packages to
understood in terms of people with capabilities. industries by the government, new projects, and
lowering or increasing taxes on the government.
Three Core Values of Development
1. Sustenance Purchasing power parity (PPP)
– The basic goods and services, such as food, – Calculation of GNI using a common set of
clothing, and shelter, that are necessary to sustain international prices for all goods and services, to
an average human being at the bare minimum level provide more accurate comparisons of living
of living. standards.
2. Self-esteem
– The feeling of worthiness that society enjoys when How do you calculate PPP per capita GDP?
its social, political, and economic systems and – it is calculated by dividing GDP by the
institutions promote human values such as respect, corresponding purchasing power parity (PPP),
dignity, integrity, and self-determination. which is an exchange rate that removes price level
3. Freedom differences between countries.
– A situation in which a society has at its disposal a – To understand PPP, let's take a commonly used
variety of alternatives from which to satisfy its wants example, the price of a hamburger. If a hamburger is
and individuals enjoy real choices according to their selling in London for £2 and in New York for $4, this
preferences would imply a PPP exchange rate of 1 pound to 2
U.S. dollars.
The Three Objectives of Development
To increase the availability and widen the Lesson 2: Comparative Economic Development
distribution of basic life-sustaining goods such as
food, shelter, health, and protection

To raise levels of living, including, in addition to

higher incomes, the provision of more jobs, better
education, and greater attention to cultural human
values, all of which will serve not only to enhance
material wellbeing but also to generate greater
individual and national self-esteem To expand the
range of economic and social choices available to Gross National Income Uses
individuals and nations by freeing them from – The World Bank uses GNI to differentiate
servitude and dependence not only with other countries based on purchasing power parity and per
people and nation-states but also to the forces of capita income.
ignorance and human misery – Based on the data obtained from GNI,
policymakers can create, recommend, and
implement fiscal policies, which can lead to
economic growth. The fiscal policies that GNI helps
Lesson 3: Classic Theories Of Economic Key Assumptions:
Growth And Development – The more people save, the more funds are
Linear Stages Of Growth Model available for investment.
– The Linear Stages of Growth model is an – Investment increases capital stock, leading to
economic model which is heavily inspired by the higher production.
Marshall Plan of the US which was used to – A lower capital-output ratio means the economy is
rehabilitate Europe's economy after the Post-World more efficient in using capital.
War II Crisis. The linear stages of growth models are
the early economic development theory that II. STRUCTURAL-CHANGE MODEL
suggests economies progress through a series of – The Structural-Change Model explains how
sequential stages in a linear manner. economies transition from one structure to another,
1. Rostow’s Stages of Growth typically from a traditional agricultural economy to a
2. Harrod-Domar Growth Model modern industrial economy. It focuses on how labor,
capital, and resources shift across sectors to drive
economic growth.

Key Features of the Structural-Change Model

1. Shift from Agriculture to Industry
– As an economy develops, labor and capital move
from low-productivity agriculture to high-productivity
industrial and service sectors.

