Unit One

1 Introduction to Economic Development

Instructor’s name : Tadele Melaku (PhD)

What is Economic Development?
Meaning, Measurement, and
Characteristics
.
 Meaning of Development

 Have you ever visited a foreign (developed country)?

 How does life differ in LDCs countries as
compared to in developed countries?
 What does development mean to you personally?
 Development can be seen . . . as a process of expanding
the real freedoms that people enjoy.
—Amartya Sen, Nobel laureate in economics
 Many Definitions of Development

 Gross National Income (GNI) Growth

o Generating and sustaining an annual increase in
GNI (5-7%)
 Income Per Capita (GP) Growth
o Generating and sustaining an annual increase in GNI
per person (GNI/POP)
o This accounts for the fact that population may
grow faster than the economy
o So ‚development‛ may not occur even if GNI is
growing when the population is growing even
faster.
 Growth of Factors of Production

 Real Economic Development

 Growth of per capita income in excess of inflation (π):
 Growth in GDPpc - π > 0

=> Growth in GDPpc = ΔGDPpc /GDPpc

=> π = ΔPrice/Price
 If π > Growth in GDPpc then purchasing power is
falling even when income is increasing.
 So ‚development‛ may not occur even if GDPpc is
growing when inflation growing even faster.
Structural Change

 Development defined to occur when the structure of

production and employment changes so that
agriculture’s share of both declines and that of
manufacturing and service industries increases.
“New” Economic View of Development

 Development defined as a multidimensional process

involving major changes in:
- Social structures,
- Popular attitudes,
- National institutions,
- Acceleration of economic growth,
- The reduction of inequality,
- Eradication of extreme poverty.
 If income is increasing in a country but poverty,
unemployment, and/or inequality worsen ‚it would be
strange to call the result ‘development’‛ (Seers, 1996).
 Three Basic Goals of Development

1. Sustenance: The ability to meet basic needs

2. Self-esteem: A sense of self-worth, self-respect,
and dignity
3. Freedom of choice
Remember Sen’s definition of development
Development can be seen . . . as a process of
expanding the real freedoms that people enjoy.
Three Objectives of Development
to Achieve the Basic Goals

1. To increase the availability and widen the

distribution of basic life-sustaining goods
(food, shelter, health, protection)
2. To raise the levels of living (higher incomes,
more jobs, better education, etc.)
3. To expand the range of economic and social
choices available
Development as Freedom

 Development consists of the removal

of various types of lack of freedom
that leave people with littel choice and
little opportunity for exersicing their
reasoned agency
Development as freedom

 Human freedom tends to promote freedoms of other

kinds: many different interconnections between
distinct instrumental freedoms
 Economic and political freedoms help to reinforce one
another (Although some argue the opposite)
 Social opportunites in the fields of heath care and
education – which require public action –
complement individual opporutinites for economic
and political participation.
 Thus – intrinsic importance of human freedoms
 Human Development Index (HDI)

 UNDP ranks countries using ‚huma n development‛

which is based on:
1. Life expectancy at birth;
2. Average adult literacy
3. Mean years of schooling;
4. Real per capita incomes
- Countries are ranked into three groups:
5. Low human development (index of 0.0 – 0.499)
6. Medium human development (index of 0.5 – 0.799);
7. High human development (index of 0.80 – 1.0.)

12
Other Ways of Characterizing Countries

 Physical size and population

 Historical background
 Physical and human resources
 Ethnic and religious composition
 Relative importance of the public and private
sectors- the economic system

13
Defining the Developing World

 Various grouping schemes: Best known is World

Bank’s System
- Categorizes countries based on their per capita income
levels into 5 groups:
1. Low-income countries ($935 or less)
2. Lower-middle-income countries ($936–$3,705)
3. Upper-middle-income countries ($3,706–$11,455)
4. High-income OECD countries ($11,456 or more)
5. Other high income countries ($11,456 or more)
Common Characteristics of Developing
Countries

1. Low levels of living

- Low total and per capita incomes relative to DCs
- Widespread poverty given low incomes and poor
distribution of income.
- Poor health and education
- High infant mortality
- Low levels of literacy, significant school dropouts,
inadequate and often irrelevant educational curricula
and facilities.

