HS 202: ECONOMIC DEVELOPMENT:PROBLEMS AND POLICY Mrinal K. Dutta, Dept. of Humanities and Social Sciences, IIT Guwahati, Assam, India. Indian Institute

HS 202: ECONOMIC HS 202: ECONOMIC DEVELOPMENT:PROBLEMS DEVELOPMENT:PROBLEMS

AND POLICYAND POLICY

Mrinal K. DuttaMrinal K. Dutta,,

Dept. of Humanities and Social Sciences, Dept. of Humanities and Social Sciences,

IIT Guwahati, Assam, India.IIT Guwahati, Assam, India.Indian Institute of Technology Guwahati

Development EconomicsDevelopment Economics

Relatively new branch of economicsRelatively new branch of economicsDevelopment - Post World War II Development - Post World War II PhenomenonPhenomenonBroader than traditional economicsBroader than traditional economicsConcerned with developing economiesConcerned with developing economiesWhich are the developing countries?Which are the developing countries?

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Economic Development?Economic Development?

• Traditional economic measures– GNP (5%-7%)– PCI (Real)-> economic well being– Planned alteration of structure of production

and employment– Casual reference to non-economic social

indicators– Belief in “trickle down effect”

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The new economic view of development Mahbub ul Haq: “The problem of development

must be defined as a selective attack on the worst forms of poverty. Development goals must be defined in terms of progressive reduction and eventual elimination of malnutrition, disease, illiteracy, squalor, unemployment and inequalities

Dudley Seers Redistribution from growth

– underdevelopment is more than just statistics– development is a multidimensional process

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• Three core values of development– sustenance: Ability to meet the basic needs– self-esteem: to be a person– freedom from servitude: to be able to choose

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• The three objectives of development

– To increase availability and improvements in the distribution of food, shelter, health, protection, etc.

– To improve ‘levels of living,’ including higher incomes, more jobs, better education, etc.

– To expand the range of economic and social choices available to individuals and nations

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Defining the Developing WorldDefining the Developing World

• On the basis of PCI

#The UN’s System

#World Bank’s System

-208 economies are ranked by GNI per capita

-Low-Income countries (LIC), Lower-middle income (LMC), Upper-middle income (UMC), high income OECD and other high-income countries

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Defining the Developing WorldDefining the Developing World

-LIC (PCGNI in 2000): $755 or less

LMC (do): $756-$2,995

UMC (do): $2,996-9,265

High Income (do): $ 9,266 or more

• The UNDP’s Human Development Index

• On the basis of degree of international indebtedness (WB)

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1010

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Figure 1.1

The Developed

and Developing World, 2002

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Figure 2.1 The Developed and Developing World, 2002 cont’d

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The Structural Diversity of The Structural Diversity of Developing EconomiesDeveloping Economies

• Size and income level– Geographical Area, – Population, – National income per capita

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• Size and income level• Historical background

-colonial past• Physical (land, mineral

and other raw materials) and human resources (no. of people and their level of skill)

• Relative importance of public and private sectors

• Industrial structure

-Farming not merely an occupation, but a way of life

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• Size and income level• Historical background• Physical and human

resources• Relative importance

of public and private sectors

• Industrial structure• External dependence

-Economic, political and cultural (related with its size, resource and political history)

• Political structure, power, and interest groups-Large landowners, urban industrialists, bankers, etc.

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Common Characteristics of Common Characteristics of Developing NationsDeveloping Nations

• Low levels of living

Manifested both quantitatively and qualitatively– Per capita national

income• PPP method

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Figure 1.2Figure 1.2 Per Capita Gross National Per Capita Gross National Product in Selected Countries, 1997 Product in Selected Countries, 1997 (in U.S. dollars at official exchange (in U.S. dollars at official exchange

rates)rates)

2020

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• Low levels of living– Per capita national income– Relative growth rates of national and per

capita income

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capita income– Distribution of national income

• Income inequality very high and widening• Poorest 40% vs. richest 20%• Brazil, Columbia, Kenya, South Africa- High

China, India Malaysia- Moderate

Taiwan, Indonesia, South Korea- Low

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capita income– Distribution of national income– Extent of poverty

• Absolute poverty• International Poverty Line (US $370)

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Common Characteristics of Common Characteristics of Developing NationsDeveloping Nations• Low levels of living

– Per capita national income– Relative growth rates of national and per capita

income– Distribution of national income– Extent of poverty– Health

• Life expectancy (98): 48 yr. (Least Developed) 63 yr. (other developing) 75 yr. (developed)

Infant Mortality Rate

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Figure 1.3Figure 1.3 Infant Mortality Rates in Infant Mortality Rates in Selected Countries, 1998 (per 1,000 live Selected Countries, 1998 (per 1,000 live births)births)

