Lecture notes: Economics of Development
Introduction
What is Development Economics ?
For people all around the world living in poverty it is important that countries in South East Asia such as South Korea, Taiwan and China, as well as Brazil in South America recently have been able to get out of the poverty trap. They are not so many, but there is a group of countries that have essentially completed the transformation to become developed. I think, for countries in Africa such as the Gambia, it is relevant to raise questions about the extent to which they can learn from experience of the newly industrialized countries and if they are potential models for other countries to follow.
Another question arising is if economics can help us to better understand the process of development, which is extremely complex, and if economics also can become an efficient tool for shaping adequate development policies. Sometimes economists are criticized for being too narrow primarily focusing on the task to increase economic growth, even if it is empirical evidence that economic growth often increase inequality and, therefore, does not provide a sustainable solution for the poor. Furthermore, traditional neoclassical economics have been developed to deal with developed economies emphasizing market efficiency, while developing countries usually are lacking market institutions. Neoclassical economics concerns the determination of equilibrium, while transformation from a developing to a developed economy is characterized by disequilibrium processes and transactions out of (traditional) equilibrium.
In addition, with regard to understanding poverty and economic growth in Africa, it is extremely important to understand the influence of geography; the intersection of climate, ecology and economic activity is crucial. For example, since long, and in the Gambia, there has been a negative development of productivity in agriculture which has depreciated the situation of the poor both in the rural and urban areas. A policy breaking this trend must be based on analyses that can explain relations between poverty and environmental destruction, for instance, deforestation destructing the quality of the soil. It links up with the green revolution by including measures to increase the rate of technology diffusion that relies on scientific discoveries of hybrid seed varieties.
In order to take account of the fact that poor countries differ from developed countries, development economics also draws on other sciences than economics. When looking at the contribution by economic science, we should admit that before the neoclassical school became mainstream, the classical economists used the notion political economy instead of economics. This distinction is important when it comes to development economics, which stresses the role of institutions. Accordingly, contemporary theory in the field of development economics has sometimes pointed at poor governance as main cause of stagnation in developing countries. It should be an important task to examine this explanation of why poverty persists which cannot be done unless economic activity is viewed in its political context taking account of political institutions.
Moreover, recently emphasis has been put on the importance of women for bringing about economic change in Africa, which suggests that economic development should be seen in view of another important institution: the extended family.
All in all, economists should recognize that mainstream, neoclassical economics is too narrow to address issues on economic development. But also T/S view of political economy as concerned with the relationships between politics and economics does not fully admit the importance of social and cultural institutions, which were included in the classical economists’ understanding of political economy. For example female genital cutting, which has a tremendous influence on the life of the women and their ability to contribute to the development of the rural economy. A more complete understanding of development economics recognizes that this field of study is rapidly evolving its own distinctive analytical and methodological identity.
T/S are arguing that the ultimate purpose of development economics is to help us understand developing economies in order to help improve the material lives of the majority of the global population. More specifically, it is the study of how economies are transformed from stagnation to growth and from low-income status to high-income status and to overcome problems of absolute poverty.
What do we mean by development
Not long ago, it was referred to poor countries, not as developing countries or economies, but as underdeveloped. This was the ethnocentric perspective of the colonizers, who used the European culture, which was considered as enlightened and as based on true knowledge, as a model for a developed Africa. The colonizing states believed that they had a responsibility to transfer this culture, which was seen as favorable to economic development. Inherent in this view was an idea that Africa had to pass the same type of industrialization as Europe had done before. This kind of intellectual orientation is very interestingly described by the Palestinian author Edward Said in a book called “Orientalism”.
Even if the way of referring to poor countries was changed, and they were now called developing countries, the view of the development process was only slightly changed in the field of development economics. Thus, proposed development policies have often focused on rapid industrialization, where manufacturing and service industries increase at the expense of agriculture and rural development. Accordingly, development has been synonymous to sustained growth in per capita income, i.e. output is growing faster than the population. This measure brings increases in gross domestic product (GDI) into the fore, but for the most part the well-being of the population has been in focus, which should be associated with monetary growth of real per capita gross national income (GNI) (monetary growth of GNI per capita minus the growth of inflation).
During the 1970s it became more and more obvious to those working in the field that even if the economies were growing, a majority of the populations continued to be poor in combination with growing inequality. Development was redefined instead emphasizing reduction or elimination of poverty, inequality and unemployment within the context of a growing economy.
Furthermore, poverty is not just an assessment of income, but it is a fact of life that influence your self-understanding as a person living a life that is not human as you are unable to control your hunger, diseases and you know that you are unable to change this situation. This raises two questions about a how to formulate a more inclusive definition of development. Firstly, if it is possible to link up with the notion of utility in economics and define a measure that takes account of how people think about their lives as more or less satisfactory. Secondly, if we can define a measure that is concerned with /and here we use the wording of Amartya Sen/ “enhancing the lives we lead and the freedoms we enjoy”.
Sen refers to the capability to function as a status of a person that matters for whether he or she is poor or non-poor. Functionings, then, is what a person does or can do with commodities of given characteristics that he or she comes to possess or control. At the same time, individuals value functionings, for instance, to be nourished, being free from diseases or being able to read.