2. Dual Economy Concept

– Many models assume an economy has a
traditional rural sector and a modern urban sector,
HARROD-DOMAR GROWTH MODEL with development driven by migration and
– The Harrod-Domar Growth Model is an economic industrialization.
theory that explains how a country's economic
growth depends on: 3. Role of Investment and Capital Accumulation
1. Savings rate (S) – Growth depends on domestic and foreign
– The proportion of income saved and reinvested. investments in infrastructure, technology, and
2. Capital-output ratio (C or K/Y) education.
– How much capital is needed to produce output.
Formula: 4. Government and Policy Influence
– Structural change often requires state intervention,
such as investments in education, trade policies,
and industrialization strategies.
Types of Structural-Change Models modernization approaches, which assumed that all 3. State-led development
1. Lewis Dual Sector Model countries follow the same development path. – Government intervention to promote industries
✓ Developed by W. Arthur Lewis in 1954. and protect local markets.
✓ Describes a dual economy with a Key Ideas of the International Dependence
traditional agricultural sector (low Revolution Major Theories Within the International
wages, surplus labor) and a modern 1. Underdevelopment is Caused by External Dependence Revolution
industrial sector (higher wages, Exploitation 1. Neo-Colonial Dependence Model
productivity). – Poor countries remain underdeveloped because – Developed countries maintain control over poorer
✓ Assumes surplus labor migrates to they are exploited by developed nations through nations through economic, political, and cultural
industry, leading to economic growth. trade, investment, and political influence. means (even after formal colonialism ends).
✓ Industrial profits are reinvested, driving – The global economy is structured in a way that – Multinational corporations (MNCs), foreign aid,
further growth. benefits rich countries (the core) at the expense of and international financial institutions (IMF, World
Strengths: Explains labor migration and poor countries (the periphery). Bank) reinforce dependency.
industrialization. – Solution: Break free from Western economic
Weakness: Assumes an unlimited labor 2. Unequal Terms of Trade dominance through self-reliance.
supply, which may not always be true. – Developing countries export raw materials (low
value) and import manufactured goods (high value), 2. The False-Paradigm Model
2. Chenery’s Pattern of Development Model creating a trade imbalance that favors developed – Developing nations follow Western economic
– Proposed by Hollis Chenery, this model is nations. advice (from economists, consultants, and
empirical, analyzing data from multiple countries. – Prices of primary commodities (e.g., coffee, sugar) institutions) that does not fit their local realities.
– Shows that economic growth follows common tend to decline over time, worsening this – These policies (like free trade and privatization)
patterns, such as: dependency. often worsen poverty and inequality instead of
✓ Decline in agriculture’s share of GDP. fostering real development.
✓ Rise of industry and services. 3. Elites in Developing Countries Contribute to – Solution: Adopt development strategies suited to
✓ Increase in urbanization and technological Underdevelopment local conditions.
adoption. – Local political and economic elites (who benefit
Strengths: Uses real-world data and recognizes from foreign aid, multinational corporations, and 3. The Dualistic Development Thesis
different growth paths for countries. trade agreements) often collaborate with rich – A dualistic world exists, where:
Weakness: Descriptive rather than explanatory—it countries, maintaining the status quo. -​ Rich and poor countries coexist, but rich
does not provide a strict mechanism for growth nations benefit at the expense of poor ones.
4. Need for Structural Change and Self-Reliance -​ Even within developing nations, modern
III. International Dependence Revolution – Instead of relying on Western models, developing industries exist alongside traditional sectors
– The International Dependence Revolution refers to nations should pursue economic independence (the rich-poor gap increases).
a set of economic theories from the 1960s and through: -​ The wealth of the rich does not "trickle
1970s that argue that underdevelopment in poorer 1. Import Substitution Industrialization (ISI) down" to the poor.
countries is largely due to external factors, – Producing goods domestically rather than – Solution: Policies must focus on reducing
particularly their dependence on richer nations. importing. inequality and redistributing wealth.
These theories challenged the neoclassical and 2. Land reform and wealth redistribution
– Addressing inequality within the country.
Criticism of the International Dependence – State-owned businesses are seen as inefficient
Revolution and should be privatized to improve productivity.
1. Ignores Internal Factors – Example: Many developing nations sold off
– Some economists argue that corruption, telecom, energy, and transportation sectors to
mismanagement, and poor governance within private firms.
developing nations are just as responsible for
underdevelopment. 3. Free Trade & Globalization
– Countries should embrace free trade and reduce
2. Overemphasizes Foreign Exploitation tariffs to encourage competition.
– While external dependency exists, some countries – Comparative advantage: Developing countries
(e.g., South Korea, and Singapore) have should focus on exporting goods they produce best
successfully integrated into the global economy and rather than relying on government subsidies.
grown rapidly.
4. Macroeconomic Stability
3. Fails to Provide a Clear Alternative – Controlling inflation, reducing budget deficits, and
– Simply rejecting Western economic models does maintaining a stable currency are key to economic
not automatically lead to a successful development growth.
strategy. – Governments should focus on monetary and fiscal
discipline, rather than direct intervention in
IV. Neoclassical, Free-Market Counterrevolution industries.
– The Neoclassical, Free-Market Counterrevolution
emerged in the 1980s as a reaction against 5. Foreign Investment & Capital Flows
Starting Economic Development: The Big Push
structuralist and dependency theories of – Encouraging foreign direct investment (FDI) brings
– Sometimes market failures lead to a need for
development. It emphasized market forces, minimal capital, technology, and jobs.
public policy intervention
government intervention, and free trade as the best – Example: China’s economic rise was fueled by
– The Big Push: A Graphical Model, 6 assumptions
ways to promote economic growth and reduce opening up to foreign investment.
1. One factor of production
poverty.
2. Two sectors
LESSON 4: Contemporary Models of
3. Same production function for each sector
Key Principles of the Neoclassical, Free-Market Development and Underdevelopment
4. Consumers spend an equal amount on each
Approach
good
1. Market Efficiency & Deregulation
5. Closed economy
– Markets allocate resources more efficiently than
6. Perfect competition with traditional firms
governments.
operating, limit pricing monopolists with a modern
– Government intervention leads to inefficiency,
firm operating
corruption, and waste.
– A big push may also be necessary when there
are:
2. Privatization of State-Owned Enterprises
1. Intertemporal effects 2. Urbanization effects
(SOEs)
3. Infrastructure effects 4. Training effects
 – Not enough to say developing countries should Lesson 5: Poverty, Inequality, and Development
produce “labor-intensive products,” because there Measuring Absolute Poverty
are thousands of them 1. Size or Personal Distribution of Income
– Industrial policy may help to identify true direct i. Lorenz Curve
and indirect domestic costs of potential products in ii. Gini Coefficients and aggregate measures of
which to specialize by: inequality
➢Encouraging exploration in the first stage 2. Functional or Distributive factor share distribution
➢Encouraging movement out of inefficient sectors of income
and into more efficient sectors in the second stage
– Three building blocks of the theory; and case Size or Personal Distribution
examples of their reasonableness in practice: – Most commonly used by economists
Further Problems of Multiple Equilibria
-​ Uncertainty about what products can be – Deals with individual persons or households and
1. Inefficient Advantages of Incumbency
produced efficiently (evidence: India’s the total incomes they receive
2. Behavior and Norms
success in information technology was – What matters is how much they earn irrespective
3. Linkages
unexpected; reasons for Bangladesh’s of where it came from.
4. Inequality, Multiple Equilibria, and Growth
efficiency in hats vs Pakistan’s in bedsheets
is not clear)
Michael Kremer’s O-Ring Theory of Economic
-​ Need for local adaptation of foreign
Development
technology (evidence: seen in cases such
The O-Ring Model
as shipbuilding in South Korea)
– Production is modeled with strong
-​ Imitation can be rapid (e.g. the spread of cut
complementarities among inputs
flower exporting in Colombia)
– Positive assortative matching in production
– Implications of strong complementarities for
Hausmann-Rodrik-Velasco Growth Diagnostics
economic development and the distribution of
Framework
income across countries
– Focus on a country’s most binding constraints on
economic growth
The “O-Ring” Theory: A Simple Illustration of
– No “one size fits all” in development policy
the Basic Idea
– Requires careful research to determine the most
– The HR Department has 4 workers- 2 H-types and
likely binding constraint
2 L-types; In a simplified model let Q = q1q2
– How to allocate? {HH, LL}; or {HL, LH}? • We
know that H2 + L2 > 2HL because: (H–L)2 > 0
– So with strong complementarity, it always pays to
do assortative matching

