Development Economics Lecture 1 Anne Mikkola Partly using slides of Prof. Haaparanta

REQUIRED READINGS (preliminary)


Debraj Ray (1998): Development Economics. Chapters 1-11.




Lecture notes Follow the course webpage as the course proceeds: http://www.valt.helsinki.fi/blogs/mikkola/post50.htm

Check the course binder at the department office of materials.

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Other material used as a basis for lectures


Charles I Jones (2002): Introduction to Economic Growth. Used in class on growth theories.




David N. Weil (2005): selected chapters covered in class

---------------------------------------------William Easterly (2001): The Elusive Quest for Growth. Economists’ Adventures and Misadventures in the Tropics.







Jeffrey Sachs (2005): The End of Poverty. Economic Possibilities of our time




Anne Mikkola – Carrie Miles (2007): Development and Gender Equality: Consequences, Causes, Challenges and Cures HECER Discussion Paper, No. 159. (downloadable from internet)




Exams

Dec and Jan options + faculty exam in the Spring for Univ. students.

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What is development?

TOPICS (preliminary) 1. Development Economics: Overview (Ray, Chp. 1-2) 2. Economic Growth theories and empirical evidence: Why are some countries rich and others poor? (Ray Chps 3-4) 3. Population Growth, fertility and changing role of women in development (Ray Chp. 9, Mikkola, and/or Weil Chp. 4-5) 4. History, Expectations, Government, Culture and Development (Ray Chp. 5; Weil, Chp 12, 14) 5. Poverty and its functional impacts (Ray Chp. 8) 6. Inequality : Measuring inequality; Interconnections of Inequality and development (Ray Chp. 6-7) 7. Rural-urban interaction and migration and agriculture (Ray Chp. 1011)

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Overview Why development economics?
World marching by: need for development
Measuring development
What is the development?
Solutions?
History of income growth


Why development economics as a separate field of study?






Many markets missing: labor, financial, insurance Institutions and public infrastructure may be missing: property rights, laws, transportation Development taking place when there is a developed world elsewhere: aid dependency, technology transfer. Speed of development differs from European experience (medical innovations, directly to the mobile phones) History of colonialism

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GDP per capita in year 2000, USD, PPP exchange rates Source: David Weil: Economic Growth, 2005

Poverty The total number of people in extreme poverty has been reduced during the last decade.
The situation has improved basically because poverty has been reduced in South and East Asia.
Poverty has increased in Sub-Saharan Africa and Central Asia.
Poverty at household level. View from history: expenditure on food and basic necessities only.


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What happened in the developed countries? Technological changes (over the past 200 years)   

industrialization, specialization in the market production out of the household household technology.


 

Engines of liberation (of women). Greenwood et al, RES,2005

changing role of children declining fertility, falling mortality, longer lives, and rising population

Self-sufficient economies: clothing from farming to garment, food preparation from fields to bread, water, heating

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Industrialization 1: Men leave homes, separate spheres of life for men and women

Industrialization 2: • Servants leave as homework reduces • not so many children needed (quantity to quality)

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Industrialization 3: • Children bring utility rather than production services • Women’s work and its significance reduced Greenwood (2005): In the US, meal preparation, laundry, cleaning took 58 hours per week in 1900, 18 hours in 1975.

• Men’s work get valued monetarily (statistics measure) => Changes in the bargaining power within families

Industrialization 4:  Women to the labor market (and men’s towards home).  need for changing roles of women  ‘engine of liberation’

 Sexual division of labor starts to fall apart

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Growth theories that we will study






were developed to explain the steady growth experience coinciding with the 200 years of western development. empirical data on incomes values only market based work. We will study these models, but it is good to keep in mind how and why they were developed.

Measuring development What do we mean by development?
Operational definitions:


 Millenium Development

Goals (MDG’s) (to be

achieved by 2015)  Human Development Index (HDI): achievement of the goals or improvement in the index is a measure of development.

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 1. 2. 3. 4. 5. 6. 7. 8.

MDGs by the UN 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.




HID Index, published by UNDP since 1990, is based on 3 measures of quality of life

1.

Life expectancy at birth (index of long and healthy life) (2/3) adult literacy rate + (1/3) (secondary and tertiary gross enrollment ratio) (index of knowledge) GDP/capita (index of a decent standard of living).

2.

3.

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Amartya Sen: Development as Freedom (also a book by that name)


We should look at people’s capabilities, i.e. their abilities and possibilities to live good life, make choices on one’s education, economic activities, freedom to participate in decision making. Avoiding starvation and premature death valued for their own sake. ⇒ development as freedom.




In the standard textbook economics many of these freedoms are assumed from the start. This is often not the case in developing countries, particularly for the women.

 Higher income, ceteris paribus, allows wider set of choices.


Role of political freedoms.

“Least Livable” Countries by HDI, 2004 1.

Sierra Leone

16.

Tanzania

2.

Niger

17.

Benin

3.

Burkina Faso

18.

Guinea

4.

Mali

19.

Rwanda

5.

Burundi

20.

East Timor

6.

Guinea-Bissau

21.

Senegal

7.

