Development Economics
4.1. Economic Development
Economic growth is a long-term expansion of the productive potential of the
economy
Trend growth refers to the smooth path of long run national output
Measuring the trend rate of growth requires a long-run series of data perhaps of
20-30 years or more in order to calculate average growth rates from peak to
peak across different economic cycles
The table below tracks the growth rates achieved in the world economy for three
recent years and also for developing countries excluding China and India.
Real GDP Growth 2010
(annual
%
change)
2011
2012
World economy
4.1
Developing
5.6
countries
excluding
China
and India
2.7
4.4
2.5
3.6
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What determines the rate of economic growth?
• Every country is different, each factor will vary in importance for a country at a
given point in time
• Remember too that in our inter-connected globalizing world, growth does not
happen in isolation. Events in one country and region can have a significant effect
on growth prospects in another
Growth Drivers
Here are some of the main determinants of economic growth – they apply for
both developing and developed countries although the relative weighting that we
might attach to each will depend on the individual circumstances facing each
country or region.
• Growth in physical capital stock - leading to a rise in capital per employee
(capital deepening)
• Growth in the size of the active labour force available for production
• Growth in the quality of labour (human capital)
• Technological progress and innovation driving productivity improvements i.e.
higher GDP per hour worked
• Institutions - including maintaining the rule of law, stable democracy, macroeconomic stability
• Rising demand for goods and services - either led by domestic demand or from
external trade
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The 20 countries with the highest growth of the gross domestic product
(GDP) in 2015 (compared to the previous year)
http://www.statista.com/statistics/273977/countries-with-the-highest-growthof-the-gross-domestic-product-gdp/
Threats / Challenges to Economic Growth
•
•
•
•
•
•
•
Changes in the real exchange rate affecting competitiveness
Cyclical fluctuations in national output and external trade
Financial instability e.g. unsustainable credit boom and fall in savings
Volatility in world prices for essential imports and key exports
Political instability / military conflicts
Natural disasters and other external supply shocks
Unexpected breakthroughs in the state of technology
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Economic Development
What is Human Development?
“Human 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.
People are both the beneficiaries and the drivers of human development, as
individuals and in groups”
What does economic development mean?
Michael Todaro specified three objectives of development:
• Life sustaining goods and services: To increase the availability and
widen the distribution of basic life-sustaining goods such as food, shelter,
health and protection.
• Higher incomes: To raise levels of living, including, in addition to higher
incomes, the provision of more jobs, better education, and greater
attention to cultural and human values, all of which will serve not only to
enhance material well-being but also to generate greater individual and
national self-esteem.
• Freedom to make economic and social choices: To expand the range of
economic and social choices available to individuals and nations by freeing
them from servitude and dependence not only in relation to other people
and nation-states but also to the forces of ignorance and human misery.
Note the emphasis placed on cultural and human values, self-esteem and
freedom from ignorance; it is important to remember that development is
about more than advancing economic growth. Many economists believe
development should be less about growth, more about inclusive well-being and
about building capacities and resilience in a fast-changing and unpredictable
world.
The most common measurement of development is the Human Development
Index published each year by the United Nations Development Programme
Dudley Sears has defined development as “the reduction and elimination of
poverty, inequality and unemployment within a growing economy”.
Nobel Economist Amartya Sen writing in “Development as Freedom”, sees
development as being concerned with improving the freedoms and capabilities of
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the disadvantaged, thereby enhancing the overall quality of life - what really
matters are the capabilities of people, that is, the extent of their opportunity set
and of their freedom to choose among this set, the life they value.
Amartya Sen pursues the idea that development provides an opportunity to
people to free themselves from deep suffering caused by
• Early mortality
• Persecution
• Starvation / malnutrition
• Illiteracy
For many, economic development should be about increasing political freedom,
cultural and social freedom and not just about raising incomes
Amartya Sen on India
In An Uncertain Glory, Sen argues that India’s main problems lie in the lack of
attention paid to the essential needs of the people, especially the poor
Despite considerable economic growth and increasing self-confidence as a major
global player, modern India is a disaster zone in which millions of lives are
wrecked by hunger and by pitiable investment in health and education services.
