1 Introducing Economic Development (Autosaved)

Chapter 1
Introducing
Economic
Development:
A Global
Perspective
1.1 How the Other Half Live
When one is poor, she has no say in public, she feels inferior.
She has no food, so there is famine in her house; no clothing,
and no progress in her family.
—A poor woman from Uganda
For a poor person everything is terrible—illness, humiliation,

shame. We are cripples; we are afraid of everything; we depend
on everyone. No one needs us. We are like garbage that
everyone wants to get rid of.
—A blind woman from Tiraspol, Moldova
Life in the area is so precarious that the youth and every able
person have to migrate to the towns or join the army at the war
front in order to escape the hazards of hunger escalating over
here.
—Participant in a discussion group in rural Ethiopia
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1.1 How the Other Half Live
• When food was in abundance, relatives used to share it. These
days of hunger, however not even relatives would help you by
giving you some food. —Young man in
Nichimishi, Zambia
• We have to line up for hours before it is our turn to draw
water. —Mbwadzulu Village
(Mangochi), Malawi
• [Poverty is] . . . low salaries and lack of jobs. And it’s also not
having medicine, food, and clothes. --Discussion
group, Brazil
• Don’t ask me what poverty is because you have met it outside
my house. Look at the house and count the number of holes.
Look at the utensils and the clothes I am wearing. Look at
everything and write what you see. What you see is poverty.
—Poor man in Kenya

Absolute poverty
Over 40% of the world’s population lives on less than
$2 per day, part of a condition of absolute poverty.
A situation of being unable to meet the minimum
levels of income, food, clothing, healthcare, shelter,
and other essentials.
• inadequate food and shelter

• health is often poor
• not know how to read or write
• unemployed
• a better life are uncertain

Subsistence economy
An economy in which production is mainly for
personal consumption and the standard of living
yields little more than basic necessities of life—food,
shelter, and clothing.
• little money income

• most food, clothing, shelter, and worldly goods are made and
consumed by the people themselves
• few passable roads, few schools, and no hospitals, electric wires,
or water supplies

Development
The process of improving the quality of all human
lives and capabilities by raising people’s levels of
living, self-esteem, and freedom.

1.2 Economics and Development
Studies
– The Nature of Development Economics
Traditional Economics - is concerned primarily

with the efficient, least-cost allocation of scarce
productive resources and with the optimal growth
of these resources over time so as to produce an
ever-expanding range of goods and services.

Studies - Nature of Development Economics
Traditional neoclassical economics deals with an

advanced capitalist world of perfect markets; consumer
sovereignty; automatic price adjustments; decisions
made on the basis of marginal, private-profit, and
utility calculations; and equilibrium outcomes in all
product and resource markets. It assumes economic
“rationality” and a purely materialistic, individualistic,
self-interested orientation toward economic decision
making.
Studies - The Nature of Development Economics
Political economy is concerned with the

relationship between politics and economics, with
a special emphasis on the role of power in
economic decision making.

Development economics concerned with the

efficient allocation of existing scarce productive
resources and with their sustained growth over time,
it must also deal with the economic, social, political,
and institutional mechanisms, both public and private,
necessary to bring about rapid and large-scale
improvements in levels of living for the peoples.

Thus development economics, to a greater extent

than traditional neoclassical economics or even
political economy, must be concerned with the
economic, cultural, and political requirements for
effecting rapid structural and institutional
transformations of entire societies in a manner that
will most efficiently bring the fruits of economic
progress to the broadest segments of their
populations.

It must focus on the mechanisms that keep families,

regions, and even entire nations in poverty traps, in
which past poverty causes future poverty, and on the
most effective strategies for breaking out of these
traps. Consequently, a larger government role and
some degree of coordinated economic decision
making directed toward transforming the economy
are usually viewed as essential components of
development economics

Unlike the more developed countries (MDCs), in the less

developed countries, most commodity and resource
markets are highly imperfect, consumers and producers
have limited information, major structural changes are
taking place in both the society and the economy, the
potential for multiple equilibria rather than a single
equilibrium is more common, and disequilibrium
situations often prevail (prices do not equate supply and
demand).

