ECON 2 – Economic Development population.

These poor are the vast

majority, but not all, of the population of
This is the course involving a digression of developing countries, which comprise 82
development theories and growth models. percent of the world’s population. Many of
Economic explanations of various problems in them are inadequately fed and housed, in
development and policy alternatives are taken. poor health, and illiterate. Calculations
Experiences of developed and fast growing based on national accounts and income
economies are considered for the exposition of distribution indicate that about 700–1000
various development paths. million (10–15 percent) of the world’s 6.5
billion people (5.3 billion in developing
TORADO: countries) are poor or living on no more
than $1 a day.1 Most Americans,
A study of the existing disparities between Canadians, and Britons have never seen
developed and less developed countries, problems poverty like that, the overwhelming majority
faced by less developed countries, historical and of which is in sub-Saharan Africa, South
modern theories regarding economic development, Asia, and East Asia.
and an introduction to growth theory.  If you have an average income in the United
Intended Learning Outcomes: States and Canada, you are among the
richest 5 percent of the world’s population.
This course is designed to introduce students to the The economic concerns of this 5 percent
theories of economic development and growth, are in stark contrast to those of the majority
both classical and modern. Throughout this course, of people on this planet.. By and large, a
the focus is on two simultaneous themes: economic person’s material wellbeing (whether rich,
theory and its application to development problems; poor, or in between) is tied to the long-run
and the interaction between economic theories and growth record of his or her country
the political arena.  Income inequality is even greater for the
world as a whole than for countries having
By the end of this course, students should be able high income concentration, such as South
to: Africa and Brazil. To see these contrasts
more clearly, let us briefly compare living
 Understand the historical patterns of conditions in North America to those in
development in the Western world, and how India, a low-income country, one that is not
the development of other countries has as poor as the poorest region of the world,
deviated from those paths. sub-Saharan Africa.
 Explain the causes and implications of
income inequality. A NORTH AMERICAN FAMILY
 Use both classical and modern theories of  An average intact family in the United
growth and development to analyze the States and Canada, the Smiths, a family of
problems of the developing world. four, has an annual income of $US55,000 to
 Understand the roles of population growth $US60,000. They live in a comfortable
and human capital in the development apartment or suburban home with three
problem. bedrooms, a living room, kitchen, and
 Relate theories of international trade to numerous electrical appliances and
growth in less-developed countries. consumer goods. Their three meals a day
 Analyze macroeconomic policies include coffee from Brazil, tinned fruit from
the Philippines, and bananas from Ecuador.
aimed at facilitating development and
their implications.  The Smith children are in good health and
Use the tools developed in this class to analyze the have an average life expectancy of 77
development problems of a specific country. years. Both parents received a secondary
education, and the children can be expected
A. Required Reading(s) to finish high school and possibly go to a
university. Modern machinery and
Todaro, Michael and Stephen Smith (2015). technology, even where these require
Economic Development (12th edition). Singapore: physical work, will probably relieve their
Pearson Education South Asia Pte. Ltd. (Note: jobs. But although the Smiths seem to have
the 11th edition may also be used) a reasonably good life, they may experience
stress, frustration, boredom, insecurity, and
Part 1 PRINCIPLES AND CONCEPT OF a lack of meaning and control over their
DEVELOPMENT lives. Their air may be dirty, their water
polluted, and their roads congested. Some
Introduction How the Other Two-Thirds Live of these problems may even result from
economic progress. Nevertheless, millions
of less fortunate people throughout the
INEQUALITY BETWEEN THE WORLD’S RICH world would be happy with even a portion of
AND POOR the Smiths’ material affluence.
 Development economics focuses primarily
on the poorest two-thirds of the world’s
INDIAN FARM FAMILIES landlord, together with his extended family –
 The family of Balayya, a farm laborer in his wife, two unmarried children, two
India, has a life far different from the married sons, their wives, and their children
Smiths’. Although work, family structure, – is relatively prosperous. The family,
food, housing, clothing, and recreational whose annual income is $US6,000, lives in
patterns vary widely in the developing world, a five to six-room brick house with a tile roof
Balayya’s family illustrates the low income and a large courtyard. Their two daily meals
of the majority of the world’s population in consist of a variety of meats as well as
Asia, Africa, and Latin America relative to seasonal fruits and vegetables.4
North America. Balayya Lakshman, his wife, Machinestitched clothes are acquired from
Kamani, and their four children, ranging in the local tailor, from the village bazaar
age from 3 to 12 years, have a combined (open-air marketplace), or on monthly bus
annual income of $US900 to $US1,2002 trips to the city. The house has electric
(but several times that in purchasing lights and fans. Servants shop for food,
power), most of which consists of goods cook, clean, carry water, and tend the lawn
produced rather than money earned. Under and garden. Sridhar and his sons and
a complex division of labor, the family grandchildren have completed primary
receives consumption shares from the school. Some of the grandsons, and
patron (or landlord) in return for agricultural occasionally a granddaughter, will complete
work – plowing, transplanting, threshing, secondary school, or even graduate from
stacking, and so on. the university.