Economic Development as Self-Discovery

– Hausmann and Rodrik: A Problem of Information
 Four Highly Desirable Properties Measuring Absolute Poverty
1. Anonymity principle – Headcount Index
– simply means that our measure of inequality – Total Poverty Gap
should not depend on who has the higher income; – Foster-greek-Thorbecke Index
for example, it should not depend on whether we – Multi-dimensional Poverty Measurement
believe the rich or the poor to be good or bad
people. Absolute Poverty
– Defined as the situation of being unable or only
2. Scale independence principle barely able to meet the subsistence essentials of
– means that our measure of inequality should not food, clothing, and shelter.
depend on the size of the economy or the way we – We can define Absolute Poverty as the total
measure its income number of or "Headcount" 'H' of those incomes fall
below a specified minimum level of real income- an
3. The population independence principle international poverty line- Y p
– it states that the measure of inequality should not
be based on the number of income recipients Headcount Index: H/N
– Where H is the number of persons who are poor
4. Transfer principle (sometimes called the and N is the total number of people in the economy.
Pigou-Dalton principle). – We defined the Headcount Index as the proportion
– it states that holding all other incomes constant, if of a country's population living below the poverty
we transfer some income from a richer person to a line
poorer person (but not so much that the poorer
Gini Coefficient person is now richer than the originally rich person), Total Poverty Gap (TPG)
➢ An aggregate numerical measure of income the resulting new income distribution is more equal. – Measures the total amount of income necessary to
inequality raise everyone who is below the poverty line up to
➢ Measured by dividing the area between the Functional Income Distribution that line.
perfect equality line and the Lorenz curve by the – Attempts to explain the share of total national – Y is the absolute poverty line; and Y1, is the
total area lying to the right of the equality line in a income that each of the factors of production income of Q the ith poor person
Lorenz diagram receives. Functional income distribution = Wages as
a percentage of Profits
 – Population growth, saving, per capita income
growth

