ECONOMIC DEVELOPMENT

What is economic

development?

The objective to raise standards of

living.

New Words Bad cycle of poverty – a chain of conditionsthat leads to poverty.

Business cycle – a period of prosperity ordepression in the economy.

Economic development – the objective toraise standards of living.

Economic growth – the measurement ofeconomic development.

Good cycle of prosperity – chain ofconditions that leads to rising standards ofliving.

Life expectancy – the length of life for theaverage citizen.

Literacy rate – the number of people whocan read and write.

Per capita income – the gross nationalproduct divided by the population.

Prosperity – a business cycle whenbusiness is booming.

Recession – a business cycle whenbusiness declines.

Recovery – a business cycle whenconditions improve after recession ordepression.

•

How to Measure Economic

Development Economic growth of the GNP – is theannual measure of the total production ofgoods and services in the country.

Growth of the average income in thenation or PCI (Per Capita Income) –economists just divide the GNP bypopulation, and the answer will be theaverage income of the people, or PCI

Other indicators – e.g. literacy rates, lifeexpectancies, number of telephones; etc.

BAD CYCLE OF POVERTY

Low Education

Underdeveloped natural resources

Low Productivity

Low Income

Low Profits

Low savings

Low Investments

Low Capital Base

Low Tax Base

Poor Public Services

GOOD CYCLE OF PROSPERITY

Better Education

More Developed Natural

Resources

Higher Production

More Income

More Profits

More savings

Higher Investments

More Capital

More Taxes

Better Public Services

• Economic CycleIt is important also to understand that

within the span of life of an economythere will come “business cycles.” Abusiness cycle is a change in businessactivity which extends over a period ofyears.

Four Types of Business Cycles

Prosperity – during a period of prosperity,GNP is the highest and business isbooming. Optimism is the businessclimate and workers are happy.

Recession – this may be followed by arecession or a period when the economyslows down. Businessmen become afraidand prices begin to fall. People hold ontheir money and use it only for basicneeds.

Depression – if the recession lasts for a longtime, then it may turn into depression, aworse cycle than a recession. During adepression, many workers are laid off,factories close down, the stock marketcollapses, and banks may go out of business

Recovery – after a depression, the economywill improve again and begin a period ofrecovery. Little by little, production increasesand so do standards of living. Asbusinessmen expand their business, lifereturns to normal and the economy returns toa period of prosperity.

Planning for Development

Governments and private leaders makeplans for the future. The development planis the vision or goals set by the governmentor private sector for improving theeconomy. Development plans may coverthe whole economy or just parts of it, likeagriculture, labor, industry, or foreigntrade.

THE INFORMAL SECTORS

According to International Labor

Organization (ILO):

“Very small scale units producing and

distributing goods and services, consisting

largely of independent, self-employed

producers, some of whom also employ family

labor and / or few hired workers or

apprentices, which utilize a low level of

technology and skill, which therefore operate

at low level of productivity, and which

generally provide very low and irregular

income, and highly unstable employment to

those who work in it.”

• The informal sector is the part of the

economy that is intentionally hidden

from the view of the government in

order to avoid taxes and regulations

or because the goods and services

being produced are illegal.

Different names of Informal Sector• Underground

• Unofficial

• Hidden

• Illegal

• Black

• Covert

• Grey

• Dual

• Irregular

• Invisible

• Parallel

• Marginal

• Moonlight

• Shadow

The existence and continued growth of the

informal sector gives rise to three major sets

of concern:

First, economically disadvantaged persons are

forced to create income-generating activities.

Second, loss or decrease in tax revenue affects

the tax system of the country.

Third, tax payers are seen as dissatisfied with

how the government delivers services to the

people, and the way the government spends

their hard-earned money.

Characteristics of the Informal Economy

• Low levels of productivity and employment

• People engaged in the activities look at

their jobs as temporary until an

appropriate job is available.

• Health and safety are always at risk.