 The rice-based daily meal, the one-room
mud house thatched with palm leaves, and CONGESTION, POVERTY, AND AFFLUENCE IN
the crudely stitched clothing are produced INDIA’S CITIES
locally. The house has no electricity, clean  In the large Indian cities, there are few
water, or latrine. Kamani fetches the day’s proper footpaths for pedestrians or
water supply from the village well, a separation of fastmoving vehicles from
kilometer (three-fifths of a mile) away. slower ones; the flow of traffic consists of
Although there is much illness, the nearest the position of buses, automobiles, taxis,
doctor, nurse, or midwife is 50 kilometers trucks, jeeps, motorcycles, motor scooters,
away, serving affluent city dwellers. powered cycles, bicycles, humandrawn and
Average life expectancy is 63 years. Few motorized rickshaws, oxcarts, handcarts,
villagers can afford the bus that twice daily cattle, dogs, and pedestrians walking or
connects a neighboring village to the city, carrying head loads. Congestion, squalor,
which is 40 kilometers away.3 The family’s destitution, and insecurity characterize the
world is circumscribed by the distance a lives of the unemployed, underemployed,
person can walk in a day. and marginally employed in cities such as
 Neither Balayya nor Kamani can read or Kolkata (Calcutta), Mumbai (Bombay), and
write. One of their children attended school Delhi – more so than for the rural, landless
regularly for three years but dropped out worker. In the central city, people literally
before completing primary school. The child live in the street, where they eat, wash,
will probably not return to school. defecate, and sleep on or near the
 Despite inadequate food, Balayya and the pavement During the monsoon season, they
two sons over seven years old toil hard huddle under the overhanging roofs of
under the blazing sun, aided by only a few nearby commercial establishments. Others
simple tools. During the peak season of with menial jobs live in crowded, blighted
planting, transplanting, and harvesting, the huts and tenement houses that make up
work is from sunrise to sunset. Kamani, with urban shantytowns. In contrast, the family
help from a six-year-old daughter, spends whose major income earner is steadily
most of her long working day in the employed as an assembly line worker in a
courtyard near the house. Games, visiting, large company or as a government clerk
gossip, storytelling, music, dancing, plays, may live in a small house or apartment.
worship, religious fairs and festivals, Upper-income professionals, civil servants,
weddings, and funerals provide respite from and businesspeople usually live in large
the daily struggle for survival. houses of five to six rooms. Although they
 Balayya has no savings. Like his father have fewer electrical appliances than the
before him, he will be perpetually in debt to Smiths do, they achieve some of the same
the landlord for expenditures, not only for material comfort by hiring servants.
occasional emergencies but also for the  Social institutions and lifestyles vary greatly
proper marriages of daughters in the family. among third-world countries. Nevertheless,
 The common stereotype is that peasant, most low-income countries have income
agricultural societies have populations with inequality and poverty rates at least as high
roughly uniform poverty, a generally false as India’s. Even the poorest Americans and
view. Although many third-world villagers Canadians are better off than most of the
are poor, a number are better off. A tiny people in India and other low-income
middle and upper class even exists. countries.
Accordingly, Sridhar Ramana, Balayya’s
Globalization, Outsourcing, and Information designing, animation art, stock market
Technology research, radiology, airline reservations, tax
preparation and advice, transcribing,
 Yet both Indians and North Americans are consulting, prayers for the deceased, and
living in worlds affected by domestic other support services, especially in south
economic change and greater integration India’s Silicon Valley, Bangalore, and other
into the global economy. In the United high-technology cities Yet with India’s
States, household income distribution is sustained economic growth and increasingly
shaped more like an hourglass, with a attractive job options for college graduates,
slender middle, so that families such as the call centers will find it more difficult to hire
Smiths are falling from the middle class university graduates cheaply.
from job loss or rising to higher incomes. In  In software and related services, India
India, the gains from economic growth and moved up the information and
reform – although these gains bypass some communications technology (ICT) value
– mean rising commercial farm income for chain from Western corporate outsourcing
the families of Sridhar and Balayya and and small IT enterprises to a major exporter.
increased business and employment
opportunities in the cities.
