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Economic Development <Lecture Note 1> 13.03.08

ED: Introduction: Poverty and Development

* Some parts of this note are summary of the references for teaching purpose only.

Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 322 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.://yoosoohong.weebly.com

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Issues for Thought and Discussion

❒ Why are there poor countries? - What are the main barriers to economic development?

❒ What are the proper development models? - Should every country follow the same or a similar development model (path) ?

❒ Is it true: “The richer, the happier”, why or why not? Then what is economic development?

❒ Is growth incompatible or compatible with income equality? Similarly, is growth a zero-sum game or a positive-sum game?

❒ Does the size of a country matter for economic growth?

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World Average Per Capita Income

Source: Data from Maddison. 2001. Borrowed from Sachs. 2005.

0

1,000

2,000

3,000

4,000

5,000

6,000

100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000

1990 International $

Year

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Evolution of Global GDP and Per Capita GDP

World Key Data

Year Latest data

GDP (current US$) (billions) 2011 69,982

GNI per capita, Atlas method (current US$) 2011 9,511

Life expectancy at birth, total (years) 2010 69.63

Population, total (millions) 2011 6,973

Population growth (annual %) 2011 1.15

School enrollment, primary (% net) 2011 88.8

Surface area (sq. km) (thousands) 2010 134,269.2

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Source: World Bank database

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World Economic Development Status

The Classification of Developing Countries

⁻ Classification of less developing countries by UN: Least developed, Non-① ②oil-producing developing countries, OPEC members③

⁻ Classification of countries by WB (2008): Low-income economies ①(</=$975), Lower middle-income countries ($976-$3,855), Upper-middle-② ③income countries (3,856-11,905), High-income countries (>/=$11,906)④

Present Status

⁻ 80 percent of the world population live in developing countries.

⁻ The rate of the population in the absolute poverty (e.g. <$1/1.25 per day) is highest in South Africa below the Sahara Desert and second highest in Latin America.

⁻ The number of the population in the absolute poverty is highest in South-West Asia.

Countries Classified by Income Group Global Finance.url

Income Gap between High-income Countries and the Rest of the World

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Regional Share of World Income, 2010

- Comparing incomes: The share of developing economies is higher when measured using purchasing

power parity

Source: World Bank, World Development indicators database8

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Structure of the World Economy (2007)

Range of

GNI

GNI per capita

($)

Population

(%)

GDP

(%)

Trade

(%)Trade/

GDP(%)

High income

Over $11,456

$37,570 15.9 73.9 72.8 56.4

Middle income

$936~

$3,705$2,190 64.4 24.5 26.5 61.9

Low

IncomeLess than

$935$574 19.6 1.4 1.65 63.7

World $7,995100.0

(6.6 billion person)

100.0($54.3trillion)

100.0($31.1trillion)

57.3

Korea $19,730 0.7 1.7 2.5 82.3

Source: World Bank. World Development Indicators. 2009.

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Regional Poverty Estimates (%)

Region 1984 1987 1990 1993 1998 1999 2002 2005 2008

Share of people living on less than 2005 PPP $2.00 a day(%)

East Asia & Pacific 88.5 81.6 79.8 75.8 64.1 61.8 51.9 38.7 33.2

China 92.9 83.7 84.6 78.6 65.1 61.4 51.2 36.3 29.8

Europe & Central Asia 8.3 6.5 5.6 6.9 10.3 11.9 14.3 12.0 2.4

Latin America & Caribbean

28.1 24.9 21.9 20.7 22.0 21.8 21.6 17.1 13.1

Middle East & North Africa

23.7 22.7 19.4 19.8 20.2 19.0 17.6 16.9 13.9

South Asia 84.8 83.9 82.7 79.7 79.9 77.2 77.1 73.9 70.9

India 84.8 83.9 82.6 81.7 79.8 78.4 77.5 75.6 68.7

Sub-Saharan Africa 75.5 74.0 76.1 75.9 77.9 77.6 75.6 72.9 69.2

Total 67.7 64.3 63.4 61.6 58.3 57.1 53.3 47.0 43.6

Source: PovcalNet, World Bank.