Economic growth without investment in human development is unsustainable –
and unethical.
Developing Countries: similarities and differences
There are many indicators that can be used to compare and contrast developing
countries
World Bank Income Classification (2013)
As of July 2013, the World Bank income classifications by GNI per capita are as
follows:
• Low income: $1,025 or less
• Lower middle income: $1,026 to $4,035
• Upper middle income: $4,036 to $12,475
• High income: $12,476 or more
Low- and middle-income economies are sometimes referred to as developing
economies. Please remember that this term is used for convenience.
Fall in Extreme Poverty
The number of people living on less than US$1.25 a day is projected to be 883 million
in 2015, compared with 1.4 billion in 2005 and 1.8 billion in 1990. However, much of
this progress reflects rapid growth in China and India, while many African countries
lag behind
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Diversity between developing countries
• No two developing countries are the same! There is a huge diversity
between them
• There are many key structural economic differences between nations –
for example:
1. The size of an economy (i.e. population size, basic geography, annual level
of national income)
2. Historical background including years since independence from colonial
rule
3. Natural resource endowment such as access to mineral deposits and a
favourable climate
4. The age structure of the population, natural rates of population growth
5. Ethnic and religious composition
6. Relative size / importance of public and private sectors of the economy
7. Structure of national output (e.g. primary, secondary, tertiary and
quaternary sectors)
8. Structure of international trade (both geographical and the commodity
pattern of trade)
9. Political stability, strength of democratic institutions, transparency of
government, level of corruption and ease of doing business
10. Ethnic and gender equality, opportunity and tolerance
11. The ease with which new businesses can be created and sustained
12. Other competitiveness indicators (see the chapter on competitiveness,
trade and growth)
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What are some of the Common Characteristics of Developing Countries?
These characteristics might include:
• Relatively low incomes per capita and a low level of absolute savings
• Lower absolute levels of productivity (labour and capital)
• Often endowed with rich natural resources
• A higher dependency on export incomes from primary commodities /
low export diversification
• They have a large share of the population living in rural areas and
employed in agriculture
• Limited scope and support provided by a welfare system
• A higher informal sector for example in partial subsistence farming
• Many industries in low-income countries tend to be some distance from
technological frontiers
• Relatively fast growth of population and a younger average age
• Rapid urbanisation and large-scale rural-urban migration
• Weaknesses in infrastructure such as telecommunications, transport,
ports, water and sanitation
• Weaknesses in institutions such as stable government, civil service
money and capital markets
• Relatively higher tariffs and other import controls
• Tendency to have capital controls / relatively closed capital markets
• Lower access to advanced country markets
Poverty Cycle
The poverty cycle is a seemingly endless continuation of poverty. It is a vicious
positive feedback loop. However, it can also be a negative feedback loop. Once a
person or community falls below a certain level of resourcefulness, a chain of
events starts to occur that tends to perpetuate the situation: progressively lower
levels of education and training leading to lack of employment opportunities,
leading to criminal activity (such as sale of illegal drugs) for survival, looting
(another form of crime and a way of survival), leading to addiction, shattered
health, early death, and breakup of family, leading to even bleaker future for the
next generation ... and so on. This cycle continues until someone intervenes by
providing worthwhile means (not handouts) for people to climb out of
destitution, and by ensuring children's health and education. With help the
poverty or vicious cycle can be turned into a virtuous one. The poverty cycle is
also a great example of a negative feedback loop. This is an extremely hard cycle
to break internally it is almost impossible so the external sources must help the
people suffering from this cycle to become productive members of society.
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Another cycle consists of the fact that low income leads to low savings, which
leads to low investment, which leads to low income again.
Source:
http://centralecon.wikia.com/wiki/Barriers_to_Growth_and_Development,
accessed Monday, 9 November 2015
Example of Poverty Cycle Diagram
Economists generally assume that people's willingness to save for future
consumption grows with their incomes. The poorer people are, the less they can
afford to plan for the future and save. The same logic applies to businesses and
governments. Thus in poor countries, where most incomes have to be spent to
meet current- often urgent-needs, national saving tends to be low. Low saving
hinders desperately needed domestic investment in both physical capital and
human capital. Without new investment, an economy's productivity cannot be
increased and incomes cannot be raised. That closes the vicious circle of poverty
(Figure 6.2) So are poor countries doomed to remain poor?