 With globalization, the worlds of India and India’s and Asia’s Golden Age of Development
the United States increasingly are
India’s recent growth is a part of a golden
intersecting, much beyond the expanding
age of development for Asia during years of
Indian-American representation in
globalization (expansion of trade and capital
electronics, academics, business, medicine,
movements), 1980–2000. From 1980 to 2000, the
and journalism in the United States. Some
absolute incomes of the industrialized countries’
U.S. corporations (or state or local
middle class “slowed down to a crawl – only 1.2
governmental units) outsource service jobs
percent a year, a third of that experienced by their
to India, where an entry salary for a
parents – [while] that of Asian elites slowed down
university graduate is $US300–500 monthly,
only marginally – to 2.9 percent” (ibid., p. 195). The
a good salary and career opportunity by
impact of this has been most substantial among the
local standards. The corporation may have
world’s middle class (income range of $US10–
an Indian subsidiary or may subcontract
$US40 a day or annual purchasing-power
work to an Indian firm. In India, two million
equivalent income, at 1993 prices, between
English-speaking college students graduate
$US3,650 and $US14,600). The relative income of
yearly, and most work for one-tenth to one-
Asian elites (top 10 percent of income earners)
fifteenth the salary that a U.S. worker of
increased from 43 percent in 1980 to 60 percent in
comparable skill receives.
2000 of the middle 50 percent of industrialized
 Low-cost high-quality telecommunications
countries’ income earners, a group with comparable
means that U.S. companies can open a call
education and skills.
center almost as easily in Kolkata, Delhi,
Dakha, Johannesburg, and Manila as in
ASIA’S COMPETITION AND AMERICAN
Omaha, Austin, or Tallahassee. Indian
PROTESTS
employees spend several weeks of training
to Americanize their accents and take a Globalized firms, in their search for lower costs, are
crash course in Americana – “holidays, hiring Indians (and Chinese, Bangladeshis, and
regional speech patterns, weather patterns, Malaysians) to do their work in place of middle-
and the meaning of terms such as ‘frat class Americans, Britons, Swedes, or Dutch; and in
party’” – to disguise the callers’ location. some instances, as noted earlier, Asians are
subsequently establishing enterprises that compete
 As night settles in Mumbai, Megha Joshi
globally. Figure 1-1 shows U.S.
enters an office with a group of young
graduates, sitting in a row of sound-muffling
cubicles, talking into their designer
headsets. She phones someone in the
United States, 12 time zones away. “Good
morning, this is Meg,” she says, Anglicizing
her name. Working from a script, she offers
the respondent a major credit card. Other
Indian call center workers handle routine
work, such as helping a customer make a
standard order, check a bank or food stamp
balance, pay a bill, or activate a credit card;
processing insurance claims; recovering
bad debts; or providing other customer
services; routing more complicated
questions back to the call center in the
United States. Other outsourcing spans the
technology spectrum, including software income, 1960–2000, falling relative to East and
code writing, chip design, product South Asia, virtually unchanged relative to Latin
development, accounting, Web site
America, and increasing substantially relative to In understanding development economics, a
Africa. natural starting point is to begin by defining the
In the 1960s and 1970s, those representing large terms ‘Economics’ itself.
U.S. corporate interests, such as Nelson
Rockefeller, a liberal Republican, supported Definition of Economics – Economics is a social
populist programs of health, education, and welfare. science subject that guides the allocation of scarce
In subsequent decades, as multinational resources to meet unlimited needs and wants of a
corporations have become more footloose with given society.
greater global opportunities for outsourcing, these Two Main Branches of Economics (Branches of
interests are more likely to oppose large Scope)
government spending on educational and welfare
programs for the middle and working classes. The two main branches of Economics are
Indian and Asian elites anticipate doubling real microeconomics and macroeconomics.
incomes in a generation. By contrast, the middle
classes of the United States and other Microeconomics
industrialized countries are facing a collapse in
growth (doubling real incomes not in one but in It is the analysis of economics in the small
three generations), more competition from foreign countries. It looks at individuals and firms; and the
skills, and lowered expectations for a better life. Is it conditions under which they make buying,
surprising that many U.S. and Western middle consumption and production decisions.
classes are protesting against globalization?
ECONOMICS AND DEVELOPMENT STUDIES Macroeconomics
It is the study of aggregate economic variables
This course is designed to help student obtain a
such as Gross Domestic Product (GDP) growth,
better understanding of the major problems and
unemployment, inflation etc. It looks at the national
prospects for economic development by focusing
dimension.
specifically on the plight of the three-quarters of the
world’s population for whom poverty and low levels
of living are a fact of life. However, the Branches of Economics by Subject
development process in the thirds world nations The list shown in Figure 1 is not exhaustive, as
cannot be analyzed realistically or indirectly there are other sub-disciplines of economics
promoting that development. including many that are upcoming – for example
‘space economics’ that deals with outer space.
The study of economic development is one of the Since these other sub-disciplines are not the
newest and most challenging branches of the subject of this course (save for Development
broader disciplines of economics and political Economics), there is no further mention of them.
economy.