11Source: World Bank.

Regional poverty estimates

Poverty headcount ratio at $2 a day (PPP) (% of population)

Growth Rate of GDP Per Capita, by Level of Development, 2000-2012

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Growth Trends in World Output (%)

Source: IMF. 2011

GDP Growth of Main Countries and Regions

Source: IMF, World Economic Outlook DatabaseEast Asia including 18 countries/regions: Japan, China, Korea, Hong Kong, Taiwan, ASEAN10, Australia, New Zealand, India

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Divergence in Economic Performance in Developing Country Regions, 1960-2006

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Poverty Change by RegionProportion of people living on less than $1.25 a day, 1990 and 2005 (%)

Source: Millennium Development Goals Report. 2011

Proportion of Working Poor, 2003, 2008 and 2009

Source: International Labour Organization, Global Employment Trends January 2010 (Geneva: ILO). Note: Data refer to the proportion of workers earning less than $2 per day(purchasing power parity). 17

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Growth of the World Population and Some Major Events in the History of Technology-9,000 B.C. to

Present

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Population Growth to 2030

Trade Share

Note: EU18:Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, the United Kingdom, the Czech Republic, Hungary, and Poland.

Source: IMF, Direction of Trade Statistics (DOTS). 20

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World Exports, 1975-2005 (Current US$)

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Developing Countries’ Share of World Exports (Current US$)

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Developing Countries’ Share of World Exports (Constant US$)

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Global Migration and Remittances, 1960 to 2005

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Remittances in Relation to FDI and Aid, 1970- 2007

Source: World Bank. World development Indicators and Global Development Finance.2007.C

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Exports of Knowledge-based* Commercial Services

- Dominated by the United States and the European Union

Balance of exports in knowledge based services

Source: World Bank. World development Indicators 2010.

Foreign Reserve Accumulation by Developing Countries, 2007~2010

Source: IMF, Statistics Department COFER database; and International Financial Statistics.

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Trends in World Population

Note: Data after 2005 are based on projections.

Source: UN Population Division, 2005

29Rate of annual economic growth (%)

Relationship between Human Development and Economic Growth- Economic growth does not necessarily assure the human development.

0

20

40

60

80

100

-4 -2 0 4 6 8 102 12

Index of HDI (%)

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Index of ‘quality of life’

GDP Growth and Changes in Quality of Life 1960s and 1990s

Industrial Countries

Developing Countries

1960s 1980s/90s

Some indicators wereimproved during growth

Some indicators wereinsensitive to growth

Some indicatorswere deteriorated

during growth

Examples of indicators

• Infant survival rate• Calorie and protein intake

• Secondary school enrollment• Gini coefficient of income

• Carbon dioxide per capita• Sulfur dioxide per capita

Note: The case of countries that achieved economic growth.

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Gini Coefficient by Region

Note: Gini Coefficient is an income inequality index.Source: Human Resource Development Report, 2007-8

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What is economic development?

– The definition and concept of economic development have changed over time in accordance with changing trends of the world economy and views (approaches) of theorists.

– Early economic development theory immediately after the World WarII viewed development in the context of growth and industrialization.

– However, economic development implies the progress in human well-being so that it includes changes in not only material (economic) dimension of life but also cultural, social, political and even spiritual dimensions of life.

Concept

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Concepts of Economic Growth and Economic Development

• Economic Growth

- Quantitative growth in GNP per capita (i.e. a quantitative concept)

- Here, GNP (or GDP) per capita is regarded as an index for the average level of welfare.

• Economic Development

- Process not only increasing income, but also enhancing ability and right of people (i.e. a qualitative concept)

- Transition to an economy in which people can enhance living standards and conditions which seek self-esteem and freer choice, etc.

