Development Economics

Development Economics

1. Introduction to development

   • Economics Growth
     • Increase in GDP (quantitative measure)
       • Limitations of GDP as measurement
         • Shadow economy not registered
         • Regional variations
         • Externalities
         • Quality change
         • Amount of leisure time
         • Difference in purchasing power
   • Economics Development
     • Improvement in quality of life (qualitative measure)
     • Reduction in poverty and unemployment, improved health care and education; distribution of income; freedom of choice; environmental protection
   • SR: each can exits without the other LR: Both need to be there, otherwise fails
   • Characteristics of Economics Growth
     • Variations in long-run growth rates
       • ELDC high rates due to low income EDC low rates due to high income
       • GDP per capita
     • Changes associated with economic growth
       • Primary- Secondary- Tertiary (due to income elasticity of demand)
       • Urbanization
       • Growth in GDP per capita
       • Increased productivity
       • Increased international trade
     • Pollution and environmental degradation
       • Deforestation
       • Loss of biodiversity
       • Soil degradation
       • Hazardous waste
       • Air/ water pollution
       • Global warming
     • Income inequality
       • Prioritize growth
         • Investment from high income earners' savings
           • top 10%, unequal distribution
     • Sustainable development
       • economic growth in the short run must not compromise the ability of an economy in the long run to meet the needs of future generations
       • Solutions
         • Government provision of basic sanitation and clean water
         • Extension of property rights
         • Prohibition of polluting activities
         • Pollution taxes
         • Tradable pollution permits
         • Education of farmers and communities
         • Family planning
         • Removal of subsidies that encourage the use of fossil fuels
       • Common characteristics of ELDCs
         • Low levels of GDP per capita
         • High level of poverty
         • Relatively large primary sector
         • Large informal markets
         • High birth rates
         • Low levels of productivity
         • High levels of unemployment/ underemployment
         • Dependent upon developed economics
       • Diversity between ELDCs
         • Historical background (colonization)
         • Resource endowment and geographical factors
         • Political structures
           • Fiscal policies
         • Industrial structure
         • Ethic/religious factors
     • Poverty Trap
       • Low income Low saving Low investment Low econ growth
       • Low income Low education Low human capital, Low productivity
     • International Development Goals
       • Eradicate extreme poverty and hunger
       • Achieve universal primary education
       • Promote gender equality and empower women
       • Reduce child mortality rate
       • Improve maternal health
       • Combat HIV/AIDS and other diseases
       • Ensure environmental sustainability
       • Develop a global partnership for development

2. Measuring Development

   • Indicators of Development
     • Indicators: due to vagueness of development
       • Monetary/Financial
         • GDP/GNP
         • GDP/GNP per capita
           • Limited to income distribution
         • PPP with GDP/GNP per capita
       • Health
         • Birth rates
           • High in ELDCs
         • Life expectancy at birth
           • Low in ELDCs
         • Infant mortality rates
           • High in ELDCs
         • Population growth
           • High in ELDCs
       • Education
         • Literacy rates
         • Net primary education enrolment
         • Primary teacher/pupil ratio
       • Important: Compare and contrast figures
     • Composite Indicator
       • Human Development Index (HDI)
         • GNP per capita, life expectancy and literacy rates
         • Compare and Contrast
           • Difference in HDI ranking and GNP per capita

3. Domestic Factors

   • Education and health
     • Opportunity Cost from government
       • But its merit G&S
     • Entrepreneurs
     • High labor supply - low GDP per capita and vice versa
   • Appropriate technology
     • Investment
       • the forgoing of current consumption for increased future consumption
     • Appropriate to labor supply
       • Capital-intensive
       • Labor intensive
     • Low costs to marginally increase production
       • e.g. bikes or motorcycles
   • Credit and micro-credit
     • Investment needs Saving, which requires surplus of income
     • Micro-credit schemes
       • Systems of small loans for income-generating activities which enable poor communities in ELDCs to gain some economic stability
       • Aim to diversify skills in local communities
         • Combat over-specialisation
       • After some financial and skill training
   • Empowerment of women
     • Lower birth rates
     • Underemployment of women
     • Reduce child malnutrition
     • Reach few Development Goals
   • Income Distribution
     • Unequal constrains econ. growth
       • Low income high propensity to cosume
       • High income high propensity to import
         • Capital flight
   • Institutional Factor
     • Over-regulation
     • Property rights
     • Lack of infrastructure
     • Political instability
     • Large informal economy