Mozambique

22.

Eritrea

8.

Ethiopia

23.

Gambia

9.

Central African Republic

24.

Djibouti

10.

Congo, Dem. Rep. of the

25.

Haiti

11.

Chad

26.

Mauritania

12.

Angola

27.

Nigeria Madagascar

13.

Malawi

28.

14.

Zambia

29.

Yemen

15.

Côte d’Ivoire

30.

Kenya

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“Most Livable” Countries by HDI, 2004 1.

Norway

16.

France

2.

Sweden

17.

Denmark

3.

Australia

18.

New Zealand

4.

Canada

19.

Germany

5.

Netherlands

20.

Spain

6.

Belgium

21.

Italy

7.

Iceland

22.

Israel

8.

United States

23.

Greece

9.

Japan

24.

Singapore

10.

Ireland

25.

Portugal

11.

Switzerland

26.

Slovenia

12.

United Kingdom

27.

Korea, South

13.

Finland

28.

Barbados

14.

Austria

29.

Cyprus

15.

Luxembourg

30.

Malta

Income is not everything


Even though Sub-Saharan economies have not grown, they have advanced in many other respects (showing in HDI-indices as well).  expected

life-times at birth have increased, literacy rates have increased  better education  adult




The impacts of HIV/AIDS can be seen clearly (Zambia, Botswana).

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What do these tell about the concept of development and problems of development?





Development is seen as an improvement in incomes (and eradication in poverty), health, education, equality in incomes (both locally and globally), achievement of gender equality, and good environment. Problems in achieving development are seen as interlinked: low incomes go together with low education and high inequality, etc.

But what is the nature of linkage? Why are income levels and income inequality related? Or are they?
What do we mean by income, inequality, and poverty?
What type of policies are needed to achieve the goals? Does aid work? Does debt reduction help? What is the role of national policy making?


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Solutions?


Easterly (2001): economists’ failed attempts decade after decade to help Africa to growth path     




investments on machines etc.  failure to produce education population control lending  debt problem debt forgiveness

Jeffrey Sachs (2005): end the poverty by increasing aid.  ‘Do

it all at once through the UN’

Some issues/problems with aid



multilateral vs. bilateral budget support vs. project aid 






NGO:s: ’alms bazaar’   




project aid: creates competition for projects and between projects rather than gives incentives to develop the country  mutual benefits to keep projects running (jobs, funding for our group) budget support: how to prevent corruption or to avoid favoring the elite or certain ethnic group (compare Peter Uvin: Aiding Violence). Are the services delivered or do the funds disappear on the way? mutual interest keep projects running NGOs’ pursuing their agendas vs host country interest NGOs compete for government officials, the same educated people

Religious organisations 

’working for God’ (Ritva Reinikka, WB): religious organisations more effective than others, as they are more committed to the local communities.

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Growth of income in the history - what do we learn?


Long run development of GDP per capita reveals interesting aspects of development

Source for the figures is A. Maddison: The World Economy, Historical Statistics, OECD. The figures are US 1990 dollars at PPP exchange rates.

Year

Egypt

Sahel & W- A

Tanzania

Taiwan

Nepal

L-A

Mexico

Brazil

Finland

UK

1500

475

415

416

425

451

714

1700

475

415

527

568

638

1250

1820

475

415

692

759

646

781

1707

1366

678

1668

4450

1900

499

902 (1913)

550 (1870)

397

539 (1913)

1950

910

424

924

496

2356

1672

4253

6939

1960

991

459

1492

607

3155

2335

6230

8645

1970

1254

567

2980

653

4320

3057

9577

10767

1980

2069

593

5869

637

6289

5198

12949

12931

1990

2522

540

9886

808

6119

4923

16866

16430

2000

2920

524

16642

999

7218

5556

20235

19817

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What do we learn from this? 1. by around 1500 income levels were quite equal around the world (with the exception of UK). 2. by 1700 the situation had changed: Latin America (North America also, US income 527 $ by 1700, Canada 800 $ for European immigrants, 400 $ for indigenous people) and Europe. The most dramatic increase in income in UK.

3. from 1800 on Europe (and North America) have grown much faster than other regions reaching very high relative incomes by 2000.

4. incomes in some other areas have also grown. E.g. Latin America and Egypt. The most dramatic change has taken place in South East Asia (example here is Taiwan. Earlier, Japan started to grow by late 1800’s).

5.

not all Asia has experienced sustained income growth: e.g. Nepal, though during the last two decades it has started to grow.

6.

the most serious trouble spot is Sub-Saharan Africa (presented here through Tanzania). Tanzania grew during the first decade of its independence, then growth first slowed down and finally stopped completely. A case of a “development trap”?

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7. Many poor countries have experienced a decline in incomes also at least temporarily since 1970: here Brazil, Nepal and Tanzania. 8. All in all, “great divergence” in incomes at least since early 1800’s. How to explain the divergence and the diversity in individual country experiences?  South-Korea

and Tanzania had equally high incomes in 1960, but now South Korea is many times richer. Why?

The divergence of the rich and the poor Graph by Prof. Pertti Haaparanta

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