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Why do we study this subject?

- One sixth of the world population today live under the absolute poverty line (with 1 dollar per day).

- We want to understand why some people and countries cannot escape from this trap while others can.

- We want to find the way all human beings can live a decent life.

- The knowledge can be useful for our future career and activities in the areas of international relations, business, politics, NGO activities and academic research.

Poverty: Deprivation in Outcomes and Means

• Tangible: shortfalls in basic needs (food, shelter, clothing, education, health)

• Intangible: e.g. vulnerability in times of crisis, exclusion

• Adequacy of means/resources to meet basic needs– Not only income– Common property resources– State-provided goods

• Institutions, rules of entitlement to means/resources– Not only markets– Family, kin– Community– Participation

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Approaches to Measure

Income/Consumption Approach

• Based on physical/material deprivation model

• Measurements look at:

– minimum food-energy needs, food basket

– food plus basic material needs

• Proxy measure: income or consumption expenditure level (absolute poverty line, e.g. $1/day/person)

Human Deprivation Approach• Focuses on material well-being (outcomes) • Broader dimensions: health, education, access to basic services, basic

living standards• Composite measures (well-known)

– Human Development Index (HDI)– Gender-related Development Index (GDI)– Human Poverty Index (HPI)

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Basic Human Needs: Material and Non-material

• The ILO approach in the 1970s

• Concerned with access to material resources to meet immediate body needs: food, clothing, shelter, water, housing

• And goes beyond: access to participation in decision-making in society

Multi-Dimensional Approach

• Not only lack of material well-being

• But lack, or exclusion from, resources, rights and opportunities

• Lack of material and non-material  capital: human, physical, financial, social

• Requiring new methods of measurement

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Adult and Youth Literacy Rates

Related Concepts

Inequality• Inequality encompasses:

– Income distribution– Disparities in access / rights to economic resources– Disparities in social, cultural, political rights– Disparities in well-being (outcomes)

• Poverty focuses on deprivation• Extent of poverty is affected by inequality

Social Exclusion

• Social exclusion:

– denial to individuals or groups of social or citizenship rights to goods, services, resources, employment, representation

• Refers to multi-dimensional processes that lead to poverty, & trap people in poverty

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Discrimination• Discrimination: distinction, exclusion, restriction or preference

– Based on any social group, e.g. sex, race, colour, language, religion, political opinion, national or social origin

– Aimed at nullifying or impairing recognition, enjoyment or execise by all persons on equal footing of all rights and freedoms

• A process that could lead to poverty; hampers escape from poverty

Vulnerability

• Probability of exposure to risks and shocks that could erode income and well-being

• The risk that an individual or household will experience an episode of poverty

• Risks linked to capacity to insure oneself from effects of risks: physical assets, savings, multiple income sources, social support networks; access to formal safety net, access to credit market

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Differences and Commonalities in Development

Some Views

- The range of human development in the world is vast and uneven, with astounding progress in some areas amidst stagnation and dismal decline in others.

− UNDP. Human Development Report. 2003

- Of course there must be differences between developing countries…[but] to maintain that no common ground exists is to make any discussion outside or across the frontiers of a single country meaningless.

− Julian West. Oxford University

- Rates of growth of real per capita GNP are diverse, even over sustained periods…Is there some action a government of India could take that would lead the Indian economy to grow…? If so, what, exactly? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.

− Robert Lucas. Nobel Laureate in Economics

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- The growth position of the less developed countries today is significantly different in many respects from that of the presently developed countries on the eve of their entry into modern economic growth.

− Simon Kuznets. Nobel Laureate in Economics

Differences and Development

- The gaps between the poorest and richest developing countries are greater than those between the rich economies and upper-middle-income developing nations.

- While almost all of these countries are relatively poor in money terms, they are diverse in culture, economic conditions, and social and political structures.