15
Common Characteristics of Developing
Countries

2. Low levels of labor productivity : some explanations:

1. In some LDCs, poor attitudes towards self-
improvement, manual labor, discipline, low levels of
adaptability, work ethic, and general drive to innovate
and experiment due to very poor property right.
2. Poor health and nutrition levels

16
 Common Characteristics of Developing
Countries

 High levels of population growth and dependency

burdens (older people and children)
 Substantial dependence on agricultural production and
primary-product exports
 Most LDCs oriented to production and export of
primary products rather than manufactured goods or
services.
 Why? What is the implication of this to economic
development?

17
 Common Characteristics of Developing
Countries

3. Prevalence of imperfect markets and

incomplete information
- Markets do not efficiently function to equilibrate
supply and demand and determine prices.
- Limited access to necessary information to make
informed economic decisions - production,
consumption, marketing, etc.

18
 Common Characteristics of Developing
Countries

4. Dependence and vulnerability in

international relations
- Many are small countries with little global economic or
political power.
- Price-takers in world markets.
- Subject to ‚Westernization‛ pressures (education,
cultural and moral values, food diets and habits).
- Why might this be a problem?
- Dependent on imports of food, fuel, and other critical
materials making LDCs vulnerable and being held
economic hostage by developed countries as well as
rich dominating groups within LDCs 19
 World development patterns and disparities

 Why have some countries achieved a higher level of

living and well-being while many others are
largely trapped in poverty?
 There are many more Less Developed Countries
(LDCs) than Developed Countries (DCs) in the world.
 A few DCs (black) produces larger proportion of the
world’s goods (GDP) while many more LDCs (dark
gray) with larger proportion of the world’s population
produce only smaller proportion of the world’s GDP.
 Cont.

Map Showing the distributions of DC and LDCs

 Why development concentrated in

limited areas of the world?
 World GDP per capita

http://en.wikipedia.org/wiki/Geography_and_wealth
Unit Two

2 Current Issues in Economic Development

Outline

 The Millennium Development Goals

 The Sustainable development: What is it?
 What have been done by the international community?
 Current status of sustainable development in the world
 Key Concepts of Inclusive Growth and Green Growth
 Strategies for Inclusive Growth
 Strategies for Green Growth

 Framework for Sustainable Development

Millennium Development Goals (MDGs)

 The MDGs are eight goals planned to be achieved by

2015 that responded to the world's main
development challenges.
 The MDGs are based on the targets contained in the
Millennium Declaration adopted by 189 nations and
signed by 147 heads of government during the UN
Millennium Summit in September 2000.
Millennium Development Goals (MDGs)
From MDGs…

 The greatest triumph of the MDGs was to mobilize

broad support for a global development agenda
 While there was progress on many of the MDGs in
certain areas, the global promise went unfulfilled
by 2015
 Three major criticisms of the MDGs are
(1)it was developed by a small group of experts and was
not member state driven
(2) it is too aid focused/donor driven and
(3) it completely overlooked the issue of inequality
Cont.…

 The UN intergovernmental process planned to begin in

September 2014 to agree the successor framework to
the MDGs which were set to expire in 2015
 The Post 2015 SDGs go beyond aid and will address
three pillars of Sustainable Development:
Economic, Social, Environmental
 There are currently 17 Focus areas that serve as the
foundation from which the SDG recommendations will
be prioritized
What is Sustainable Development?

 The relationship between development and

environment has given birth to the sustainable
development concept.
 Sustainable development
 is that global ecosystems and humanity itself can be
threatened by neglecting the environment.
 involves maximizing the net benefits of economic
development, subject to maintaining the services &
quality of natural resources over time
 Concerned with balancing the objectives of
economic growth and attending to environmental
considerations. 29
What is Sustainable Development?

 As an individual, what is the ultimate goal?

