ISSUES IN DEVELOPMENT

POLICY (IDEC 8003)

LECTURE 1
Development and under-
development: an overview
Consider the following questions
before we start
• What do you hope to gain from a course in
economic development (other than a good grade)?
• Why is studying economics so central to
understanding the problems of developing
countries?
• What are the ultimate goals for economic
development?
• The main goal of this course is that you, after
studying the material in this course, can form your
own informed opinion of what is important in the
development process of countries.
The remarks on development by
Theodore Schultz (1981. p. 3)
• Most people in the world are poor.
If we knew the economy of being
poor, we would know much of the
economics that really matter.
– Schultz, T. (1981), Investing in
People: The Economics of
Population Quality, University of
California Press: Berkeley
 Key Issues
· Why study development
economics: some critical questions
· The meaning and issues of
development and the challenge
(fallacies) of development
economics
· The perpetuation of under-
development
• The new challenges in economic
development (can the poor
countries ever catch up?)
•
 Why study development
economics
• A renewed academic interest
• Developing countries’ own awareness
• Increasing poverty and backwardness
• The recognition of interdependence
• New challenges facing developing world
 Economic development: a huge
challenge
• ‘Achieving universal economic
development is likely to be one of todays’
most important challenges for humanity.
With 85 percent of the world’s population
living in developing countries, 58 percent of
developing countries’ population in poverty,
and 26 percent in extreme poverty—some
1.6 billion people—the problem is of
massive dimensions’ (De Janvry and
Sadoulet 2016, p. 1)
 Achieving development: what is
at stake?
• ‘In spite of notable success stories, continued
failure to achieve development for half of
humanity not only has huge intrinsic welfare costs
for that population but is also a lost opportunity
for the population of the industrialised countries
and poses serious threats to the survival of the
entire human race. Achieving development should
thus be an issue of concern not only to developing
countries, but also to industrialised ones, and this
not only on ethical grounds, but also for self-
interest’ (De Janvry and Sadoulet 2016, p. 1)
 Growth miracle in East Asia?
• The “Growth Report” of the Commission on
Growth Development (2008), chaired by Nobel
Laureate Michael Spence, found out that, since
1950, 13 economies achieved growth of 7% a
year or more for over 25 years or longer. They
are: Botswana, Brazil, Hong Kong, Indonesia,
Japan, Korea, Malaysia, Malta, Oman, China,
Singapore, Taiwan, and Thailand, i.e., 9 East
and Southeast Asian economies.
• How did this happen?
Distribution of world income

Figure 2.2, p. 38, Economics of Development

 Development issues (past)
• What are the sources of growth?
• Does macro-stability matter, and how can it be
sustained?
• Should developing countries liberalise trade?
• How crucial are property rights?
• Is reducing poverty a function of growth?
• Can developing countries defer or downplay
environmental problems?
• How closely should the state manage and regulate
development?
 Development issues
•
(present)
Globalisation and de-globalisation
• Environmental degradation (climate change)
• Demographic change and migration
• Urbanisation
• Low and Middle income traps
• Innovation and technological change
– Internet, digital revolution, artificial
intelligence AI, and implications for
development the end of catching up growth
strategies?)
– Digital divide
 Development issues (future)
• Governance and regulation
– Participatory politics
– Organisational capability
– Decentralisation
– Income inequality
– Urban development and governance
– Rising global debt levels and financial
instability
Development issues (future)
• Management of human and natural
resources
– Cross-border migration
– Inclusion (less marginalisation of people and
countries)
– Ageing and capital supplies
– Managing the global commons
– Food and water security
– Climate change
– New model of growth (green growth and the role
of ideas)
– Uncertainties associated with rising geopolitical
tensions
IMF: some undesirable developments
can lower global output
 Fallacies in development theory
• Underdevelopment has but a single cause
– Physical capital, entrepreneurship, incorrect
relative price, international trade, ineffective
government, human capital,
• A single criterion suffices for evaluating
development performance
– GNP
• Development is a log-linear process
– Ignores initial conditions, no path dependence,
hence universal policy prescriptions apply to all
countries at all times
 Key questions asked in
understanding economics
• In economics, four key questions are asked:
What, How, When and for Whom goods are
produced?