• More labor-intensive

• Non-payment of taxes

• Workers are usually paid below the

minimum wage.

• Absence of social protection and benefits.

Approaches in Measuring the

Informal Sector

• Direct Approach

surveys

not ready to reveal their involvement

auditing tax returns

personal relations rather than formal

or contractual arrangements

• Indirect or Discrepancy Approach

Disagreement in various markets

Employment and income oftentimes

are not reflected in national

government accounts.

What are the effects of the

underground economy?• Some consider it as an effective limit of

government restrictions on the economy

and society.

• Some argue that many transition

economies would perform at much lower

level of production.

• The relationship between the country and

the people is weak and needs

improvement.

• The underground economy benefits a

great number of people by responding to

the demand for urban services and small-

scale manufacturing.

SYNTHESIS

• The informal sector is the part of the

economy that is intentionally hidden from

the view of the government in order to

avoid taxes and regulations or because

the goods being produced are illegal.

• The informal sector is known under

different names and adjectives such as

underground, hidden, illegal, grey,

irregular, invisible, parallel, and twilight.

• There are two approaches to consider in

measuring the underground economy: the

direct approach and the indirect approach.

• There are several effects of the underground

economy on the official economy. First, it is

an effective limit on government restrictions

in the economy and the society. The

relationship between the country and the

people is weak and needs improvement.

Third. It benefits a great number of people by

responding to the demand for urban services

and small scale manufacturing.

GOVERNMENT

AND

ECONOMY

Role of Government in Economic

Development

• Market Failure

Market implies sufficient sellers and

buyers in the market

Presence of financial institutions or capital

markets to support business

Government intervention in the form of

credit programs will enable wider access

to seed funds and will promote faster

growth of the country

• Externalities

The effects of these actions of outside agents

to one’s production or consumption activities

are termed externalities

Two types of externalities:

consumption – ex. The pollution emitted by an old

bus while one is walking along a highway. A

neighbor playing loud rock music during wee hours

or morning.

Positive such as the pleasure one derives

from observing a neighbor's flower garden.

production – ex. Garbage and pollutants

dumped in a fishing area that affect

fisherman’s catch.

Through policy, laws regulations, and police

powers, the government serves to minimize

negative externalities and promote positive

externalities.

Examples of these policies include:

Nonsmoking law

Pollution act

Garbage dumping regulations

• Public Goods

Public goods are those that benefit many

people and must be provided in the same

amount to all affected consumers. Examples:

Sidewalks

Street lightings

Airports

Police and military protection

These firms that consumes public goods or services

without sharing their costs are called FREE RIDERS.

• Integrity of Market

The government can strengthen the integrity

of the economy by installing laws and

punishing those who commit moral hazards.

The government can minimize the problem of

adverse selection by providing quality

inspections and licenses.

Example: Medical products have to go

through the review of the Bureau of Food

and Drugs (BFD) before they get into

production and are sold in the market.

• Promotion of Economic Growth

The most important role of the

government is promotion of economic

growth.

Agriculture to industry (Arthur Lewis

model) – farm workers migrate and

take employment in factories.

Synthesis• The promotion of the general welfare and

economic stability is the primary concern

of the government.

• The government’s role in the economy

includes correcting inefficient allocation of

resources, redistributing income and

regulating economic activities.

• In performing its role as moral guardian,

government may prohibit the sale and

purchase of specific goods and services.

• Public goods and services are provided by

the government. Their benefits spill-over to

society as a whole.

• Private goods and services are produced

by the market. Their use and benefits are

restricted to the buyers onl.

Questions:

1. What are the economic functions of

the government?

Answer: The government exercises the

allocative, redistributive, and regulatory functions

within the economy.

2. What are the two kinds of externalities?

Give an example of each.

Answer: 1. consumption

2. production

3. Differentiate public goods from private

goods.

Answer: Public goods – those that provided

by the government and whose benefits spill-

over to society as a whole.

Private goods – those that the market

produces. Their use and benefits are

restricted to the buyers only.