3. 7 Negatives
– Lower Y per head
– Poor people bear the burden of population growth
– Large population limits educational opportunities
– The health of women is harmed
– Family food is limited
– Environmental degradation occurs
– Illegal international migration and
over-urbanization 2.2 The Malthusian Model
– Malthus predicted that natural population growth
1.2 Population Growth Isn’t A Problem! would inevitably outpace agricultural output,
Growth And Poverty 1. Other Issues resulting in famine and other catastrophes until the
– Rapid growth is bad for the poor because they – Underdevelopment population was reduced below a sustainable level.
would be bypassed and marginalized by the – Resource Depletion and Environmental
structural changes of modern growth. Destruction
– Population Distribution
Policy Options On Income Inequality And – Subordination of Women
Poverty: Some Basic Considerations
1. Altering the functional distribution of income 2. False Issue.
through relative factor prices – Neocolonial dependence theory
2. Modifying the size distribution through increasing
assets of the poor 3. Desirable
3. Progressive income and wealth taxes – Consumer Demand
4. Direct transfer payments and the public – Economies of Scale
provisions of goods and service – Labor Supply (sufficient-low cost)
– Non-economic reasons
Lesson 6: Population Growth and Economic Criticisms of Malthus’ model
Development: Causes, Consequences, and – the theory only addressed population issues
Controversies related to his home country of England. the theory
1.1 Population Growth Is A Problem! was rooted in racist ideologies related to England's
1. Population and the Global Crisis imperialist foreign policy. Malthus failed to anticipate
– Poverty, low levels of living, malnutrition, ill health, the development of new technologies that would
environmental degradation, etc. decrease food insecurity.

2. Population-poverty cycles
2.3 The Household Model
– Gary Becker's fertility theory holds that with higher
income people would purchase more children,
people behave as they would in purchasing
consumer durables. However, higher-income groups
frequently have fewer children. Becker says that
higher-income families want high-quality children
who are more expensive.

Microeconomic Theory Of Fertility

1. The microeconomic theory of fertility offers a
contribution to the understanding of fertility in two
ways:
1. the first is the theoretical-methodological
standpoint that birth is the outcome of
decision-making on the level of the individual, along
with their maximization behavior;
2. the second is the involvement of economic
variables among the factors that explain births.
3.3 Population Growth: Relations
– Population growth & income
-​ how the population's size changes over
time.
– Population density & income
-​ how many individuals are in a particular
area
– Population growth & structure (Number &
Structure)
– Producer & Consumer
4. Some Policy Approaches
What developing countries can do:
– Long run: increase the price of child
➢ opportunity cost of mother’s time
➢ Cost of educating a child Urbanization Costs, and Efficient Urban Scale
– Short run: control fertility – But, cities also entail *congestion costs"
➢ Persuade people – Economically efficient urban scale (from point of
➢ Family-planning programs view of productive efficiency)> found where average
➢ Economic incentives and disincentives costs for industries are lowest
➢ Redistribute population – Generally, differing efficient scales for different
➢ Coerce people industrial specializations imply different city sizes
➢ Raise women’s social and economic status – More extensive (expensive) capital, and
infrastructure required in urban areas
Urbanization and Rural-Urban Migration (Theory – Smaller cities may be expected in labor-intensive
and Policy) developing countries
 -​ The probability of obtaining a city job is
inversely related to the urban
unemployment rate
-​ High rates of migration are outcomes of
rural-urban imbalances
– A Diagrammatic Presentation is below

The Urban Informal Sector

Why promote the urban informal sector?
– Makes surplus despite the hostile environment
– Creating jobs due to low capital intensity
– Access to (informal) training, and apprenticeships
– Creates D for less- or un-skilled workers
– Uses appropriate technologies, local resources
– Recycling of waste materials
– More benefits to the poor, specifically women who
are concentrated in informal sectors
– Policies for the Urban Informal Sector Women in
the Informal Sector

Economic Theory of Rural-Urban Migration

– A Verbal Description of the Todaro Model
-​ Migration is a rational decision
-​ The decision depends on expected rather
than actual wage differentials