• Broadening the scope of economic ways of
thinking
a.Economics in one lesson: why markets
work so well?
b.Economics in two lessons: why markets
can fail so badly?
 Key elements in a market
economy
• A clearly defined property right and its protection
on a legal basis (the fundamental requirement)
• Function of prices in allocating resources
(efficiency)
• Division of labour (specialisation) and market
competition (productivity)
• Trust and contractual arrangements (market
transactions)
• Innovation and technological changes
(entrepreneurship)
• Legal foundation of a market system (stability)
• Social welfare system (inclusiveness)
 Four propositions
• The development process is highly
nonlinear
• Development paths are not unique
• Initial conditions shape subsequent
development (initial levels of social
capability)
• The development trajectory of countries is
not only nonunique but also malleable
 The core of development
economics
• ‘Development economics is a distinct yet very
important extension of both traditional economics
and political economy. While necessarily also
concerned with efficient resource allocation and
the steady growth of aggregate output over time,
development economics focuses primarily on
those economic, social and institutional
mechanisms necessary to bring about rapid and
large-scale improvements in levels of living for
the masses of poor people in developing countries’
Michael Todaro (1985)
 The role of theory and its limitation in
the context of development
• ‘Economic theorists, more than other social
scientists, have long been disposed to arrive at
general propositions and then postulate them as
valid for every time, place and culture. There is a
tendency in contemporary economic theory to
follow this path to the extreme… when theories
and concepts designed to fit the special conditions
of the Western world are used in the study of
underdeveloped countries, where they do not fit,
the consequences are serious’ Gunnar Myrdal
(1968)
 The challenge of
development economics
• ‘This branch of economics has suffered from
several intellectual mistakes. The major mistake
has been the presumption that standard economic
theory is inadequate for understanding low-
income countries and that a separate economic
theory is needed…. Fortunately, the intellectual
tide has begun to turn. Increasing economists have
come to realise that standard economic theory is
just as applicable to scarcity problems that
confront low-income countries as to the
corresponding problems of high-income countries’
Theodore Schultz (1980)
 A theory of change is needed
• ‘The problem in development economics are
straightforward. We come to these problems with a
heritage from neoclassical theory, which is a static
body of theory and , at least in its pure form, looked at
frictionless perfect markets. What we try to
understand in development is the process of
formation, change, and development of both political
and economic markets and the way in which that
process occurs. In order to do that, we have to evolve
a new body of theory, or at least to modify existing
theory to integrate it with those parts of neoclassical
theory that are of value’ (Douglass North, 2001)
 What constitutes development
economics (1)
• ‘General economic principles are precisely
too general to give us insights into
applications for less developed economies.
Alone, the parts of economic theory and
method they apply more or less universally
tell us less than we need in particular
application. To give them life they have to
be enlarged and translated. When this is
done a specialty is created, (continued)
 What constitutes development
economics (2)
• Development economics consists in part of
the refinement of general economics to deal
with questions that arise in the context of
development, and partly of certain special
ideas that have proved useful in studying
developing countries’ Christopher Bliss
(1989).
 Ideas as framework and as
productive factors
• ‘Ideas should be our central concern… [I]deas are
extremely important economic goods, far more
important than the objects emphasised in most
economic models. In a world with physical limits,
it is discoveries of big ideas, together with the
discovery of millions of little ideas, that make
persistent economic growth possible. Ideas are the
instructions that let us combine limited physical
resources in arrangements that are ever more
valuable’ (Paul Romer 1993)
 Education and human capabilities
(Development as Freedom, Sen
1999)
• This capabilities approach incorporates all the
three followings, namely
1) their direct relevance to the well-being and
freedom of people;
2) their indirect role through influencing social
change; and
3) their indirect role through influencing
economic production” (p. 296).
• We therefore need to be aware that “in the
standard literature human capital is seen primarily
in terms of the third of the three roles” (p. 297).
 Defining social capital
• Following the successive emphasis on
tangible (physical), human and knowledge
capital, some economists would now add
‘social capital’ to the sources of growth
• Collier (1998) characterises ‘social capital’
as the internal social and cultural coherence
of society, the norms and values that govern
interactions among people, and the
institutions in which they are embedded.