It was the Industrial Revolution which bifurcated the

World into two distinctive parts. The Rich Countries
and the Poor Countries. The rich countries are
consisted of US, UK, France, Germany and
Australia etc. Where the incomes, outputs, and
employment levels rose sharply. Whereas the poor
countries are consisted of Pakistan, India,
Bangladesh and so many from Latin America and
Africa. They have poor levels of income,
employment and production. They have very poor
standard of living. The literacy rates in the poor
counties are very low. The basic needs like food,
health and shelter are provided to the masses in
very lower amounts. Accordingly, one comes
across the heavy flow of diseases, miseries and
troubles in case of poor countries commonly known
Figure 1 of Economics by Subject
as "Developing Countries, Underdeveloped
Countries, Less-developed Countries and Third It should be noted however that there do exist a
World Countries". number of overlaps between and amongst these
sub-disciplines. As an example, some of the topics
All the poor countries are not alike. Therefore, the we will cover in this course will also include aspects
economists and policy makers classify the of environmental economics and social economics
developing countries. Despite certain sub disciplines (and many more others).
dissimilarities, the Third World countries have a lot
of common characteristics. Development Economics
After having briefly discussed some foundational
LESSON 2: What is Development Economics? aspects (just a few of them) of Economics, we can
now get our focus back to the definition of
2.1 DEFINITIONS AND OVERVIEW development economics.
“Development economics is a branch of even though tax payers are not happy. Here are a
economics that focuses on improving fiscal, few reasons:
economic, and social conditions in developing • Taxpayers may form a very small percentage
countries” . of voters due to high informality or a rural
This is only one definition. As cited by Mackenzie based majority
and Puffhausen (2017), the teaching content for
• There may be high rates of illiteracy or
development economics varies from one college or
ignorance of the political system
university to another, although there are a number
of commonalities that cut across. In the same vein, • High levels of corruption, intimidation, lack of
there would be several other definitions of constitutional checks and balances (or lack of
Development Economics but this should suffice. their enforcement), lack of transparency and
Following the great economist Amartya Sen, we many other factors
can also look at development as well-being.

2.2 KEY FEATURES OF DEVELOPMENT STRUCTURE OF DEVELOPING COUNTRY

ECONOMICS
(1) Size And Income Level: The physical size
As a complex subject, one may want to recognise of a country, its population and its GNP per capita
and distinguish Development Economics within the are the important determinants of the economic
broader set of relatable sub disciplines of position of a country. Moreover, these factors also
Economics as previously discussed. To do so, differentiate. The Third World countries from one
there are a number of characteristics of another. Out of 160 UDCs (UN Classification) 87
Development Economics. Here we adopt three had fewer than 5 million people, 58 fewer than 2.5
characteristics. million. There were 38 countries whose population
was less than 5 lac. In Third World nations there
Setting – It very consciously takes place in are large and populated nations like Brazil, India,
developing countries. However this statement Pakistan, China, Egypt and Nigeria as well as the
opens up a lot of debate because many challenges small countries like Paraguay, Nepal, Jordan, and
faced in developing countries also manifest in Chad. The large and high countries have more
developed countries – albeit with lesser incidence. resources, extended markets and they have lesser
The 2008 Financial Crisis for example resulted in dependence on foreign sources and material etc.
homelessness in some developed countries as a But the large sizes also create the problems
result of foreclosures as thousands failed to honor regarding regional imbalances, national cohesion
mortgage payments – yet the effects in some and of administration.
developing countries were not as severe since
many of them were/are not well connected to the Thus in the "Third World Scenario" one
international financial market. Hence, development finds the most populous nation 'India' with the
economics is also relevant in developed countries. population of approximately 1016 million in 2000
In terms of ethics and institutions, controversial and GNP per capita level of $460; and sparsely
activities such as share buybacks[1] are actually populated country. Singapore having the population
much more concentrated in developed countries. of 4 million people and GNP per capita of $24740
in 2000, while US population was 282 million and
Focus – It is intensely concerned with identification GNP per capita was $34260 in 1998.
of causal effects. Examples are the effects of
deworming on child health or the effects of land (2) Historical Background: Most of Asian and
reform on welfare. African Third World Nations have been the
Nature of inference – The nature of inference is to colonies of England, France, Germany, Spain and
an extent atheoretical. We may interpret this to Holland etc. The economic, social educational and
mean that the subject is mostly concerned about institutional structures of the poor countries have
field practicalities and realities that may not been molded by their former colonial rulers. These
necessarily conform to theory. We may interpret rulers introduced three important and tradition-
this to mean that due to imperfect markets in shattering ideas: (i) private property, (ii) personal
developing countries, outcomes do not always taxation, (iii) money taxation, rather taxation in
mirror the hypothetical view. Given that kind. These ideas helped in eroding the autonomy
development economics might have more of local communities, and they also developed
relevance in developing countries – culture, values certain other ways of exploitation.