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• Low levels of living– Per capita national

income– Relative growth rates

of national and per capita income

– Distribution of national income

– Extent of poverty– Health

– Education– The Human

Development Index

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Common Characteristics of Common Characteristics of Developing NationsDeveloping Nations• Low levels of living:

-Low levels and slow growth rates of national income

-Highly skewed patterns of income distribution. Top 20% receiving 5 to 10 times as much of the bottom 40%

-Up to 1.3 billion people living on income less than $370per year

-Low life expectancy, Ill health, malnutrition, diseases, high infant mortality rates

-Low levels of literacy, high school dropout rate

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Common Characteristics of Common Characteristics of Developing NationsDeveloping Nations• Low levels of living• Low levels of productivity

-Labour productivity

* Law of Diminishing Marginal Productivity

* Lack of complementary factors such as physical capital or experienced management

* Mobilisation of domestic savings and foreign finance

* Institutional Changes

* Attitude towards work

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• Low levels of living• Low levels of productivity• High rates of population growth and dependency

burdens– Natural growth and migration– Birth rate: 30-40/1000 (LDC)– Avge. rate of population growth: 1.6% (LDC)

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• Low levels of living• Low levels of productivity• High rates of population growth and

dependency burdens• Substantial dependence on agricultural

production and primary exports

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Figure 1.4Figure 1.4 Composition of World Composition of World Exports (percentages of primary Exports (percentages of primary and manufactured products)and manufactured products)

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• Low levels of living• Low levels of

productivity• High rates of

population growth and dependency burdens

• Substantial dependence on agricultural production and primary-product exports

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• Low levels of living• Low levels of productivity• High rates of population growth and dependency

burdens• Substantial dependence on agricultural production

and primary-product exports• Technological Backwardness

– Lack of R&D institutions, weak communication system, lack of capital

– Technological choice dictated by poverty

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• Low levels of living• Low levels of productivity• High rates of population

growth and dependency burdens


• Technological Backwardness

• Prevalence of imperfect markets

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Prevalence of imperfect marketsPrevalence of imperfect markets

• Move towards market economies in 1980s and 90s

• Market economies and market friendly policies depend heavily on existence of institutional, legal and cultural prerequisites– Legal system, stable and trustworthy currency,

infrastructure of roads and utilities, developed system of banking and insurance, formal credit markets, market information for consumers and producers, and norms of behaviour that facilitate long term trade

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• Low levels of living• Low levels of productivity• High rates of population

growth and dependency burdens


• Technological Backwardness

• Prevalence of imperfect markets

• Dependence • Others

– Social life– Transfer of values, Demonstration Effect

Brain Drain

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Human Development Index (HDI)Human Development Index (HDI)• United Nations Development Programme. Initiated in

1990• Range: 0 to 1• Three goals of development:

-Longevity: measured by life expectancy at birth

-knowledge: measured by weighted average of adult literacy and mean years of schooling,

-standard of living: measured by real per capita income adjusted for PPP.

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Human Development Index (HDI)Human Development Index (HDI)

• HDI═ 1/3(Income index)+ 1/3 (Life expectancy index) + 1/3 (Education index)

• Education index ═ 2/3 (adult literacy index)+ 1/3 (gross enrolment index)

• HDI reveals that a country can do much better than might be expected at a low level of income, and that substantial income gains can still accomplish relatively little in human development

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Human Development Index (HDI)Human Development Index (HDI)

• Some criticisms:

– Gross enrolment (No dropout)

– Equal weight to all three variables

– Role of quality. Healthy extra year of life

– Quality of schooling

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Concepts for ReviewConcepts for Review

• Absolute poverty• Brain drain• Crude birthrate• Death rate• Dependency burden• Developed world• Foreign exchange• Gross domestic

product (GDP)

• Gross national product (GNP)

• Human Development Index (HDI)

• Imperfect markets• Income gap• Income inequality• Incomplete

information

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Concepts for Review, cont’dConcepts for Review, cont’d

• Infant mortality rate• International poverty

line• Labor productivity• Least developed

countries (LLDCs)• Levels of living

• Low income countries (LICs)

• Malnutrition• Mixed economic

systems• Physical resources

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Concepts for Review, cont’dConcepts for Review, cont’d

• Production function• Purchasing power parity (PPP)• Resource endowment• World Bank

Documents

HS 202: ECONOMIC DEVELOPMENT:PROBLEMS AND POLICY Mrinal K. Dutta, Dept. of Humanities and Social Sciences, IIT Guwahati, Assam, India. Indian Institute