Introduction

Lecture 1

What is Development Economics (DE)?

• Development Economics is mainly a study of the economic transformation of those countries which are part of the developing world.

• It takes two strands of thought that for the understanding of DE. Problems of developing countries are best understood in the context of

international environment. Growing literature approach to market failure and government intervention.

• It helps us to understand the nature and causes of poverty in low income countries and transition of societies from primarily rural to primarily industrial with bulk of resources being utilized to serve service and industrial sector.

• DE also shares with us theories of the perpetuation of underdevelopment but non seems to have universal identity.

• It accounts for the upsurge of interest in the new international economic order.

• The challenge of development is very different. DE discuses advances in growth theories coupled with more detailed understanding of the sources of growth and refinement of techniques for resource allocation.

A few words about the use of the terms ;

“Developing” and “Developed”. • These words are misnomers. • Before 1950 (Backward vs Advanced).• After 1950 (Underdeveloped, Developing or Less Developed Vs

Developed). • Euphemistic terms ( Lagging and Leading). • Other distinction: North and South.• High income, upper middle income, lower middle income and low

income.

What is the need of Development ?

Human evolution process has been a story of how informal, imaginative, institutions that replace the formal constructs we are accustomed to in industrialized economies .

It is the primary objective of the majority of the world’s nations. To raise the income, well-being and economic capabilities of peoples everywhere is easily the most crucial social task facing us today.

When we speak of a developed society , we think of people who are well fed and well clothed.

We think of a society free of violent discrimination, with tolerable levels of equality .We think of sick receiving proper medical care and people do not have to sleep on the sidewalks.

Physical quality of life be high, and be so uniformly, rather than being restricted to an incongruously affluent minority.

What is underdevelopment? Agriculture in the early stages of development does not provide the purchasing

power over industrial goods.

Huge population size combined with low level of human capital formation.

Lack of psychological conditions required for modernization.

Dependency

System of Governance

Low per capita income

Composition of imports and exports

• Since the mid eighteenth century (1750), a small but slowly growing number of countries took the lead in development and have continued to widen their lead over most countries.

• Development Economics tries to understand why and how this happened and what the lagging countries can do to narrow their development lag and even catch up

Why did it take one and half century to develop this subject?

The gap between lagging and advanced nations had already started to widen in 1800.

Most of the developed countries possessed developing countries as their colonies or quasi colonies. They fetched cheap raw materials and markets for their manufacturing output.

In World War II, colonial powers lost their power. They needed manpower and resources from their colonies, but they were unable to hold their empire by force.

The process of decolonization became evident. The process further accelerated due to the start of Cold War.

United States had a remote apprehension that if there is a delay in decolonization, these colonies might become socialist. Because of this fear there was a spate of decolonization in Africa in 1960

The basic question that we intend to answer in this course is:

Why some countries are underdeveloped and others are not?

Two Problems

We encounter two problems when we ascertain what factors determine backwardness. (convergence

approach) Endogeniety problem (Causality), Superficial (and sometimes wrong) policy interventions. (Policy to reduce fertility rate)

Beyond the Convergence Idea

Multiple equilibria; bad equilibrium because of coordination failure, the multiple equilibria context views

policy as a way of pulling the economy from low equilibrium to higher equilibrium.

(Dependency Theories) Variations in historical legacies — or initial conditions — may also be regarded as an important determinant of economic development.

Millennium Development Goals• Set for the year 2015, the MDGs are an agreed set of goals that can be

achieved if all actors work together and do their part. • Poor countries have pledged to govern better, and invest in their

people through health care and education. Rich countries have pledged to support them, through aid, debt relief, and fairer trade.

Goal 1: Eradicate extreme poverty and hunger Goal 2: Achieve universal primary education Goal 3: Promote gender equality and empower women Goal 4: Reduce child mortality Goal 5: Improve maternal health Goal 6: Combat HIV/AIDS, malaria and other diseases Goal 7: Ensure environmental sustainability Goal 8: Develop a Global Partnership for Development

Sustenance, Self-esteem, Freedom from Servitude

In short, by development we now mean a sustained elevation of an entire society. A society should be able to provide its citizen or members three basic things:

1.      Sustenance (the ability to meet basic needs): A human being needs food, shelter, health and protection.

2.      Self-esteem: To establish a sense of worth and self-respect among its citizens.

3.      Freedom from Servitude:

Societies, which can supply its citizen’s sufficient supply of these three ingredients, should be considered as developed.