4. International Trade

   • International Trade problems
     • Over-specialisation
       • Short range of exports
         • Deterioration of Term of Trade
     • Primary product price volatility
       • Hard to plan and invest
         • Oil and gas
     • Inability to access international markets
       • "Free Trade" EDCs subsidize commodities
         • ELDCs can't compete
           • Unable to export
   • Trade Strategies
     • Open, outward-orientated (export promotion)
       • Free Trade
         • Specialize in manufactured goods rather than primary goods which ELDCs have comparative advantage
           • Commodities have low YED
             • E.g. China and India
     • Closed, inward-orientation (import substitution)
       • Protectionism: Tariff, Quotas and substitutes
         • Low growth due to lack of movement of resources
           • e.g. Ghana and South American countries
     • Trade liberalisation
       • Movement towards free trade, specialise in G &S with comparative advantages
     • WTO
     • Diversification
       • Aim to gain stable revenue from manufactured goods
       • Capital investment and technology
     • Bilateral and regional preferential trade agreements
     • Fair trade organization
       • Beneficial contracts and fair prices for producers in ELDCs
         • Training for long term stability

5. Foreign Direct Investment

   • Activities of MNCs
     • Potential Adv.
       • Investments helping to overcome saving "gap"
       • Employment
       • Training and education, expertise and R&D
       • Improvements to local infrastructure
       • Tax Revenue
       • Local multiplier effects
       • Competitive benefits
       • Wider choice and lower prices for ELDC consumers
     • Potential Dis.
       • MNCs don't use local employees for high income positions
       • Profits repatriated and taxes avoided
       • Crowding out
       • Political Influences
       • Take advantage in different tax rates
       • Use then leave
       • Take advantage of "relaxed" labor and environmental regulations

6. Aid and Multilateral Assistence

   • Sources of Aid
     • Donor government ODA
     • NGOs
   • Types of Aid
     • humanitarian (food, medical and emergency relief in short term)
     • Development (grants, long-term loans, project and tied aids and technical assistance for long term development goals)
     • Bilateral (individual governments) and Multilateral (e.g. World Bank)
   • Evaluation
     • Adv
       • Fills saving and foreign exchange gaps
       • Funds health/education/infrastructure
       • Aids recovery from disaster
     • Dis
       • Does not reach those most in need
       • ELDCs lack skills to carry out projects effectively
       • Food aid causes dependency
       • Dependency culture develops
       • Aid strengthens government control
       • Corruption
       • Unsustainable industrilaisation
   • Trade vs. Aid
     • Free Trade Arguments
     • Protectionism Arguments
   • The IMF
     • Promote stabilization polices
       • Sharp shocks on ELDCs due to fiscal reforms
         • Ineffective
     • Dominated by rich countries
     • Sustainable econ. Growth
   • The World Bank
     • Breaking poverty cycles
       • Healthcare/education provision
       • Access to credit
       • Effective tax system
       • Property right
       • Empowerment of women
       • Reduced corruption
       • Infrastructure
       • Innovation
     • Dominated by rich countries
       • Scope leads to widening income distribution

7. International Debt

   • International finance
     • Debt hampers Growth and Development
     • Structural Reforms
       • Pays debt, but widens income distribution and loss of welfare
     • Capital Flight
     • Non-converertible currency
     • Debt relief Funds with strict policies to aid ELDCs with high debts

8. Markets vs. Intervention

   • Market-oriented Policies
     • Policies
       • Free Trade
       • Floating exchange rate
       • Labor market reforms
       • Deregulation and privatisation
       • Liberalised flows of capital, goods and services
     • Strengths
       • Reduced incidence of government failure
       • Efficient working of the price mechanism
       • Competition and efficiency
       • Allocative and productive efficiency from reduced barriers to entry and the movements of resources
     • Weaknesses
       • Market failure
       • Asymmetric info in market
       • Weak institutions needed for effective markets
       • Income/access to resource and credit inequality
       • Development of dual economy
   • Interventionist Policies
     • Policies
       • Provision of infrastructure
       • State provided/subsidized education and healthcare
       • Welfare safety nets (basic levels of welfare)
       • Demand-side policies to maintain macro stability
     • Strengths
       • Correction of market failures
       • Stable macro objectives
       • Reduced income inequality and safety nets provided
       • Infrastructure provision
     • Weaknesses
       • Government failures
       • red tape, bureaucracy and corruption
       • Planning problems through lack of information and time-lags
   • Market with government intervention
     • Good governance
       • 'How' rather than 'what'
     • Interventionism good at education/healthcare
     • Market good at export promotion, privatization and less barrier to trade
     • However, every countries is unique, thus no "blue print"
     • Start with interventionism then gradually move to market-based is ideal