- Large size entails complex problems of national cohesion and administration while offering the benefits of large markets, a wide range of resources, and economic diversity.

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- Small countries may have problems including limited markets, shortages of skills, scarce physical resources, and weak bargaining power.

- Despite variations, developing nations share a common set of problems, both domestic and international-problems that in fact define their state of underdevelopment. The study of development puts these problems, shared objectives and underlying requirements for growth in comparative historical, geographic, international economic relations, and institutional context. (Todaro, 2006)

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Meaning of Development

Traditional economic meaning

- Development is the capacity of the national economy, whose initial economic condition has been more or less static for a long time, to generates and sustain an annual increase in its gross national product (GDP) at rates of 5% to 7%.

- For this there is a stress on the industrialization often at the expense of agriculture and rural development.

- Development is seen as an economic phenomena in which rapid gains in overall growth would either trickle down to the masses in the form of jobs and other economic opportunities.

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New Economic View

- Development is the reduction or elimination of poverty, inequality and unemployment within the context of a growing economy. The development of people rather than development of things.

- The challenge of development is to improve the quality of life. Especially in the world’s poor countries.

- Development means less poverty, cleaner environment, more equal opportunity, greater individual freedom and a richer cultural life.

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- Development must be conceived of as a multidimensional process.

- Development must involve major changes in social structures, popular attitudes and national institutions as well as acceleration of economic growth, the reduction of inequality and the eradication of poverty.

- Development must represent the whole set of changes by which an entire social system tuned to the diverse basic needs and desires 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.

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Core Values of Development

SUSTENANCE: The Ability to Meet Basic Needs

- When life sustaining basic human needs like food, shelter, health and protection are absent underdevelopment exists.

- One clearly has to “have enough in order to be more”.

- Purpose of development is to create an environment in which all people can expand their capabilities and opportunities can be enlarged for both the present and future generations.

- Real foundation of human development is universalism in acknowledging the life claims of everyone.

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Poverty: New Approach Needed

• Poverty as an insufficiency in one or several essential dimensions: lack of information, irrationality, imperfect markets, public services

• Income is not sufficient to fully explain child nutrition, education, health, etc. (Provision of public goods)

• A more pragmatic and humanitarian approach than the utilitarian approach, focusing on minimum attainments.

• Effort to go beyond monetary measures and an exclusive focus on growth: Failure of poor to participate in benefits of growth

• Policies targeted at directly satisfying the perceived basic needs of the poor, rather than their income.

• Lack of consensus on basic needs and minimum attainments: geographic and individual variations (age, sex, metabolism, activities, etc.)

• Examples of minimum attainments (basic needs): nutrition (consumption, access to water), health (access to a dispensary, incidence of infectious disease, sanitation), housing (income, access, credit), education (income, access to and quality of schools), etc.

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Poverty: Facts

% of total Population

In Millions

Sub-Saharan Africa 50 381Eastern and South-Eastern Asia 18 339Southern Asia 39 575Latin America and the Caribbean 8 44Rest of the World 3 61TOTAL WORLD 22 1400

Source: UN MDG Report, 2008

▪ Greater number of poor people in Asia, but▪ Highest poverty rates in Sub-Saharan Africa

People living on less than US$ 1/day (2005)

71% (1billion) are children

Energy Poverty: Facts

Access:- 1.4 billion people have no access to electricity and 1 billion people have

unreliable access.- 2.5 - 3 billion rely on biomass (wood, agricultural residues and dung) for their

basic needs.

No electricity means: No light, no computers in schools, no night time study, No evening adult literacy classes, no steady pumping of water, no refrigeration for vaccines and medicines.

- Living without electricity also means no industrial activity, restricted agricultural productivity ( irrigation, processing capacity).

- Electricity is vital to development as it enhances income generating.

Relying on biomass means- 1.45 million deaths per year.- Less time at school- More deforestation activities

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The Least Developed Countries (LDCs)

What are the LDCs? 