Today’s Biggest Development Challenges

One billion slum dwellers in the developing world’s cities

One billion people in remote lagging areas

On billion people at the bottom of global hierarchy of nation

Lecture 2

Beginnings of Sustained Economic Growth The rapid sustained increase in per capita GNP characteristic of modern

economic growth began in the West one to two centuries ago.The West and Afro-Asia: The Nineteenth Century and Today GNP per capita for Developed Countries in Europe in the early 199os was

roughly 15 to 20 times that of Afro- Asian countries.Capitalism and Modern Western Economic Development Why did sustained economic growth begin in the West? Capitalism and break up of feudalism from the fifteenth to the eighteenth

centuries.After the eleventh century the growing long distance trade between

capitalistcenters contributed to the collapse of the medieval economy.Private property , deposit banking, formal contracts, craft guilds, merchantassociations, joint stock companies, insurance , international financial

marketsnaval protection of trade vessels, and government support in opening

marketsand granting monopoly privileges for interventions.

Why was capitalism first successful in the West? The break down of the authority of the medieval Roman Catholic

Church, together with the Protestant reformation of the 16th and 17th centuries, stimulated a new economic order.

Between the 16th and 19th centuries, Western Europe witnessed the

rise of strong national states that created the conditions essential for rapid and cumulative growth under capitalism.

Monarchy ceded power to the bourgeoisie class.

The nation-states established a domestic market free of trade barriers, a uniform monetary system, contract and property law, police and militia protection against internal violence, defense against external attack, and basic transportation and communication facilities.

The declining influence of the church coincided with the enlightenment , a period of great intellectual activity in 17th and 18th century.

Intellectual and economic changes led to political revolutions in England, Holland and France in the 17th and 18th centuries that reduced the power of the church and landed aristocracy.

The modern capitalism is distinguished from earlier economic systems by a prodigious rate of capital accumulation.

Capitalism as an engine of growth, spread beyond Europe to the outpost of western civilization .

However modern industrial capitalism was established in the West at great human cost.

Economic Modernization in the Non-Western World Capitalism led to modern economic growth in only a few non-Western

countries. Japan’s level of economic development was much lower than Western countries

in the middle to later nineteenth century. In 1867, it did away with feudal property relationship.

Japan’s guided capitalism under the Meiji emperor, 1868 to 1912, relied on state initiatives for :

large investment in infrastructure, helping domestic business find export opportunities, making laws encouraging freedom of enterprise and corporate

organization Banking System Hiring foreigners to adapt and improve technology under local

government or business direction. Today’s international economic conditions are not so favorable to LDC

export expansion as against Japanese approach of using international competition and market clearing exchange rates to spur export.

Japan is a good lesson to learn but pathologies in growth, such as zaibatsu

concentration, income inequality, labor union repression, militarism and imperialism.

Korean – Taiwanese Development Model The governments of Korea and Taiwan systematically intervened to further economic development:• building infrastructure• providing tax incentives and subsidized credit for export manufacturing.• investing heavily in primary education and other human capital.• maintaining macroeconomic stability during external shocks.• public-private sharing of information alongside competition by a few. • high quality of economic management.• Both countries have pursued dual–industrial strategy of protecting import substitutes and promoting labor intensive manufactures in exports.• In both countries , government owned and controlled financial institutions

provided cheap investment funds for the private sector.• They borrowed substantial technology from abroad, often increasing

productivity while learning to meet foreign standards for manufactured exports.

The two countries subordinated agriculture to industry using a state monopsony to keep farm prices low.

Both countries achieved widely shared improvements in economic welfare which brought legitimacy to government policy.

Both countries relied on authoritarian governments and repressed labor union, as Japan did in its early modernization but unlike Japan they were successful in achieving low income inequality before democratization.

The Russian – Soviet Development Model The 1917 Communist revolution provided an alternative road to economic modernization, an approach usually associated with Soviet leader Joseph

Stalin,(1924-1953). The first five year plan of 1928 featured:

• replacement of consumer preferences with planners’ preferences• state control of capital and land• collectivization of agriculture• virtual elimination of private trade

State monopoly trading with the outside worldTransformation in to major industrial power

• Share of industry in NNP increased from 28% to 45% and share of labor from 18% to 29%

• Decline of agriculture share in NNP from 49% to 29% and share of labor from 71% to 51%

• 60% illiteracy rate, avg life expectancy of 40 years, and widespread poverty before the revolution gave way to universal literacy, life expectancy of 70 years and economic security.

The Fel’dman- Stalin Investment Strategy• China and India used the Soviet priority on investment in the

capital goods industry as the centre piece of planning in the 1950s.

• The Fel’dman model implies not merely sacrificing current consumption for current investment and also cutting the fraction of investment in the consumer goods industry (λ2) to attain a high level (λ1) .(Planning Commission 1928).

• Between 1928 and 1937, heavy manufacturing’s share of the product of total manufacturing increased from 31% to 63%, where as light manufacturing ‘s share fell from 68% to 36%.

• During the same period gross capital investment grew at an annual rate of 14 % and the ratio of gross investment to GNP doubled from 13% to 26%. • Household consumption scarcely increased (0.8 %) per year while share of

consumption in GNP (1937 prices) declined from 80% to 53%.