 More money?
 Answer: Happiness of individual (personal
well- being)
 As a nation, what is the ultimate goal?
 Large GDP? high income per capita?
 Answer: Happiness of the people (national
welfare or sustainable development)

30
What is Sustainable Development?

 A nation's welfare can increase when the following

conditions are met.
1. Economic growth (Y): Increase in paid consumption
of goods and services:
2. Environmental protection (E): Increase in unpaid
consumption of environmental services:
3. Social equity (S): Decrease in desire (Increase in
income equity)
 i.e. Welfare is a function of YES (W = Y*E*S)

31
 Sustainable Development

 Sustainable Development meets the needs of the

present generation without comprising the ability of
future generations to meet their own needs.
 The concept of UN’s Sustainable Development

“The achievement of sustainable development requires the integration of

its economic, environmental and social components at all levels.” 32
The SDGs are
…
 A set of 17 goals for the world’s future, through 2030
 Backed up by a set of 169 detailed Targets
 Negotiated over a two-year period at the United
Nations
 Agreed to by nearly all the world’s nations, on
25 Sept
2015
What is new and different about the 17 SDGs?

 First, and most important, these goals apply to

every nation … and every sector.
 Cities, businesses, schools, organizations, all
are challenged to act. This is called
Universality
 Second, it is recognized that the goals are all inter-
connected, in a system.
 The aim is not to achieve just one goal. We must
achieve them all. This is called Integration
 And finally, it is widely recognized that achieving
these goals involves making very big, fundamental
changes in how we live on Earth.This is called
Transformation
Sustainable Development Goals (SDGs)
 Each
goal is
importa
nt
in itself
…
 Each And
goal is they
importa are all
nt connec
in itself ted
…
 Sustainable Development Goals (SDGs)

 Action-oriented?
 Concise?
 Easy to communicate?
 Limited in number?
 Aspirational?
 Global in nature?
 Universally applicable to all
countries ?
39
 How do we measure sustainable development?

 There are no internationally agreed

sustainable development indicator, but
 Happiness Index (Sustainable Development
Solutions
Network, Happiness Foundation)
 Better Life Index (OECD), Happy Planet Index
(New Economics Foundation), Gross National
Happiness Index (Bhutan)
 Human Development Index (UNDP)
 Need for a development of SD index
Also need for a development of measurements 40
of SDGs
 Ranking of Happiness Index 2012-
2014

Helliwell, J. R. Layard and J. Sachs eds., World Happiness report 2015

3. How do we measure sustainable development?
 Social Inequality
 Income inequality
-Gini Coefficient, Theil Index, General Enthropy Index,
etc.
- Rate of return on capital vs. rate of economic
growth
 Gender inequality
- Gender Gap Index (World Economic Forum)
-Gender Inequality Index (UNDP’s Human
Development Reports)
42
 Global Income Inequality – Trend

The Economist, 2012, “For richer, for poorer”, October 13.

 Gini Coefficient – Comparison of individual
countries
 Gender Gap Index -
World

World Economic Forum, World Gender Gap Index 2014

3. How do we measure sustainable development?

 The UN has pursued sustainable development (SD), but

without much success.

 World’s ecological footprint has been rapidly

increasing,
thus degrading environmental sustainability.

 In many countries, economic growth has contributed to a

decline in the poverty, it has also been accompanied by rising
income inequalities.

46
4. Key Concepts of Inclusive Growth and Green
Growth
 Traditionally,
 The three pillars of SD have been thought separately and
policies have not been designed and implemented
synthetically.
 Also, the three pillars of SD have been often viewed as
contradictory, or environmental sustainability and
social equity have been viewed as residual outcomes
of economic growth,
 Accordingly, in many countries, economic growth was
taken up as the first goal and environmental
protection and social development were dealt with as
secondary goals.
47
4. Key Concepts of Inclusive Growth and Green
Growth

 But,
 Three pillars can be enhanced via synergy
creating policies.
 i.e., while pursuing economic growth, social
equity and environmental sustainability can be
enhanced.

48
4. Key Concepts of Inclusive Growth and Green
Growth

 Inclusive Growth
 Socially equitable growth
 i.e., Economic growth that allows people to contribute
to and benefit from economic growth.
 Socially equitable growth has been termed as ‚shared
growth‛, ‚pro-poor growth‛, ‚broad-based growth‛
and more recently ‚inclusive growth‛.

49
4. Key Concepts of Inclusive Growth and Green
Growth

 Green Growth
 Environmentally sustainable growth
 i.e., Economic growth which is consistent
with environmental sustainability.
 Environmentally sustainable growth has been termed
as ‚sustainable growth‛, ‚clean growth‛, and more
recently ‚green growth.‛

50
4. Key Concepts of Inclusive Growth and Green
Growth
 The Green Growth Initiative and Inclusive
Growth Initiative should constitute two
important ‚strategies‛ to achieve the
ultimate, long-term goal of Sustainable
Development.