and norms in this setting may drive certain
decisions/behaviours rather than economic theory. The Latin American countries are furnished
While in advanced countries a sitting government with a longer history of political independence and
may be expected to behave in a rational manner Spanish and Portuguese Colonial heritage. This
that makes taxpayers happy to the extent that shows that though the Latin American countries
voters (who are also the taxpayers) will be able to differ in their size and resources, yet these
vote it into power again at the next election, the countries are similar in respect of economic, social
same expectation may not hold in developing and cultural institutions and face similar problems.
countries. A developing country may be trapped in As far as India and Pakistan are concerned the
a poor institutional environment such that the colonial heritages from Britain have been combined
government may still secure an election victory with local traditions. It means that in case of
Pakistan and India we find 'Left Hand Drive', the
British System of education, and of administration. have shown marvelous growth in manufacturing.
While in case of Indonesia one finds "Dutch" India has the largest manufacturing sector in the
influence; and in case of Vietnam one can easily Third World countries.
observe the "French" ways and modes of life.
(6) External Dependence on Economic,
(3) Physical and Human Resources: The Political and Cultural: The external dependence
economic potentialities of any country depend of a country is related to its size, resource
upon its physical and human resources. The Third endowments, and political history. In case of
World Countries differ in respect of physical UDCs, this dependence is substantial. They are
resources. As the Gulf States are rich in oil, heavy bound to export their raw material to the DCs, and
endowments of natural resources. While the they have to import finished products as well as
countries like Bangladesh, Haiti, Yemen, Ethiopia, technologies from them. Such technologies are
Chad etc., are highly deficient in natural resources, hardly appropriate for the LDCs. In such situation,
oil and fertile lands. the growth of UDCs is highly dependent upon the
behavior of DCs. The UDCs not only depend upon
In respect of human resource endowments foreign goods and technologies, but they are highly
not only the quantity and quality of people counts, influenced by the foreign values, patterns of
but also the cultural outlooks of the people, their consumption and attitudes towards life, work and
attitudes toward work and their desire for self. This transmission phenomenon brings mixed
selfimprovement. Again, the administrative skill blessings to most LDCs, especially which are
also determines the ability of public sector to alter highly ambitious for self-reliance. But it has also
the structure of production. In case of developing been observed-that the degree of such
countries the traditions, religions, ethnic and dependence also varies from country to country in
sectarian setup differ which affect the human case of Third World.
resources. Thus the differences in physical and
human resources also differentiate themselves. (7) Political Structure, Power and Interest
Groups: The national approaches and strategies
(4) Relative Importance of the Public and followed in UDCs are based upon political
the Private Sectors: Most of the UDCs have structures, vested interests and allegiances of
"Mixed Economic Systems" i.e., they depend upon ruling elites like landlords, urban industrialists,
a mixture of public and private sectors in respect of bankers, foreign investors, the military rulers and
allocation of resources and production of goods. trade unionists etc., in addition to economic
The historical and political circumstances would considerations. The constellation of interests and
determine their role in an economy. Generally, one power among different segments of the populations
finds the greater role of private sector in Latin of most developing countries is itself the result of
American and South East Asian countries as their economic, social and political histories and
compared with African and South Asian they differ from country to country in developing
Countries. Again, in certain UDCs there is a greater world. In Latin American countries there are the
role of foreign investment like Malaysia, Singapore, landowners; there are bureaucrats in Pakistan;
Thailand, Taiwan and Gulf-States etc. While in there are money lenders in India; there are wealthy
case of Pakistan, Bangladesh, Ethiopia, Chad and sheikhs of Gulf-States which play their role in the
other African countries the foreign private politics of their respective countries.
investment has never been attractive.
(8) Ethnic and Religious Composition: There
The countries of Africa like Ghana and was a time when there existed a cold war between
Kenya where there is shortage of skilled two super powers USA and USSR and two
personnel the greater dependence was Iaid upon economic systems like capitalism and socialism.
public sector, though now a days they are But after the disintegration of USSR and Eastern
reverting towards privatization of state-owned Europe, so many developing countries curtailed
enterprises. their defense expenditures. But quite against it,
within and outside countries, the conflicts and
(5) Industrial Structure: In case of most of enmities rose. As after the incident of 11th
LDCs the main occupation is agriculture. Thus the September 2001, an era of terrorism is being
people's economic, social and cultural life is highly observed. It is said that the countries which suffer
influenced by agrarian set-up. The agriculture in from religious , ethnic and cultural differences, they
these countries, is not just an occupation, it is also will also face political instability. As a result, the
a way of life. The Asian agriculture system is close development efforts will suffer.
to Latin American's. However, the culture of Asia
and Latin America differs. Again, as far as The development of South Korea, Taiwan,
industrial structures are concerned they also differ Singapore and Hong Kong is attributed to their
in the developing countries. The Latin American cultural homogeneity. While during 1990s, and then
countries which have a long history of from 2000 to present, one finds the riots, terrorism,
independence and their incomes are higher than ethnic and linguistic tensions, civil war and conflicts
African and Asian countries follow advanced in Afghanistan, Rwanda. Sri Lanka, Iraq, India,
techniques of production in their industrial Somalia, Ethiopia, Liberia and Zairect etc.
structures. However, in 1970s and 1980s the NICs
like Malaysia, South Korea and Singapore etc.