Economic payoff of social capital
• Social capital has an economic payoff when
it is a social interaction that yield
externalities and facilitates collective action
for mutual benefit outside the market. Trust,
reciprocity, inter-personal networks,
cooperation, and coordination can be
viewed as ‘civil social capital’ that
conditions the interaction of agents and
yields externalities.
Interdisciplinary research needed
• Douglas North (1990 and 1997) contends,
cultural beliefs are a basic determinant of
institutional structure. Not economics, but
psychology, sociology, political science,
anthropology, law, and history must provide
the answers regarding the origins of cultural
beliefs and how they lead to institutional
change and the formation of social capital
over time.
 Interactions between policy and
institutions
• ‘Innovation and productivity improvements
were the basic forces behind economic
progress’.
• ‘Policies and institutions interact in a
complex and intricate way; they relate to
each other in the subtle multiplicative or
nonlinear fashion’ (Sebastian Edwards,
2010)
 Four broad policy and
institutional concerns
• The distribution of human development
• Environmental sustainability
• Financial risk management
• Governance
 Governance of economic
globalization
• How global is the global economy?
• The international division of labour is
limited by the scope of political and legal
jurisdictions
• International architectures for managing
globalization (the challenge of de-
globalization process now)
 The challenge of globalization
• The challenge of globalization in the new
century is not to stop the expansion of
global markets. The challenge is to find the
rules and institutions for stronger
governance-local, national, regional and
global-to preserve the advantage of global
markets and competition, but also to
provide enough space for human,
community and environmental resources to
ensure that globalization works for people-
not just for profits. (UNDP 1999).
The challenge of de-globalization
• What has happened to international trade
(no longer an engine for global growth)?
• Gains from trade against background of
income distribution
• The rising protectionism and the
implications for development
• The fate of the WTO and the prospects for
regional groupings
 Is it the sequencing too costly?
• Liberalise first, regulate later
• privatise first, ensure competition later
• grow first, clean up later
• grow first, seek liberties later
 Some figures on poverty
• The number of people living in the world
on less than US$1.25 at PPP is 1.4 billion,
and the number living on less than $2 a day
is 2.5 billion, or approximately 40 per cent
of the world’s population.
• In Africa, 73 per cent of the population live
on less than $2 a day
 Can the poor countries ever catch
up?
• Three possible mechanisms by which catch-
up may occur (1)
– the larger the gap between a country’s
technology, productivity and per capita income
on the one hand and the level of productivity in
the advanced countries on the other, the greater
the scope for a poor country to absorb existing
technology and to catch up with richer
countries
 Can the poor countries ever catch
up?
• Three possible mechanisms by which catch-
up may occur (2)
– the process of development is characterised by
a shift of resources from low-productivity
agriculture to higher-productivity industrial and
service activities. Other things being equal, this
should also produce a move towards
convergence to the extent that the resource
shifts are greater in poor than in rich countries,
 Can the poor countries ever catch
up?
• Three possible mechanisms by which catch-
up may occur (3)
– mainstream neoclassical growth theory predicts
convergence because of the assumption of
diminishing returns to capital. Rich countries
with a lot of capital per head will have a lower
productivity of capital than poor countries.
Thus if tastes and preferences are the same, the
same amount of saving and investment in poor
countries should lead to faster growth than in
rich countries,
 Understanding a complex world
• ‘The world is a complex and subtle place,
and efforts to understand it and improve it
must match its complexity and subtlety’
• ‘Teachers have a responsibility to train
complex minds that are suited to a complex
world’.
» Barry Schwartz (AFR 1/11/2013)
 Tutorial questions
1. How would you define the process of
economic development?
2. What forces perpetuate under-development?
3. What lessons, if any, can poor countries learn
from the development experience of today’s
industrialised countries?
4. What are the key challenges that developing
countries face now in the next phase of
economic development?
5. What are the fallacies in understanding issues
in development policy?
 Readings
• Chapter 1 in Economics of
Development (Thirlwall 2017)
• De Janvry, Alain and Elisabeth Sadoulet,
Development Economics: Theory and
Practice (2016)
• Gerald M. Meier and Joseph E. Stiglitz
(eds), Frontiers of Development Economics:
The Future in Perspective (2001)
 Appendix: Course descriptions
• This course is an introduction to the analysis of core
issues in economic development.
