Development Economics Overview

Development Economics

• The text discusses development economics, including its core concepts and challenges.
• It delves into the disparities in living conditions across countries, exploring factors like income, health, education, and freedom.
• The text highlights the importance of addressing multidimensional poverty, recognizing it extends beyond financial limitations

Four Stylized Living Standards Strata

• The document outlines four strata of living standards:
  • Poorest: Lack essential needs, experience vulnerability and precarity.
  • Second poorest: Experience hardship, lack basic amenities, but may possess some agency.
  • Middle strata: Satisfy basic needs, experience moderate agency, but face economic limitations.
  • High-income strata: Stable employment, comfortable living standards, possess significant agency.

Population Growth and Development

• An inverse relationship exists between development and population growth.
• Lesser development leads to higher population growth due to limited resource allocation for individual children.
• Increased population growth contributes to heightened pressure on existing resources and infrastructure.

Institutions and Development

• The document highlights the role of institutions in economic life, including:
  • Property rights
  • Contract enforcement

Plantation Economies

• Plantation economies represent a specific type of economic structure characterized by large-scale agriculture for colonial markets.
• These economies often rely heavily on forced labor, leading to social divisions and inequality.
• Examples of plantation economies include the Southern United States and the Caribbean.

Exploitation

• Exploitation occurs when colonial powers focus on extracting resources, strategic locations, and cheap labor for their benefit.
• It often leads to a lack of investment in enduring social infrastructure for colonized regions.
• Exploitation contributes to economic inequality and limited development within colonized areas.

Classic Theories of Economic Growth and Development

• Four approaches to economic development are discussed:
  • Linear-stages-of-growth model: Posits multiple stages of growth, prioritizing production over consumption.
  • Structural-change model: Focuses on transforming economic structures through industrialization.
  • Dependence theory: Emphasizes the dynamics of power and exploitation between developed and developing nations.
  • Neoclassical counter-revolution: Advocates for market liberalization and reduction government intervention in the economy.

Constraints to Development

• The text explores constraints impeding development, including:
  • Physical capital: Insufficient investment in infrastructure and productive assets.
  • Human capital: Lack of education, skills, and health.
  • Natural resources: Scarcity or overuse of natural resources limiting economic opportunities.
  • Technology: Barriers to acquiring and applying new technologies.
  • Institutions: Weak governance, corruption, and lack of property rights.
  • Geography: Geographic location impacting trade costs and economic opportunities.
  • Demand constraints: Limited domestic and international markets for goods and services.
  • Policy constraints: Government policies hampering economic growth and development.

Poverty and Inequality

• The text emphasizes the multidimensional nature of poverty, acknowledging both income and social factors.
• It discusses challenges in measuring poverty and inequality, highlighting the limitations of traditional measures.
• The Foster-Greer-Thorbecke (FGT) Index is introduced as an alternative poverty measure addressing some limitations of the headcount index.
• The text emphasizes that poverty measurement methods can influence policy decisions and impact incentive structures.

Solow Model

• The most important factor in economic growth is technology.
• However, technology is difficult to define and measure.
• The Solow equilibrium equation is: sf(k*) = (δ + n ) k*
  • Where sf(k*) is savings per worker
  • δk* is the amount of capital needed to replace depreciating capital
  • nk* is the amount of capital needed to account for population growth

Dependency Theory

• Existing relationships in international trade and investment can limit a country's development.
• However, there are many examples of countries with strong global integration that have performed well economically.

Market Fundamentalism

• Governments often fail to promote economic development.
• But markets also fail in developing countries.
• East Asia shows that government intervention can be constructive.

Coordination and Development

• Economic agents need to coordinate to achieve higher social welfare.
• This requires cooperation.

Population Momentum

• Even if birth rates decline, population growth can continue for several decades due to population momentum.
• This occurs because a large proportion of the population is in the working-age group.
• To reduce population momentum, women need to delay family planning and focus on education and employment opportunities.
• Having more women in the workforce decreases the population pyramid, and thus the number of births.

Malthusian Population Trap

• Rising population and diminishing returns to fixed factors can lead to low levels of living.
• This occurs when population growth outstrips available resources.
• This can lead to a decline in the standard of living.

Population Demographic Transition

• Nations shift from high birth and death rates to low birth and death rates as societies achieve more technology, education, and development.

Rationale For Population Policy

• Higher female education and employment opportunities correlate with lower fertility rates.
• Improved child survival rates also reduce family size.

Demand Function For Children

• There is a price associated with having children.
• Parents need to ensure that they have the resources to provide for their children's needs.
• Higher-quality children are more expensive.
• Increased spending on children can contribute to economic optimism.

Coordination Failure

• Can occur when individuals overspend on consumption based on optimistic views of future incomes.
• Conversely, it can also occur when individuals save too much because of fear.
• This can lead to a decline in overall spending.
• This also applies to situations like climate change, where individuals act in a way that is efficient, but not effective.

Basic Indicators of Development

• Real Income: Gross National Income (GNI), Gross Domestic Product (GDP), and Purchasing Power Parity (PPP).
• Health: Infant mortality, life expectancy.
• Education: Literacy rates, school enrolment rates.

Institutional Factors

• Institutional factors are essential for development, but they often play a small role in neoclassical economic approaches.

Empirical Patterns of Development

• There are common but not universal patterns of development.
• These include a shift from agriculture to industry, and a rise in income inequality followed by redistribution.

Poverty Measures

• Headcount index: the fraction of the population that lives in poverty.
• Foster-Greer-Thorbecke (FGT) Index: a more comprehensive measure that considers the depth and severity of poverty.
• Poverty measures are often distorted by political incentives to report improvements, and by a bias towards urban development.

The International-Dependence Revolution

• Explores the power dynamics at play in the global economy.
• False-Paradigm Model
  • Pitfalls of using developed-country models in developing countries.
• Dualistic-development thesis
  • Superior and inferior elements can coexist.
• Criticisms and limitations
  • Frameworks offer little guidance for achieving development.

Neoclassical, free market “counterrevolution”

• Challenges the Statist Model.
• Emphasizes free markets, public choice, and market-friendly approaches.
• Measuring Absolute poverty with headcount index results in unintended policy incentives for using headcounts.

Stylized Facts

• Some processes are typical but not universal. These are often referred to as "stylized facts."
• Switch from agriculture to industry.
• After a period of time, the Gini coefficient will go back down as income is redistributed within the economy.
• This will happen after the period of rapid industrialization.

Explore the fundamentals of development economics and the challenges associated with living standards worldwide. This quiz covers key concepts like multidimensional poverty and the relationship between development and population growth. Delve into the four strata of living standards to understand global disparities.