2.3 CHARACTERISTICS OF DEVELOPING whereas in a number of developing countries
ECONOMIES societies still invest in more children per family –
We have discussed the nature of Development hence reducing the amount of money that can be
Economics as a subject or some of the attributes invested per child. Hence, the low labour
that define it. Let us now consider some of the productivity.
characteristics of developing countries. We have
already talked about some of them in the previous Poor Institutions
section. Some of the most important features of Institutions are related to the rule of law,
developing countries are listed below and explained transparency, property rights enforcement and
thereafter. corruption (among other issues). Ruttan and
Hayami (1984) defines institutions as the
• Low Industrial Base organizational or societal rules that assist in
• Low Human Development Index (HDI) facilitating coordination by helping members of the
• High marginal Productivity of Capital society/organization develop expectations that form
• Low labour productivity the basis of interaction. Corruption, transparency
• Poor Institutions and rule of law are important topics in the
development discourse because without them there
• Imperfect Markets is little or no development. In the words of Demsetz
• Low technology proliferation (1967), “property rights specify how persons may
• Raw material exporting be benefited and harmed, and, therefore, who must
• Relative land abundance pay whom to modify the actions taken by persons”.
According to Demsetz (1967), property rights
• Plenty of challenges
function by ensuring greater internalization of
externalities by properly guiding incentives.
Externalities (to be discussed in greater detail in
Due to a low industrial base, developing later topics) are scenarios in which individuals are
countries may also be referred to as low income affected by a transaction that they are not party to.
countries. Therefore, the term “Low and middle These effects can either be positive or negative. As
income countries” may also generally mean an example, if politicians can unfairly benefit from
developing countries. ‘protection payments’ from a business, then
property rights are ill-defined and institutions are
High marginal Productivity of Capital not well-formed in such a jurisdiction.
Developing countries are characterised by a very
low base in as far as capital is concerned. That also Imperfect Markets
means a unit of capital can do more than it could do Perfect markets will be discussed in more detail
in developed countries. Developed countries are later in the course in Lesson 3 (Section 3.8). Three
characterized by capital saturation, and it means defining conditions for perfect markets are free
that investor funds/loanable funds are plentiful in market entry and exit, many buyers and sellers and
their supply on the market to the extent that an perfect (widely available) information. Perfect
investor is not always able to get the first chance at markets are free markets without any exogenous
the best returns project. On the other hand, barriers or restrictions. However, in developing
developing countries are capital starved, and very countries the low rates of technological proliferation
good projects can spend years before attracting may result in market imperfections. Market
any funds. Thus, capital in developing countries is imperfections are distorted markets that do not
likely to fund the best ‘high return’ projects ceteris reflect genuine market equilibrium. For example, for
paribus (holding other factors constant). Secondly, certain political ends, a government may enforce
given the relative absence of technology, a small certain ideological training programs (diplomas and
amount of capital can ensure jumps in degrees) in a manner that do not correspond to the
technological investment that can have an dictates of the market in any way, thus creating
important multiplier effect on productivity, incomes market distortions by creating an oversupply of
and welfare. Investing in an ox-drawn plough in a graduates that are not sought after on the market.
peasant area in a developing country can protect Due to low technological proliferation (internet for
the beneficiary family from hunger, potentially also example), a recent graduate in a developing
allowing it to sell excess produce on the market. country may struggle to find a position that matches
This would not be the same in an advanced country his or her profile yet in a developed country there
where the ‘ox-drawn’ plough might now be a relic may be job matching programs or even phone
found only in museums. applications that match graduate profiles to jobs to
create nearly a ‘perfect information’ scenario.
Low labour productivity
With the little or no proliferation of technologies that
Low technology proliferation
complement labour, there is also very low labour
Developing countries are also not as
productivity (output per unit of labour) in developing
technologically advanced as their developed
countries. However, labour complementation is only
counterparts. The industrial revolution did not take
part of the story. Human capital theory tells us that
place in many developing parts of the world, and
developing Western countries have had less
‘catchup’ is the name of the ‘game’ that developing
children per household, allowing them to invest
countries are currently engaged in. However,
more per child in terms of training and education
importing technology is expensive. Where
 developing countries do manage to import  PPP Measure: the number of units of a
technology it is usually in the form or finished country’s currency required to purchase the
products or components for assembly. Despite the same of basket of goods and services in the
high technology costs, developing countries also local market that a US $1 would buy in the
have a long way to go from the perspective of USA. Under PPP, exchange rates should
increasing technical capabilities and their adjust to equalize the price of a common
applications in universities. basket of goods and services across
countries. Penn World Tables rank
Raw material exporting countries using the PPP method.
