Development Economics

Development Economics

Prof. Dr. Hans H. Bass

Jacobs University, Spring 2010

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Development Economics Agenda Feb. 04

0. Introductory remarks, grading, topics for presentation, and overview

1. Economics1.1 Approaches in mainstream economics1.2 Approaches in Development Economics

2. Development2.1 Meaning2.2 Measurement

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Development Economics Overview

Voices of the Poor ...... and some questions for our course:“Why does affluence coexist with dire poverty not only on

different continents but also within the same country?Can traditional low-productivity, subsistence societies be

transformed into modern, high-productivity, high-income nations?

To what extent are the development aspirations of poor nations helped or hindered by the economic activities of rich nations? ...”

(Todaro/Smith 2009, p. 7)

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1. Economics1.1 Approaches in mainstream economics

1.2 Approaches in Development Economics2. Development

The economic problem

Material wants exceed productive capacity scarcity!

Utility maximization under conditions of scarcity Economics is about making choices

What is the most efficient way to allocate scarce resources and allow optimal growth of these resources?

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From Adam Smith to modern times ...

Adam Smith, 1776 (founder of classical economics)(„An Inquiry into the Nature and Cause of the Wealth of Nations“)

modern mainstream economics(neo-classical and beyond)

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Main neo-classical assumptions

homo economicus (fully informed, completely rational, utility maximizing behavior)

decisions made on the basis of marginal, private-profit, and utility calculations

consumer sovereignty, producer sovereignty perfect markets

(perfect market information + no participant with market power to set prices + no barrier to entry or exit + equal access to production technology = perfect competition)

prices equate supply and demand, immediate price adjustments

equilibrium outcomes in all product and factor markets

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The new economic problem

What is the most efficient way to allocate scarce resources and allow optimal growth of these resources?

and: What are the economic, social, and political mechanisms necessary to bring about rapid and large-scale improvements for the world’s poor(est), i.e. 150+ economies?

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Development Economics assumes ...

imperfect markets are the rule rather than the exemption; consumers and producers have limited information; prices often do not equate supply and demand

disequilibrium situations prevail; economic calculations can be dominated by political or social

priorities (building new nations, replacing foreign advisors with local decision makers, resolving ethnic conflicts …);

non-economic (extended family, tribal …) considerations may take precedence over private, self-interested utility or profit-maximizing calculations.

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strategic economic variables (savings, investment, product and factor prices, forex rates ...) and

non economic factors (attitudes to life, work, authority; bureaucratic structures, kinship, religion, values ...)

can be equally important to increase national production, raise standards of living, promote employment opportunities

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Economics is not a formal science (as mainstream economists, “formalists” tend to believe), but a social science (“substantivist approach”):

It is about societies organizing their production, distribution, and consumption (rather than only about “making choices”)

It implies value judgments in the identification of its subjects (“poverty is worth being investigated”) and its research goals (“poverty should be eradicated”).

The heterogeneity of the Developing World and its complexity need eclectic and multi-disciplinary approaches.

Its research must be policy-oriented.

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What they say about each other

(1) Development Economics is an amalgamation and basically an unaltered application of traditional fields (micro, macro, monetary economics, public finance ...) with a specific focus on industrializing economies in Asia, Africa, and Latin America.

(2) Neo-classical mainstream economics is “monoeconomics” (A.O.Hirschman): A book about horses cannot be called “Animals” (D. Seers)!

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From Adam Smith to modern times ...

Adam Smith, 1776John Maynard Keynes, 1936

Paul N. Rosenstein-Rodan, 1943Gunnar Myrdal, Nobel Prize 1974 (not for D.E.)