Indian Adaptation of the Soviet Investment Model

• The Indian Planning Commission tried to combine the Fel’dman- Stalin Investment Strategy with democratic socialism to reduce capital

shortages. • New investment in heavy industry occurred more slowly than had been planned

because of technical and managerial problem.• Planners miscalculated the demand for consumer and capital goods as a result of

unreliable figures on population growth, income distribution and demand elasticities.

The unbalanced investment in capital goods industry suggests:• A larger investment share in this industry is likely to increase

economic growth if there is sufficient demand for capital goods.• The squeeze on current consumption implied by the unbalanced

investment pattern may be at least as long as a generation.• Planners in capitalist and mixed economies may have too

limited a control over total investment to implement a Fel’dman investment strategy.

Kuznets identified six characteristics in the growth process of

developed countries:• High rates of growth of per capita output and population• High rates of increase in total factor productivity• High rates of structural transformation of the economy• High rates of social and ideological transformation• The propensity of economically developed countries to reach

out to the rest of the world for markets and raw materials.

The Limited Value of the Historical Growth Experience:

Differing initial conditions• Physical and human resource endowments• Per capita incomes and levels of GNP in relation to the rest of the world• Climate • Population size, distribution and growth• Historical role of international migration• International trade benefits• Basic scientific and technological research and development capabilities• Stability and flexibility of political and social institutions

Lecture 3

Income and Growth

Distribution of income across the world’s nations is extraordinarily skewed.

85% of the world’s population shares just 20% of total global output.

Switzerland ‘s per capita income is close to 400 times that of Tanzania.

There are some measurement issues of income in developing countries e.g under-reporting of income.

Self consumed crops outputs may not be reported adequately. A serious issue comes from the fact that prices for many goods in all countries are

not appropriately reflected in exchange rates.

GNP measurement uses market prices to compare apples and oranges.

Distortions in prices can be corrected for by imputing and using appropriate shadow prices that capture true marginal values and costs.

Historical Experience Over the period 1960-85, the richest 5% of the world’s nations averaged a per

capita income that was twenty nine (29) times the corresponding figure for the poorest 5%.

Over the period 1965-90, the per capita incomes of East Asian economies increased at an annual rate of 5.5%.

Between 1980 and 1993, China’s per capita income grew at an annual rate of 8.2%. The data of 102 countries reveal that during 1960-85, the per capita growth

averaged 1.9% per year. In Latin America per capita income fell by 11% during 1980s and sub-Saharan

Africa experienced substantial stagnation and decline of per capita income. The diverse experience of countries demand an explanation, but this demand is

ambitious. The observation that several countries have changed relative positions suggests that

there are no ultimate traps to development. Poor countries seem to have some advantages.

Income distribution in developing countries It is common place to see enormous wealth coexisting with great poverty.

Many faces of under-development Human development A relatively prosperous country may fare poorly on some of the common sense

indicators. There is an overall co-relation of human development with per capita income, but it

is worthwhile to be sensitive to the outliers.

Index of human developmentDirect physical symptoms of under-development are easily observable and

independently measurable. International agencies and national statistical surveys have been collecting

data on the incidence of malnutrition, life expectancy at birth, infant mortality rates, literacy rates etc.

Some middle income countries exhibit low human development rates and vice versa.

HDI has three components: Life expectancy at birth, measure of educational attainment of society and per capita income.

HDI creates, for each country, a final number that takes a value somewhere between 0 and 1.

Per capita income and human developmentPer capita income, or even the equality of its distribution, does not serve as

its unilateral guarantee of success in ‘human development’.

Per capita GDP still acts as a fairly good proxy for most aspects of development. It can be argued that rising income levels ultimately and inevitably translate in to

better health, nutritional, and educational standards in a population.

Some structural features Demographic characteristics: High population growth has two effects:

I) Overall income must grow faster to keep per capita growth at reasonable levels.

II) Overall population is quite young.

Occupational and production structure: Agriculture accounts for a significant fraction of production in developing

countries. Substantial agriculture output is being self –consumed.

Labor force living in rural sectors: 72% for low income category, 60% for middle income countries and 80% in developed countries are urbanized.

Rapid rural urban migration There are push and pull factors involve. The average rate of urban population growth over the period 1980-93 was 3.9% per

year for low income countries. 2.8% for middle income and 0.8 for developed countries.

For developed economies, large part of migrants get employed in services sector, where as it is the same for developing countries as well.

International Trade All countries in the world with differing variations are significantly involved in

international trade. Ratio of exports and imports to GNP against per capita income does not reveal a

significant trend. These ratios are low for countries like India, USA and Mexico. The difference between developed and developing countries is more pronounced in

composition of trade.