Individuals also value a high per capita income but there are important disparities between these two measures of development. For example, a person can have a high income and, thus, being able to buy food or books. However, when looking at his or her functionings, we may find that he or she has low or no capability to function, i.e. has a parasitic disease implying that he or she cannot extract nourishment from food or is illiterate, and therefore has a low or no well-being in spite of high income.
With regard to finding a method for measuring development, some economists have linked up with the notion of utility in the sense of happiness and defined national happiness which they have identified with family relationships, financial situation, work community, health etc.. It has been found that the average level of happiness increases with a country’s average income, but evidence also shows that people are happier when they are not unemployed, not divorced, have high trust of others (social capital) in the society and enjoy democratic freedoms and have religious faith.
It should be mentioned, however, that increased well-being in Sen’s understanding as increased functioning is not the same as increased utility or happiness. This is obvious if we think about a person who is hungry and cannot afford nutritious food, but reduce his hunger with rice (cheap way to satisfy one’s hunger). This person increase his or her utility or happiness. However, as the person reduces his or her hunger with food that has a low nutritional content his or her well-being in the sense of health or capability to function has not increased. Capability to function, then, is freedom that a person has in terms of the choice of functionings (being able to read a book, have the health to go to work) given his personal features and command over commodities. From this perspective, well-being as utility or happiness is just a part of the ability to function.
The most authoritative measure of development - the Human Development Index produced by UN (the United Nations Development Program UNDP) - is inspired by Sen’s ideas. Thus, standard of living measured as real per capita gross domestic product is only one outcome of development included in the measure. The others are longevity as measured by life expectancy at birth, reflecting health and access to nutrition, and knowledge measured as weighted average of adult literacy and school enrollment. This index is used to rank all countries on a scale of 0 to 1.
In our next lecture, we will return to and look more in detail into how to measure poverty, inequality and development and the way the different measures are calculated.
Measuring poverty, inequality and development
/by Sering/
Explanations of development and classical theory of how it is attained
Explanations of relative development
Time has come to make you acquainted with the evolution of scholarly theories about why development has not taken place and how it is brought about. However, in order to judge the appropriateness of the various theories we need a context that can explain why some countries are developed and other are poor.
Figure 2.11 is extremely informative but, nevertheless, the factors and their interrelationships included in the figure, is a selection made by the authors. However, they argue that the figure is based on the most influential recent research literature.
By placing physical geography and climate at the top, the authors emphasize the importance of a recent scholarly discussion about the importance of geography for differences in development between countries. There are scholars who reduce the role of arrow 1 and instead emphasize the role of institutions which they associate with type of colonial regime (see figure). By institutions, then, we mean formal rules like constitutions and laws, and with regard to laws, development economists have been concerned about property rights; private or public property. It should be mentioned that institutions also include customs associated with local cultures and social structures but these institutions are rather constraints on the colonial regime.
There is empirical evidence showing that after accounting for institutional differences, geographic variables such as distance from the equator and whether countries are landlocked (like Mali) have little influence on their incomes today. For instance, if geography is crucial, then those regions that were prosperous before colonialization should continue to be prosperous also today. Thus there is empirical evidence showing that past population density and past urbanization, which is positively correlated with income, is negatively correlated with high income today.
The explanation provided is that the European colonizers, in order to extract significant surplus from colonized peoples, set up extractive institutions in prosperous areas and these institutions have often persisted to the contemporary period. In Africa, I think extraction of minerals and oil in countries such as Congo and Nigeria are examples and, as we will find later on, after independence the post-colonial regimes have retained the same institutions and used export of primary commodities as a strategy for development.
However, geography has an indirect effect on contemporary per capita incomes as it influence the mortality rate of the settlers, which has an impact on type of colonial regime (arrow 2). In climate zones with high health-risks the colonizers established administrations using local people who were loyal to the colonizers, who did not have to be physically present. Moreover, there where climate was favorable for plantation agriculture, slavery and other types of mass-exploitation of indigenous labor were introduced (arrows 6 and 7).
According to the figure, investments in human capital is an important factor explaining a country’s relative development (arrow 14). But amount of human capital in its turn depends critically on the degree of inequality generated in the context of a particular colonial regime. The institutions tend to be more democratic, with more constraints on the elite, in countries with a higher level of education. But there are cases where dictators have implemented good education programs leading to growth in per capita incomes, which, in a second step has led to changes in the institutions.
It is interesting to note that there are no arrows that could indicate an influence by indigenous cultural institutions. With regard to Africa, for instance, customs, gender relationships between men and women as well as traditions of giving elderly a say with regard to use of land and other natural resources often replace laws that regulate the use of property and property rights.
Social and cultural institutions such as tribe, religious affiliations and family influence social learning that affects adaptations of new technology and the diffusion of innovations influencing per capita income. There is a growing amount of scholarly research on how social and cultural institutions influence development, but the reason for not including these factors in the figure is that in relation to economic factors, there are few established results.
You may also lack arrows indicating influence of international integration and trade that explains why some countries are developed and other are poor. However, in fact evidence shows that after it has been accounted for the impact of institutions on countries’ contemporary incomes, trade itself explains very little. This is not contrary to another fact that many post-colonial regimes have used trade policies successfully as an integrated part of their development strategy, which the new-industrialized countries in South East Asia such as South Korea and Taiwan are examples of.