Developing countries
Countries of Asia, Africa, the Middle East,

Latin America, eastern Europe, and the
former Soviet Union, that are presently
characterized by low levels of living and other
development deficits. Used in the
development literature as a synonym for less
developed countries.
Figure 1.1 World Income Distribution

Studies
Why Study Development Economics? Some Critical

Questions.
The Important Role of Values in Development
Economics
Economics is a social science. It is concerned with
human beings and the social systems by which they
organize their activities to satisfy basic material
needs (e.g., food, shelter, clothing) and nonmaterial
wants (e.g., education, knowledge, spiritual
fulfillment).
Studies
• Economies as Social Systems: The Need to Go
Beyond Simple Economics
• Social Systems
- The organizational and institutional structure of a
society, including its values, attitudes, power
structure, and traditions.
- Interdependent relationships between economic
and non-economic factors
• Success or failure of development policy
– Importance of taking account of institutional and
structural variables along with more traditional
economic variables

1.3 What Do We Mean by
Development?
• Traditional Economic Measures
In strictly economic terms, development has
traditionally meant achieving sustained rates of growth
of income per capita to enable a nation to expand its
output at a rate faster than the growth rate of its
population. Levels and rates of growth of “real” per
capita gross national income are then used to measure
the overall economic well-being of a population.
– Gross National Income (GNI)
– Income per capita
– Utility of that income?
Development?

Development?
• Traditional Economic Measures
Income per capita : Total gross national income of a country
divided by total population.
Gross national income (GNI): The total domestic and foreign
output claimed by residents of a country. It comprises gross
domestic product (GDP) plus factor incomes accruing to residents
from abroad, less the income earned in the domestic economy
accruing to persons abroad.
Gross domestic product (GDP): The total final output of goods
and services produced by the country’s economy, within the
country’s territory, by residents and nonresidents, regardless of its
allocation between domestic and foreign

Calculation
• GDP
• GDP Per Capita
• GNI
• GNI per Capita

1.3 What Do We Mean by Development?
• The New Economic View of Development
“Leads to improvement in wellbeing, more broadly understood”
Development must therefore be conceived of as a

multidimensional process involving major changes in social
structures, popular attitudes, and national institutions, as well
as the acceleration of economic growth, the reduction of
inequality, and the eradication of poverty.

• The New Economic View of Development
Development, in its essence, must represent the whole gamut

of change by which an entire social system, tuned to the
diverse basic needs and evolving aspirations of individuals and
social groups within that system, moves away from a condition
of life widely perceived as unsatisfactory toward a situation or
condition of life regarded as materially and spiritually better.

• Amartya Sen’s “Capability” Approach

– Functioning as an achievement
Sen identifies five sources of disparity between
(measured) real incomes and actual advantages:
– personal heterogeneities
– environmental diversities
– variations in social climate
– distribution within the family
– differences in relational perspectives,

• Amartya Sen’s “Capability” Approach
– Capabilities as freedoms enjoyed in terms of

functionings
– Well being in terms of being well and having
freedoms of choice
– “Beings and Doings”:

Some Key “Capabilities”
• Some Important “Beings” and “Doings” in Capability to
Function: human “well-being” means
– Being able to live long
– Being well-nourished
– Being healthy
– Being literate
– Being well-clothed
– Being mobile
– Being able to take part in the life of the community
– Being happy – as a state of being - may be valued as a
functioning
Development and happiness
happiness - part of human well-being, expand an

individual’s capability to function
Subjective well-being - happiness, satisfaction,
- positive emotions such as joy and pride
- negative emotions such as pain and worry

Development and happiness
– Utility in the sense of happiness may well be included in the list

of some important functionings relevant to a person’s well-
being.”
– the average level of happiness or satisfaction increases with a
country’s average income.
– Richard Layard identifies seven factors: family relationships,
financial situation, work, community and friends, health,
personal freedom, and personal values.
– Many opinion leaders in developing nations - gain the benefits
of development without losing traditional strengths such as
moral values, and trust in others—sometimes called social
capital .

Economic Development
Economic Growth
Economic +
= Changes in output distribution and
Development economic structure
 Improvement in the material well-being of
the poorer half of the population
Changes  Decline in agriculture’s share of GNP
 Increase GNP share of industry and
services
 Increase in the education and health
 increase in labor force
 Substantial technical advances
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29
1-29
Three Core Values of Development
 Sustenance
 Self-esteem and
 Freedom
1. Sustenance: The Ability to Meet Basic Needs
- The basic goods and services - food, clothing, and shelter,
necessary to sustain an average human being at the bare minimum
level of living.
- When any of these is absent or in critically short supply, a
condition of “absolute underdevelopment” exists.
- Rising per capita incomes, the elimination of absolute poverty,
greater employment opportunities, and lessening income
inequalities therefore constitute the necessary but not the sufficient
conditions for development.
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1-30
2. Self-Esteem: To Be a Person
• The feeling of worthiness that a society enjoys when

its social, political, and economic systems and
institutions promote human values such as respect,
dignity, integrity, and self determination.
• Due to the significance attached to material values in
developed nations, worthiness and esteem are
nowadays increasingly conferred only on countries
that possess economic wealth and technological
power—those that have “developed.”