Related to low technological proliferation,
developing countries are mostly raw material Problems:
exporters because they lack the technology to  Underreporting of income by developing
convert those materials into finished products. countries and high proportion of income is
generated for self-consumption.
 Prices of non-traded goods are not
Plenty of challenges appropriately reflected in exchange rates
‘You heard that right’. In some developing countries and markets are not competitive and
almost nothing works. There are no proper roads, externalities are not reflected.
clinics, educational and recreational facilities for
 The technology gap refers to the gap in
young people. In some developing countries there
access to and knowledge about technology.
is no electricity and piped water even in urban
Poorer populations have less access to
areas. The schools and universities do not have
technology, and younger people tend to
enough capacity, and there are no proper
know more about how to use technology
provisions in the constitution or rather enforcement
than older people
of property rights to ensure the right incentives are
there to attract capital and investment.

Definition of Economic Development: 1970s

Economics, Institutions, and Development: A  Dethronement of GNP in the 1970s and
Global Perspective increasing emphasis on “redistribution from
growth”
 Increasing emphasis on non-economic
Examples of an affluent economy and social indicators
subsistence economy.  Economic development consists of the
Nature of development economics: reduction or elimination of poverty,
 Traditional economics- efficient inequality and unemployment within the
 allocation of scarce resources context of a growing economy.
 Political economics- social and  A resource frontier contains natural
 political process resources
 Development economics- Role of Definition of Economic Development
 values, attitudes, and institutions  World Bank in its 1991 WDR asserted that
the “challenge of development is to improve
Definition of Economic Development: the quality of life.”
1950s  The improved QOL involves higher
 In economic terms, development is the incomes, better education, higher standards
capacity of a nation to generate and sustain of health and nutrition, less poverty, a
an annual increase in its GNP of 5% or more. cleaner environment, more equality of
Traditional economic measures: opportunities, greater individual freedom,
 GDP: is the market value of all final goods and a richer cultural life.
and services produced within a country in a  Standard of living is a measure of the
given period of time wealth and personal enjoyment that a
 GNP: is the market value of all final goods person experiences
and services produced by permanent  A basic industry is one in which most of the
residents of a country in a given period of goods or services produced are exported
time out of the geographical region
 GNP= GDP+ net factor income from abroad Economic factors of development
 capital
Definition of Economic Development:  Labor
 Common alternative index is the rate of growth of  Natural resources
income per capita or per capita GNP  technology
 Per capita GNP: is the per-head value of  established markets (labour, financial,
final goods and services produced by goods)
permanent residents of a country in a given Non-economic factors (institutional, social,
period of time. It is converted to USD using values)
the current exchange rate.  attitudes toward life and work
 public and private structures
  cultural traditions
 systems of land tenure, property rights Common Characteristics of Developing
 integrity of government agencies Nations

Definition of Economic Development: Low levels of living

“Development is a multi dimensional process - Per capita national income
involving changes in social structures, popular - Relative growth rates of national and per
attitudes, and national institutions, as well as the capita income
acceleration of economic growth, the reduction of - Distribution of national income
inequality, and the eradication of poverty.” (Todaro - Extent of poverty
and Smith) - Health
- Education
Development is both a physical reality and a state - The Human Development Index
of mind for attaining a better life.
Basis Economic Economic
Three basic core values as a practical guideline Development Growth
for understanding development Effect Brings Brings
 Sustenance qualitative quantitative
 Self-esteem and changes in
 Freedom quantitative the economy
changes in
Specific components of better life vary from the economy
time to time and from society to society. Relevance Economic Economic
Three Objectives of Development: development growth is a
 Increase availability and distribution of basic is more more relevant
goods relevant to metric for
 Raise levels of living measure progress in
progress and developed
 Expand range of social and economic
quality of life countries. But
choices available to individuals
in developing it's widely
nations. used in all
Human Development Index
countries
Ranks 175 countries into 3 groups
because
 Low human development = 0.00-0.099
growth is
 Medium human development = 0.5-0.799 necessary
 High human development = 0.80-1.00 condition for
Country HDI GDP rank- development.