- Since 1971, the United Nations has recognized the Least Developed Countries (LDCs) as the “poorest and weakest segment” of the international community. Extreme poverty, the structural weaknesses of their economies and the lack of capacities related to growth, often compounded by structural handicaps, hamper the efforts of these countries to improve the quality of life of their people. These countries are also characterized by their acute susceptibility to external economic shocks, natural and man-made disasters and communicable diseases.

  How many countries are the LDCs?

  - As of 2007 the list of LDCs includes 49 countries: 33 in Africa, 15 in Asia

and the Pacific and one in Latin America.

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Which countries are recognized as LDCs? 

- Africa : 33 countries

Angola, Benin, Burkina Faso, Burundi, Central African republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauretania, Mozambique, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Togo, Uganda, Tanzania, and Zambia.

- Asia and the Pacific: 15 countries

Afghanistan, Bangladesh, Bhutan, Cambodia, Kiribati, Lao Peoples Democratic Republic, Maldives, Myanmar, Nepal, Samoa, Salomon Islands, Timor-Leste, Tuvalu, Vanuatu, and Yemen.

- Latin America and the Caribbean: 1 country

Haiti

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What characterizes a country to be an LDC? 

- The United Nations Committee for Development Policy (CDP) uses the following criteria to identify LDCs:

- Low-income, measured by an average income per person over three years. An average income less than $745 per person per year is considered for inclusion, and above $900 for graduation;

- Weak human resources, as measured by indicators of nutrition, mortality of children aged five years or under; secondary school enrolment; and adult literacy rate;

- High economic vulnerability, measured by population size; remoteness; diversity of goods exported, share of agriculture, forestry and fisheries in the economy; instability of agricultural production; instability of exports of goods and services; and homelessness owing to natural disasters.

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What are the main challenges facing the LDCs? 

- High levels of poverty: More than half the 800 million people in the LDCs live on less than a dollar a day. Women in LDCs have a one in 16 chance of dying in childbirth, compared to one in 3500 in North America.

- Food insecurity: More than 300 million Africans, where 33 out of the 49 LDC are located, are food insecure.

- Economic vulnerability: LDCs are highly dependent of external sources of funding, including official development assistance, workers’ remittances and foreign direct investment. This overly exposes them to external shocks such as the global financial crisis, which has had a severe impact on their economies.

- Environmental vulnerability: While they contribute least to climate change, LDCs are among the groups of countries most affected by climate change. Poor housing, over-dependence on natural resources and the lack of adaptive capacity all people in LDCs at a greater risk to the impact of climate change than people in other countries. Many LDCs are also small islands whose very survival is threatened by rising sea levels.

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Commission on Growth and Development. 2008. Growth Report: Strategies for Sustainable Growth and Inclusive Development. World Bank.

IMF 2011. World Economic Outlook.

Sachs, Jeffrey D. 2005. The End of Poverty. New York: Penguin Press.

Sen, Amartya. 1999. Development as Freedom. New York: Alfred A. Knopf.

Todaro, Michael P. and Stephen C. Smith. 2006. Economic Development (9th Ed.). Pearson.

United Nations New York. 2010. World Economic Situation and Prospects 2011.

UN. 2011. World Economic Situation and Progress 2012.

References

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UNDP. (20th Anniversary Edition.) 2010. Human Development Report 2010: The Real Wealth of Nations: Pathways to Human Development.

World Bank. 2000. The Quality of Growth. Oxford University Press.

World Bank. 2005. World Development Report 2006.

World Bank. 2009. Development Economics through the Decades: A Critical Look at 30 Years of the World Development Report .

World Bank. 2009, 2010, 2011. World Development Report 2009, 2010, 2011.

(e)Atlas of Global Development (http://issuu.com/worldbank.publications/docs/978082138538)

Economics: A Guide to Selected Resources (http://www.nichols.edu/commoncontent/library/economics.pdf)