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3. Freedom from Servitude:
To Be Able to Choose
 A situation in which a society has at its disposal a variety of
alternatives from which to satisfy its wants and individuals
enjoy real choices according to their preferences.
 Due to the significance attached to material values in developed
nations, worthiness and esteem are nowadays increasingly
conferred only on countries that possess economic wealth and
technological power—those that have “developed.”
 Some countries that have achieved high economic growth rates
or high incomes, such as China, Malaysia, Saudi Arabia, and
Singapore, have not achieved as much on human freedom
criteria.

32
1-32
Figure 1.2 Income and Happiness:
Comparing Countries

(cont’d)
The Central Role of Women

• Globally, women tend to be poorer than men.
• deprived in health and education and in freedoms
• transmit values to the next generation
– To make the biggest impact on development,
societies must empower and invest in women.

The Three Objectives of Development
1.To increase the availability and widen the distribution of basic

life-sustaining goods such as food, shelter, health, and protection
2. To raise levels of living, including, in addition to higher incomes,

the provision of more jobs, better education, and greater attention
to cultural and human values
3. To expand the range of economic and social choices available to

individuals and nations by freeing them from servitude and
dependence

1.4 The Millennium Development Goals
– Eight goals adopted by the United Nations in 2000

• Eradicate extreme poverty and hunger
• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDS, malaria, and other diseases
• Ensure environmental sustainability
• Develop a global partnership for development

1.4 The Millennium Development Goals
– Eight goals adopted by the United Nations in 2000

• Eradicate extreme poverty and hunger
• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDS, malaria, and other diseases
• Ensure environmental sustainability
• Develop a global partnership for development

Specific Targets

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Responsible Agencies
• The MDGs were developed in consultation with the
developing countries.
• Key international agencies, including the United
Nations, the World Bank, the International Monetary
Fund (IMF), the Organization for Economic
Cooperation and Development (OECD), and the World
Trade Organization (WTO), all helped develop the
Millennium Declaration and so have a collective policy
commitment to attacking poverty directly.
• The MDGs assign specific responsibilities to rich
countries, including increased aid, removal of trade
and investment barriers, and eliminating unsustainable
debts of the poorest nation.
1.5 Conclusions
• The importance of Development Economics

• Inclusion of non-economic variables in
designing development strategies
• Achieving the Millennium Development
Goals
• “…One future-or none at all”

Concepts for Review
• Absolute Poverty • Gross national income

• Attitudes (GNI)
• Capabilities • Income per capita
• Developing countries • Institutions
• Development • Less developed countries
• Development economics (LDCs)
• • Millennium Development
Freedom
• Goals (MDGs)
Functionings • More developed countries
• Globalization (MDCs)
• Gross domestic product • Political economy

Concepts for Review (cont’d)
• Self-esteem
• Social system
• Subsistence economy
• Sustenance
• Traditional economics
• Values

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Chapter 1

For a poor person everything is terrible—illness, humiliation,

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-2

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-3

• inadequate food and shelter

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-4

• little money income

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-5

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-6

– The Nature of Development Economics

Traditional Economics - is concerned primarily

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-7

Traditional neoclassical economics deals with an

Political economy is concerned with the

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-9

Development economics concerned with the

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-10

Thus development economics, to a greater extent

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-11

It must focus on the mechanisms that keep families,

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-12

Unlike the more developed countries (MDCs), in the less

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-13

Countries of Asia, Africa, the Middle East,

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-15

Why Study Development Economics? Some Critical

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-17

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-19

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-20

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-21

• The New Economic View of Development

“Leads to improvement in wellbeing, more broadly understood”

Development must therefore be conceived of as a

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-22

• The New Economic View of Development

Development, in its essence, must represent the whole gamut

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-23

• Amartya Sen’s “Capability” Approach

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-24

• Amartya Sen’s “Capability” Approach

– Capabilities as freedoms enjoyed in terms of

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-25

happiness - part of human well-being, expand an

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-27

– Utility in the sense of happiness may well be included in the list

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-28

• The feeling of worthiness that a society enjoys when

Copyright ©2015 Pearson Education, Inc. All rights reserved.

Copyright ©2015 Pearson Education, Inc. All rights reserved.

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-33

The Central Role of Women

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-34

1.To increase the availability and widen the distribution of basic

2. To raise levels of living, including, in addition to higher incomes,

3. To expand the range of economic and social choices available to

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-35

– Eight goals adopted by the United Nations in 2000

Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-36