HDI rank
Low HD: 0.436 +21 Low levels of productivity
Tanzania - High rates of population growth and
Medium HD: 0.735 -21 dependency burdens
Turkey - Substantial dependence on agricultural
High HD: 0.936 +3 production and primary-product exports
Canada - Prevalence of imperfect markets
- Dependence and vulnerability
Initiated in 1990 and undertaken by UNDP in its
annual series of HDRs. How Developing Countries Today Differ from
HDI is based on 3 goals: Developed Countries in Their Earlier Stages
 Longevity - Physical and human resource endowments
 Knowledge - Per Capita incomes and levels of GDP in
 Standard of living relation to the rest of the world
- Climate
HDI= 1/3(Income index)+1/3(Life - Population size, distributions and growth
expectancy index)+1/3(education index)
- Historical role of international migration
- International trade benefits
CHAPTER 2
Classifying Countries - Basic R&D capabilities
Most Developed Countries (MDCS) - Stability and flexibility of political-social
- the richest of the industrialized and democratic institutions
nations of the world. - Effectiveness of domestic economic
institutions
Less Developed Countries (LDCs)
- countries with little industrial development, little Developed vs. Developing
wealth, and high population growth. Developed Developing
- Good educational - Schooling not
Least Developed Countries (LLDCs) system; available to all
- very low per capita income, low literacy rates, and - school required citizens of country.
very little in the way of manufacturing industries. - Widely available - Poor health care;
 health care. not enough  Greater quantities of natural resources,
- Many doctors. human resources, and capital,
manufacturing and - Live by  Improvements in the quality of resources,
service industries. subsistence and
Farmers use farming in rural  Technological advances that boost
technology. areas. Few productivity.
- Participate in businesses.
international trade - Few items to trade
- People mostly live - People live mostly What is Development
in cities. in rural areas.  Economic development is the process by
- People have - Modern which a nation enhances its standard of
access to communications living over time.
telephone and are are not found  The economic standard of living is often
part of global outside of defined as GDP per capita.
network. - city.
Economic Development vs. Economic Growth
FIRST WORLD COUNTRIES
the term "First World" refers to so called Economic Growth
developed, capitalist, industrial countries, roughly, a is a narrower concept than economic
bloc of countries aligned with the United States development. It is an increase in a country's I level
after World War Il, with more or less common of national output which can be caused by an
political and economic interests: North America, increase in the quality of resour (by education etc.),
Western Europe, Japan and Australia. increase in the quantity of resources &
improvements in technology or in anot way an
SECOND WORLD COUNTRIES increase in the value of goods and services
"Second World" refers to the former produced by every sector of the economy. Econo
communist-socialist, industrial states, (formerly the Growth can be measured by an increase in a
Eastern bloc, the territory and sphere of influence country's GDP (gross domestic product).
of the Union of Soviet Socialists Republic) today:
Russia, Eastern Europe (e.g., Poland) and some of Economic development
the Turk States (e.g., Kazakhstan) as well as is a normative concept i.e. it applies in the
China. context of people's se of morality (right and wrong,
good and bad). The definition of economic
THIRD WORLD COUNTRIES development given by Mich Todaro is an increase
"Third World" are all the other countries, in living standards, improvement in self-esteem
today often used to roughly describe the developing needs and freedom fr oppression as well as a
countries of Africa, Asia and Latin America. greater choice. The most accurate method of
The term Third World includes as well measuring development is Human Development
capitalist (e.g., Venezuela) and communist (e.g., Index which takes into account the literacy rates &
North Korea) countries, as very rich (e.g., Saudi life expecta which affect productivity and could lead
Arabia) and very poor (e.g., Mali) countries. to Economic Growth. It also leads to the creation of
m opportunities in the sectors of education,
healthcare, employment and the conservation of
What makes a nation third world? environment.It implies an increase in the per capita
 Despite ever evolving definitions, the income of every citizen.
concept of the third wor serves to identify
countries that suffer from high infal Economic Growth
mortality, low economic development, high does not take into account the size of the
levels of povert low utilization of natural informal economy. The informal econom also
resources, and heavy dependence ‹ known as the black economy which is unrecorded
industrialized nations. economic activity. Development alleviates pec from
 These are the developing and low standards of living into proper employment with
technologically less advance nations of suitable shelter. Economic Growth does take into
Asia, Africa, Oceania, and Latin America. account the depletion of natural resources which
 Third world nations tend to have economies might lead to pollution, congestion & dise:
dependent on tl developed countries and Development however is concerned with
are generally characterized as poor wi sustainability which means meeting the needs of
unstable governments and having high the pres without compromising future needs. These
rates of populatic growth, illiteracy, and environmental effects are becoming more of a
disease. problem
 Most third world nations also have a very Governments now that the pressure has increased
large foreign debt. on them due to Global warming.

What is growth? Economic growth

 Economic growth is the increase of a is a necessary but not sufficient condition of
nation's real output (GDP). economic development.
 Results from: