Economic Development
(Tragakes Chapter 16 pages 436-448)
Economic Growth and Economic Development
Economic Growth – the increase in output and incomes over
time; often measured on a per capita basis
Causes of economic growth:
1. Investment in physical capital, human capital and social
capital
2. Increase in labor and/or land
3. Increase use of technology
4. New and improved technology
5. Increase in productivity
Economic Development – the process that leads to improved
standards of living for a population as a whole;
Process where increases in real per capita output and
incomes are accompanied by improvements in standards of
living of the population and reductions in poverty, increased
access to goods and services that satisfy the basic needs,
increasing employment opportunities and reduction in
unemployment, and reductions of serious inequalities in
incomes and wealth.
Increasing levels of output and incomes resulting from
economic growth mean that societies can better satisfy
the needs and wants of their populations and secure
improvements in the standards of living.
Human development – Process of :
● Increasing life sustenance
● Increasing self-esteem
● Expanding freedom
Multidimensional Nature of Economic Development
1. Reducing widespread poverty
Poverty – Inability to satisfy minimal consumption needs
2. Raising living standards
3. Reducing income inequalities
4. Increasing employment opportunities
A → B : No economic growth with some development
B → C : Economic growth with no development
B → D or E : Economic growth with development
Sources of Economic Growth
Natural factors – Quantity and/or quality of land or raw
materials
Human factors (labor) – Quantity and/or quality of human
capital
Physical capital and technological factors – Quantity and/or
quality of physical capital
Development and use of new technologies – can improve the
quality of physical capital; Technology that is well suited for
developed countries may not be well suited for developing
countries.
Appropriate technology – technology that is well suited to the
economic, geographical, ecological, and climate conditions
Institutional factors that contribute to development
Institution – The rules, organizations and social norms that
facilitate coordination of human action
Economic, legal, and social institutions that influence
economic growth:
1.
Banking system
2.
Education system
3.
Health care
4.
Infrastructure
5.
Political stability
Economic Growth and Economic Development
Although economic growth is usually necessary for economic
development, limited economic development can occur
without economic growth. In order to have economic
development without economic growth, resources must be
allocated from industrial goods to merit goods.
Common characteristics of economically less
developed countries
Low levels of GDP/GNI per capita - Economically less developed
countries are countries with GNI per capita levels below a certain
level. Within the 3 groups of economically less developed
countries, there are huge differences in income levels
High levels of poverty
● Almost all extreme poverty and most moderate poverty are
concentrated in less developed countries.
● However, there are huge differences between countries in
amounts of poverty, in terms of absolute number and the
proportion of a country’s population that is poor.
Relatively large agricultural sector
● Large urban informal sectors
Formal sector - The part of an economy that is registered
and legally regulated;
Informal sector - The part of an economy that lies outside
the formal economy, and refers to economic activities that
are unregistered and legally unregulated
Poverty
One cause of poverty is poverty itself. When conditions of
poverty feed on themselves it creates more poverty, it
develops into the poverty cycle.
Poor people spend all their money on necessities, leaving
little to no money left for their saving; therefore they will
most likely not be able to make investment in physical,
human and natural capital, which are needed in order to
come out of their state of poverty.
The Poverty Cycle
Breaking from the Cycle
To break out of a poverty trap, Intervention of the government is
required to:
● Undertake investments in human capital (health services,
education, nutrition), in physical capital in the form of
infrastructure (sanitation, water supplied, ie.,)
● Take steps to ensure that poor people can participate in private
sector activities (such as borrowing from finance private
investments)
*Escaping from poverty cycle is possible only if resources are suffice,
or provided from the foreign aid.*
Diverse characteristics of economically less
developed countries
Economically less developed countries differ in many important
aspects such as:
1. Resource Endowments
Economically less developed countries tend to have more labour
resources relative to capital (Because of the abundance of labour,
this makes labour price to become lower than capital), which is in
contrary to more developed countries.
The amount of resource endowment varies in each country
(natural [fixed], human, capital); this forms the basis of
comparative advantage between countries.
2. Climate
Climate differences determine the type/method of agricultural
production, animal husbandry, and labor productivity
Example:
Tropical and subtropical climates typically lowers soil quality
and have negative effects on human and animal health.
Economically less developed countries tend to have tropical or
subtropical climates while economically developed countries tend
to have temperate climates.
3. History
Developing countries are often former colonies of European countries.
While these countries were colonies, systems were put in place that
focus on extracting resources rather than encouraging economic
development. Even after these countries achieved independence, these
systems are still in place and are difficult to reform.
4. Political System - A set of legal institutions that define how government is
structured and functions
Political structure, the relationship between various groups within a
society and the degree of political power they control, is crucial to
economic development. Without the support of these groups of people,
it is difficult to carry out an effective development program.
5. Political Stability - Stable government and its ability to
withstand forcible removal from power
Political stability often leads to higher rates of growth and
improved development because:
1. Stable government is required for effective government
decision-making and for implementing economic policies
that can lead to a stable economy
2. Political instability creates uncertainty in economic
policy, property rights, expropriation, and taxation. All
of these make investment more risky for both foreign
and domestic investors, thereby reducing investment
3. Political instability leads to outflow of financial capital as
people move their financial assets to foreign countries for
financial safety. This deprives the country of financial resources
and contributes to balance of payment deficit
4. Political instability increases vulnerability to hunger and
famine because it deprives governments of the capacity to
provide relief which is diverted to military or political activities
Example:
1984-85 famine in Ethiopia was caused by internal
war and violence brought by drought. This resulted in
the deaths of over 1 million people.
International development goals
[The Current State] The UN hosted the largest meeting of
world leaders in Sep, 2000, and adopted the Millennium
Declaration, a global statement of commitment to eliminate
● extreme poverty
● hunger
● disease
● environmental damage
by using development strategies based on the needs of the
poor, human rights and sustainable development.
The Millennium Declaration is different from the earlier year
in that
● specific goals called “Millennium Development Goals”
● its targets are to be achieved within 15 years
● It specifies to indicators to be used to monitor
countries’ progress towards achieving the goals