AS Macro Revision

Introduction to Economic Development

Spring 2014

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Introduction to Economic

Development

“Development is the expansion of people’s freedom to live long, healthy and creative lives; to advance other goals they

have reason to value; and to engage actively in shaping development equitably and sustainably on a shared planet.”

(Source: United Nations)

The Meaning of Economic Development

1. Dudley Sears has defined development as “the reduction and elimination of poverty, inequality and unemployment within a growing economy”

2. Nobel Economist Amartya Sen writing in “Development as Freedom”, sees economic development as being concerned with improving the freedoms and capabilities of the disadvantaged, thereby enhancing the overall quality of life

Millennium Development Goals (MDG)

Eradicate extreme poverty and hunger

Achieve universal primary education

Promote gender equality and empower women

Reduce child mortality

Improve maternal health

Combat HIV / AIDS, malaria and other diseases

Ensure environmental sustainability

Develop a global partnership for development

The Human Development Index (HDI)

• HDI focuses on longevity, basic education and minimal income1. Knowledge: First an educational component made up of two

statistics – mean years of schooling and expected years of schooling

2. Long and healthy life: Second a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years

3. A decent standard of living: The final element is gross national income (GNI) per capita adjusted to purchasing power parity standard (PPP)

• GNI is now used because of growing size of remittances• Log of income is used in the HDI calculation because income is

instrumental to human development but higher incomes are assumed to have a declining extra contribution to human development

Limitations of the Human Development Index (HDI)

1. HDI fails to take account of qualitative factors, such as cultural identity and political freedoms (human security, gender opportunities and human rights for example)

2. The GNI per capita figure – and consequently the HDI figure – takes no account of income distribution. If income is unevenly distributed, then GNI per capita will be an inaccurate measure of the monetary well-being of the people. Inequitable development is not human development

3. Purchasing power parity (PPP) values used to adjust GNI data change quickly and can be inaccurate or misleading

4. 2010 saw launch of a new Inequality-adjusted HDI, a Gender Inequality Index and a Multidimensional Poverty Index. Average loss in the HDI due to inequality is about 23%

Common Characteristics of Lower Income Countries• Relatively low incomes per capita and a low level of absolute savings• High levels of income and wealth inequality (high Gini coefficient)• Lower absolute levels of productivity (labour and capital)• Often have natural resources but many countries remain poor• Higher dependency on export incomes from primary commodities• Large % of population living in rural areas and employed in agriculture• Limited scope and support provided by a welfare system• Higher informal sector for example in partial subsistence farming• Relatively fast growth of population and a younger average age• Rapid urbanisation and large-scale rural-urban migration• Weaknesses in institutions such as stable government, civil service• Relatively higher tariffs and other import controls• Tendency to have capital controls / relatively closed capital markets• Lower access to advanced (high-income) country markets

Economic & Social Costs of High Inequality in LICs

Social unrest and civil disobedience• Strikes and demonstrations over poor pay and

conditions at Foxconn in China which produces iPhones and iPads

Self-perpetuating poverty cycle• Limited access to health care and education• Volatile incomes, high debts• Low savings

Misallocation of scarce resourcesInvestment skewed towards preferences of the richLow collateral – limits entrepreneurship

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