51
5. Inclusive Growth

1. Creation of synergy between growth and

social equity has to be created
2. Management of both supply side and demand
side
3. Support for the long-term perspective
4. International Cooperation

52
 IG1: Creation of synergy between
growth and social equity
 Providing equal opportunities for high-quality
education and training
 Strengthen human capabilities of all members of the
economy, including the disadvantaged and the bypassed.
 Providing equal opportunities for employment
 Create more employment opportunities and make them
accessible to all, including the disadvantaged and the
bypassed.
 Strengthening ‚productive‛ social safety nets
 Provide and strengthen social safety nets that can increase
(not decrease!) capabilities and incentives of the
disadvantaged and the bypassed to take part more actively
in productive employment. 53
 IG 2. Management of both supply side
and demand side

 Conventional social equity policy has focused primarily

on the consumption side (i.e., income distribution).
 Pro-poor growth has been promoted: providing monetary
subsidy to the poor, unemployed, the aged, etc., thus
reducing work incentives
 However, supply side management is more crucial for the
creation of synergy between growth and social equity.
 Equal opportunities for high-quality education
 Equal opportunities for high-quality employment
Productive social safety nets
54
 IG3. Support for the long-term perspective

 Conventional social equity policy has

been conducted on the short-term basis.
 However, the long-term perspective is
required.
The public sector needs to bridge the gap between
long-term social benefit and short-term social cost to
provide extensive training and education opportunities,
etc.
The public sector also needs to bridge the gap between
long-term social benefit and short-term commercial
benefit to promote the active participation of the private
sector in ‚socially inclusive‛ production activities. 55
 IG 4. International Cooperation

 International cooperation to support

structural reform in developing economies.
 International cooperation for education,
training, migration labor, etc.

56
 Green Growth

1. Creation of synergy between growth and social

equity has to be there
2. Management of both supply side and demand side
3. Support for the long-term perspective
4. International Cooperation

57
 GG 1 : Internalization of environmental
costs in price mechanism

 E.g., 1: Green tax reform: Increase environment-related

tax, while reducing income tax
 E.g., 2: Subsidy reform:
 Investment in environment-related industry
 Strengthen the future industry by investing in
environment.
 E.g., Subsidy for green R&D
 Public investment in environment structure
 Increase employment by public investment in environment
structure, especially when the economy is down.
58
 GG 2. Management of both supply side and
demand side

 Conventional environmental management has

focused primarily on pollution control.
 However, management of both supply side and
demand side management is also required so as to
increase eco-efficiency in both production and
consumption process.

59
 GG 2. Management of both supply side and demand
side
 Environmental sustainability can be achieved not just with pollution
reduction, but rather with improving eco-efficiency in both production
and consumption sides.
 Determinants of environmental
sustainability

 Flows of Production and Consumption

60
GG 3. Support for the long-term perspective

 Conventional environmental protection has

been conducted on the short-term basis.
 However, the long-term perspective is required.
 The public sector needs to bridge the gap
between long-term social benefit and short-term
commercial benefit to promote the active
participation of the private sector in
environmental R&D.
 Creation of new growth engines for the future.

61
IG 4. International Cooperation

International cooperation to reduce barriers to trade

and investment in environmental goods and services
(EGS).
 To ensure environmental sustainability to be
consistent with keeping global trade and investment
open and free, without raising new barriers to trade
and investment.
International cooperation to expedite green
technology transfer to developing economies

62
Questions for Review

1. Critically explain Green Growth and Inclusive

Growth strategies for Sustainable Development.
2. Explain some market-friendly Green Growth
strategies that were not identified in class.
3. Explain some market-friendly Inclusive Growth
strategies that were not identified in class.
http://jeffsachs.org/category/topics/sustainable-development/

2. Jeffrey Sachs, The Age of Sustainable Development,

Coursera
http://live.worldbank.org/age-of-sustainable-development

http://www.oecd.org/greengrowth/keydocuments.htm

http://www.oecd.org/greengrowth/keydocuments.htm