A. William Lewis & Theodore Schultz, Nobel Prize 1979Amartya K. Sen, Nobel Prize 1998Joseph Stiglitz, Nobel Prize 2001

Muhammad Yunus, Nobel Peace Price 2006

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Development Economics Agenda Feb. 04

1. Economics

1.1 Approaches in mainstream economics1.2 Approaches in Development Economics

2. Development

2.1 Meaning2.2 Measurement

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1. Economics2. Development2.1 Meaning2.2 Measuring

Three phases

Turning the vicious circle of poverty into a virtuous circle of growth – resulting in a diversified industrial economy and higher per capita incomes (1950s)

Looking beyond averages: Reducing poverty, unemployment, and inequality (1970s)

Replacing the domination of circumstances and chance over individuals by the domination of individuals over chance and circumstances (1990s)

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Phase I: Vicious to virtuous circles

“Low productivity is the problem. The economic remedy for the problem is capital creation, ...

... though I readily agreed that non-economic remedies may be more important.”

“Economic progress is not a spontaneous or automatic affair.” “Big push”

(Ragnar Nurkse 1953)

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Goals Policies

Theories Data


Development Paradigms

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Datanational accounts

Theoriesbig push, critical minimum effort,

no full employment natural state intervention

Policiescapital accumulation, planning, industrialization, diversification,

infrastructure investment

Goal: Economic Growth

(GNI, GNI p.c.)


Paradigm 1950s/1960s

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Phase II: Social Dimensions

of Growth “What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? ... If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result ‘development’ even if per capita income has soared.”

There is no trickle-down effect!(D. Seers 1969)

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Phase II

Phase I


Phase II: Social Dimensions

of Growth

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Goalsemplyoment, harmonizaton of

income distribution, basic needs

Policiesintegrated rural development,

employment creation, asset redistribution

Theoriesinformality, migration (Harris-Todaro model), appropriate

technology

Dataemployment censuses,

household / rural / IS surveys


Paradigm 1970s / early 1980s

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Phase III: Development as Freedom / Capabilities

„The process of economic development has to be concerned with what people can or cannot do, e.g. whether they can live long, escape avoidable morbidity, be well nourished, be able to read and write and communicate, take part in literary and scientific pursuits ...“

Sustenance, self-esteem, freedom

(A. K. Sen 1983)

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Phase II

Phase I

Phase III


Phase III: Development as Freedom / Capabilities

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“Millenium Development Goals“(multidimensional)

Policiespromotion of good governance and accountability, change in social and political institutions

Theoriesnew institutional economics,

economics of corruption

Datalarge-scale income / household

surveys, subjective poverty assessments, health surveys


Paradigm late 1990s / present

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Government as Main Protagonist

Market Forces as Main Protagonists

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DataTheories

PoliciesGoals

late 1990s - present

1970s1950s / 60s

DataTheoriesDataTheories

PoliciesGoalsPoliciesGoals

Government as Main Protagonist

Market Forces as Main Protagonists

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1. Eradicate Extreme Hunger and Poverty 2. Achieve Universal Primary Education3. Promote Gender Equality and Empower Women4. Reduce Child Mortality5. Improve Maternal Health6. Combat HIV/AIDS, Malaria and other diseases7. Ensure Environmental Sustainability8. Develop a Global Partnership for Development

1. Economics2. Development

2.1 Meaning2.2 Measuring

Millennium Development Goals

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1. Eradicate Extreme Hunger and PovertyTarget 1. Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a dayTarget 2. Halve, between 1990 and 2015, the proportion of people who suffer from hunger

4. Reduce Child MortalityTarget Reduce by two-thirds the mortality rate among children under 5.

1. Economics2. Development

2.1 Meaning2.2 Measuring

MDG Targets

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Todaro/Smith, Economic Development, 9th ed., 2005

http://wps.aw.com/aw_todarosmit_econdevelp_9/35/9052/2317470.cw/index.html

Chapter 1

Quiz 1

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1. (Why) is economics central to an understanding of the problems of development?

2. (Why) is a strictly economic definition of development inadequate?

3. Are there dimensions of development not mentioned so far? Which ones?

Questions for

Discussion

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http://www.hs-bremen.de/internet/de/hsb/struktur/mitarbeiter/bass/lehrveranstaltungen/schwerpunkt_internationale_wirtschaft/Development_Economics/

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