Recent data on gross domestic investment in East Asia suggest that the answer is
no. Despite low initial GNP per capita, gross domestic saving and gross domestic
investment in the region were high and growing until the 1998 financial crisis
(Figure 6.3). Experts are still trying to explain this phenomenon. Generally
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speaking, however, many of the factors that encourage people to save and invest
are well known, including political and economic stability, a reliable banking
system, and favorable government policy.
In addition to domestic investment, foreign investment can help developing
countries break out of the vicious circle of poverty, particularly if such
investment is accompanied by transfers of advanced technology from developed
countries. The opportunity to benefit from foreign investment and technology is
sometimes referred to as the "advantage of backwardness," which should (at
least theoretically) enable poor countries to develop faster than did today's
industrial countries. However, many of the conditions needed to attract foreign
investment to a country are the same as those needed to stimulate domestic
investment.
Source:
http://www.worldbank.org/depweb/beyond/global/chapter6.html,
accessed Tuesday 5th of January 2016
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Poverty Cycle when applied to both Growth and Development
Millennium Development Goals
In September 2000, building upon a decade of major United Nations conferences
and summits, world leaders came together at the United Nations Headquarters in
New York to adopt the United Nations Millennium Declaration.
The Declaration committed nations to a new global partnership to reduce
extreme poverty, and set out a series of eight time-bound targets - with a
deadline of 2015 - that have become known as the Millennium Development
Goals (MDGs).
The final MDG Report found that the 15-year effort has produced the most
successful anti-poverty movement in history:
• Since 1990, the number of people living in extreme poverty has declined
by more than half.
• The proportion of undernourished people in the developing regions has
fallen by almost half.
• The primary school enrolment rate in the developing regions has
reached 91 percent, and many more girls are now in school compared to
15 years ago.
• Remarkable gains have also been made in the fight against HIV/AIDS,
malaria and tuberculosis.
• The under-five mortality rate has declined by more than half, and
maternal mortality is down 45 percent worldwide.
• The target of halving the proportion of people who lack access to
improved sources of water was also met.
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The concerted efforts of national governments, the international community, civil
society and the private sector have helped expand hope and opportunity for
people around the world.
Yet the job is unfinished for millions of people—we need to go the last mile on
ending hunger, achieving full gender equality, improving health services and
getting every child into school. Now we must shift the world onto a sustainable
path.
The global Sustainable Development Goals (SDGs), or Global Goals, will guide
policy and funding for the next 15 years, beginning with a historic pledge on 25
September 2015, to end poverty. Everywhere. Permanently.
The 8 MDG Goals
Information on goals and level of achievement
http://www.un.org/millenniumgoals/reports.shtml
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Questions – Case study on Malawi
Rapid Development in Malawi
Item 1:
Poverty in Malawi:
Malawi is one of the world’s poorest countries, ranking 160th out of 182 countries on the
Human Development Index. Progress towards reaching the Millennium Development Goal of
eradicating extreme poverty has been limited. According to the United Nations Development
Programme’s Human Development Report for 2009, about 74 per cent of the population still
lives below the income poverty line of US$1.25 a day and 90 per cent below the US$2 a day
threshold. The proportion of poor and ultra-poor is highest in rural areas of the southern and
northern parts of the country.
http://www.ruralpovertyportal.org/country/home/tags/malawi
The above data is from 2014, MDG Country Progress Snapshot: Malawi.
Item 2:
Exports in Malawi:
https://www.youtube.com/watch?v=WGPvFUmCVBM
Watch at 00:40 seconds.
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Item 3:
World Development Indicators:
Item 4:
FDI into Malawi:
In 2012, Malawi managed to attract Foreign Direct Investment worth US$1.2 billion
representing 22 percent of the FDI flows to Southern Africa. With reference to Malawi
Investment and Trade Centre records for investment pledges for the year 2012, FDI
significantly rose by 18 percent from US$987,458,231 recorded for 2011 to US$1,161,432,000.