• It is an applied course that tackles major real work
problems faced by policy makers in developing
countries.
• The course combines description and analysis with an
emphasis on the elaboration of simple and useful
theoretical models for an understanding of the issues
that comprise the subject of development economics.
• Its aim is to provide students with some foundational
analytic tools for addressing core problems associated
with economic development today while drawing on
some actual experiences from developing economies.
 Learning outcomes
• Demonstrate a sound understanding of the theoretical
principles and conceptual arguments for dealing with
key issues in economic development
• Demonstrate the capacity to apply the analytical
methodology learned to the real world situation
• Gain a clear understanding of the key issues with respect
to government economic policy aimed at enhancing
economic development
• Evaluate the role, strengths and limitations of various
kinds of institutions which exist in many developing
countries
• Gain an understanding of the issues surrounding
development through the use of practical examples
(assigned quantitative exercises through tutorials)
• Demonstrate the capacity to carry out research on a
topic explaining the cross-country differences in
economic growth performance in developing countries
 Textbook and reference
• The textbook used for this course is:
Economics of Development by A. P.
Thirlwall (Palgrave Macmillan, Tenth
Edition 2017). E-book on short loans.
• Supplementary readings will be identified
separately for students who are interested in
exploring a topic more deeply.
 A written assignment and four
seminar responses
• A written assignment (1,000 words) on the
topic assigned accounts for 15% of the total
scores.
• Four Seminar Responses on four seminar
discussions accounts for 10% of the total
scores.
 Essays (2,500 words excluding
references)
• The purpose of the essay is to provide
students with the opportunity to write an
independent essay with a chosen topic in
order to gain deeper knowledge and
understanding of the interaction between
economic, institutional, environmental and
policy factors in the development of
nations.
 Writing the essay
• In writing the essay, students are expected to interpret facts
and synthesise existing knowledge and understanding of
the key issues in economic development. When writing the
essay keep in mind:
– Why is this topic important?
– What does it tell us about the characters of policy
formation and economic development?
– What causal factors are involved in economic growth?
– What factors affect policy strategies and through which
the institutional, or economic or environmental
outcomes?
 Essay topics (1)
• Institutions
– QUESTION: Good institutions are all poor
countries need to develop. Discuss.
• Trade
– QUESTION: Openness to international trade
will always lead to positive development
outcomes. Discuss.
 Essay topics (2)
• Foreign aid
– QUESTION: Poor countries don’t need more foreign
aid but they need more effective and better
implemented foreign aid. Do you agree? How can
foreign aid implementation and effectiveness be
improved?
• Resource curse & the environment
– QUESTION: Large natural resource endowments will
always lead to positive development outcomes.
Discuss.
 The new empirical development
economics
• Stage 1: Empirical description of the
relevant phenomenon.
• Stage 2:Formulation of a relevant theory
that might explain the phenomenon.
• Stage 3: Testing and estimation of theory,
maybe leading to a modification or
replacement of previous theories.
• Stage 4: Use of ‘best’ theory for purpose of
prediction and policy evaluation.
 Essay assessment criteria
• Structure (relevance of essay to topic, coverage of the topic),
• Argument (logically developed arguments, accuracy of
presentation of facts, critical understanding of the issues),
• Originality (clear demonstration of original and creative
thought),
• Style (fluency of writing, clarity, coherence and succinctness),
• Presentation (legible and well set out structure with appropriate
headings, sub-headings, paragraphs and sentences, appropriate
word length),
• Mechanics (grammatically correct sentences, effective use of
table and figures where appropriate, correct spelling),
• Sources (adequate acknowledgement of all sources in the
Crawford reference style).
 The final exam
• Final exam
– The exam at the end of the course will be a synoptic
review of the main themes covered throughout the
semester. The exam is an “open book” (online
examination) and lasts for three hours with 15 minutes
reading time.
 Course assessment
• One written assignment 15%
– See a separate message about the background
• Seminar Responses 10%
• Essay 35%
– Turnitin via wattle
• Final exam 40%
– online and open book