This is a reflection of the improved business environment which attracted more investors from
within and outside Africa. This upward trend commencing from 2011 was a diversion from the
collapsing investment figures traced from 2008 to 2010. Infrastructure and Energy sectors
shared 62 percent and 33 percent of the 2012 total investment respectively with tourism,
services and agro-processing having minimal contribution.
Source: Malawi Investment and Trade Center
http://www.mitc.mw/index.php?Itemid=648
Item 5:
Source: Drivers of Economic Growth in Malawi, By Dr Naomi Ngwira Deputy Governor
(Economics), Reserve Bank of Malawi. Page number 11.
https://www.rbm.mw/documents/governor_statements/ECAMA_Conference_Presentation.pd
f
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Item 6
http://countryeconomy.com/hdi/malawi
Item 7
Diversifying Away from Tobacco
The video says that forex market influences the domestic firms a lot due to electricity supply.
Therefore, the industries can be unstable and heavily relying on to the foreign investors.
Because Malawi has large bodies of water, the solution to create electricity is the hydropower.
So the government is trying to alleviate the pressure of forex market by producing Malawi’s
own electricity.
Item 8 Prevalence of HIV, total (% of population ages 15-49)
Source:
http://data.worldbank.org/indicator/SH.DYN.AIDS.ZS/countries/1W-MW?display=graph
Item 9
http://www.osisa.org/sites/default/files/sup_files/chapter_2_-_malawi.pdf
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Video Notes - Doing Business in Africa
1. Economic Miracle
Agricultural subsidy program, → increase in average GDP rate 7.5% in 5 years.
80% of nation is involved in agriculture. 2% involved in production of tobacco
and they look for more types of production..
2. Diversifying Away from Tobacco
Main productions : cotton tea, sugar. Sugar is the biggest taxpayer in Malawi.
Duty free deal with EU → more expectation since ⅔ of the products are exported.
Good distribution: subsidies transport costs; thus, local sugar price down. forex
market influence a lot due to electricity supply. Government’s idea: Power
generation (hydropower since there are lots of water). Trying to alleviate the
pressure of forex by producing own electricity; increase in income; reduce
poverty; plenty of raw materials. Desire more investment from China.
3. Growing Financial Sector
Malawi became democracy in 1994. Their investment have increased by other
African banks. 3 new banks have entered the banking sector in 4 month time. One
major bank out of this 3 is the Ecobank. Ecobank is the largest bank in Africa and
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it is geographically spread. This bank is also ranked number 9 as well as their
goal is to be in top 3 banks.
Although Malawi is developing, it is still closed country. More than half of
Malawi’s population is under the age of 18 and about 2 and a half million people
have cellphones, which provides the perfect combination for value edition mobile
phone technology and this is the key to TNM’s (Telecom company) growth
strategy.
4. Surviving the Tough Times
They have started crocodile farming, using crocodile skin to make luxurious bags.
Even though there is a big demand for crocodile skin products, it only lasts for
about a year or year and half. Within 5 years, Malawi had to make tough decisions
about their future but they have seen the rewards of their efforts to make their
country more developed. Huge number of Malawians were living below the
poverty line but it has dropped by 12%. Due to this, their government is
confident that it will achieve the UN’s Malawian development goals. Although
their focus must stay on developing country’s rural areas. They also think
reducing
poverty
is
the
first
thing
to
do.
By 2015 they think they can meet their objectives.
Questions:
a. Define/state the following term (two marks each). You can use the items given to
support your definition.
i. FDI ( Foreign direct investment)
ii. Economic Development
b. Malawi’s main export is tobacco, explain how the Malawian government would benefit
from diversifying their exports.
c. Using a poverty cycle, explain the effects of the FDI into Malawi and why the Malawian
government is keen to attract more investors.
d. Malawi was quite successful in achieving the first Millennium Development Goal,
eradicating extreme poverty. Using the information from the text/data and your
knowledge of economics, explain and evaluate some measures that the Malawian
government might have taken to do so.
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Examination questions
1:
17
18
2:
19
20
3:
21
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