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Food, shelter, clothes and wordly goods are made and consumed by the people themselves.
Finding the most efficient, least-cost allocation of scarce productive resources with the optimal growth of these reoucrces over time to produce and ever-expanding range of goods and services.
Traditional newclassical economics
Advanced capitalist world of perfect markets, consumer power, automatic price adjustments. Decisions made on the basis of marginal, private profit and ultility. Assumes rational, materialistic, self-interested behaviour towards decision making
Studies both the social and institutional processes through withch certain groups influence the allocation of scarce productive resources; either for their own benefit or for the larger population.
Concerned with efficient allocation of existing scarce or productive resources and with their sustained growth over time. Deals with economic, social, political and institutional mechanisms (private and public) to bring about rapid large scale improvements in the living levels in LDCs
Social System of a country
Interdependent relationships between economic and noneconomic factors. Latter includes attitudes toward life, work, authority, bureaucraticm legal and administrative structures, kinship and religion, culture, government, etc.
Gross National Income
Total domestic adn foreign output claimed by residents of a country. It includes GDP plus factor incomes accruing to residents from abroad, less the income earned in the domestic economy accuring to persons abroad. It DOES NOT make deductions for depreciation of capital stock.
Sen's capabilities and functionings approach
- More important than having things is what a person is, or can be, and does or can do.
- Functionings: is what a person does or can do with commodities that they come to possess, things a person may value doing or being. Capabilities: The freedom to choose functions. People have given their personal features and their command over their commodities.
Three core values of development
Sustanence: the ability to meet basic needs, food shelter, health, protection. Self-esteem: quality of life, a sense of worth and self respect of not being used by others for their own end. Freedom from servitude: being free from material condietion, social servitude to nature, other people, misery, oppresive insitutions and dogmatic beliefs.
Three objectives of development
To increase availability of basic life-sustaining goods. To raise levels of living. Expand the range of economic and social choices.
Millennium Development Goals
1. Eradicate extreme poverty and hunger 2. achieve universal primary education 3. romote gener equality/empower women 4. reduce child mortaility 5. improve maternal health 6. combat HIV/AIDS, malaria and other diseases 7. ensure environmental sustainability 8. develop a global partnership for development.
The increasing integration of national economies into expanding international markets.
Human Development Index
- 1. Income index
- 2. Life expectancy index
- 3. Education index: Adult literacy (2/3) + Gross enrollment (1/3)
Ten characteristics of LDCs
1. Lower levels of living and productivity 2. Lower levels of human capital 3. Higher levels of inequality and absolute poverty 4. Higher population growth rates 5. Greater social fractionalization 6. Larger rural population- rapid migration to cities 7. Lower levels of industrialization and manufactured exports 8. Adverse geography 9. Underdeveloped financial and other markets 10. Colonial legacies- poor institutions etc.
Critisisms of the HDI index
Overstates the amount of schooling, only counts enrollment not drop out rate. Each term has equal weight which is a value judgment. There is nothing to measure the quality. Does not take into account Sen's capabilities and functions.
A bad equilibrium for a family, community or nation involving a vicious circle in which poverty and underdevelopment lead to more povery and underdevelopment often from one generation to the next.
The elderly and children are referred to this way because they are nonproductive members of society and must be supported by everyone else.
Eight Initial Conditions of Poverty
1 Physical and human resource endowments 2. Per capita incomes and levels of GDP 3. Climate 4. Population size, distribution and growth 5. Role of international migration 6. International trade benefits 7. Scientific and technological R&D capabilities 8. Efficacy of domestic institutions
Classic Theories of Economic Development: Four Approaches
- 1. 1950s-60s: Linear stages of growth (H-D)
- 2. 1970s:
- • Structural change (Lewis 2 sector)
- • International-dependence revolution
- 3. 1980s-90s: Neoclassical, free marketcounterrevolution (Solow)
- 4. 2000s:Eclectic approach with appreciationfor markets, government, and institutions (Romer)
Harrod-Domar Growth Model
A linear function Y=AK in which the growth rate of GDP (g) depends on the national net savings (s) and inversely on the national capital-output-ratio (k), g=s/k. Need domestic and foreign savings to generate sufficient investment fro growth. The drawbacks are that the model does not take labor into consideration (it is assumed abundant). Also called financing gap model, problem is that saving and investment are necessary but not sufficient for long-term growth
Lewis two-sector model
Traditional Sector: sector with zero marginal labor productivity, seen as surplus labor which can be easily moved Industrial Sector: labor from traditional sector moved here. Model assumptions: labor movement and growth are brought about by investment and capital accumulation, capitalists reinvest all their profits, level of wages in the industrial sector is constant, supply curve of rural labor to the modern sector is perfectly elastic. Two assumptions: there is surplus labor and rural wage is determined by the average NOT marginal product of labor.
Emphasized beneficial role of free markets, open economies, privatization of inefficient public enterprises. Failure to grow according to this theory is the result of too much government intervention and regulation.
Three major ingredients of growth
- 1. Capital accumulation
- 2. Growth in the labor force
- 3. Tecnological progress - most important
Criticisims of the Lewis Model
- 1. Labor transfer and employment creation in modern sector is proportional to modern sector capital accumulation
- 2. That all profits are reinvested - not true
- 3. Surplus labor exists in rural area and that there is full employment in the modern sector
- 4. Modern sector guarantees constant real urban wages.
What are the pillars of French colonialism, led by Jules Ferry to justify/rationalize colonialization?
- 1. Economic: That we are helping poor countries by giving them loans for small businesses.
- 2. Moral: We are supporting children in a country by sending money to pay for food, school, etc.
- 3. Political: Sending in experts to help set up a democratic society, reform election system.
Income per country has diverged but income per individual seems to have converged. How can this happen.
Poorer countries generally grow slower than rich countries, but recently China and India have broken out of this trend and are growing rapidly. In a graph of showing divergence countries are not weighted by population, so the outliers: China and India cause the graph to slope up. If population is taken into account the growth rate in China and India would have more significance and would shift the left side of the graph up.
Market Friendly Approach
Somewhat different that the neoclassical approach. Recognized there are many imperfections in LDC markets and that governments do have a role to play maybe investing in infrastructure, health care or education and providing climate for private business. Accepts that market failures are more widespread in LDCs.
Three Classifications of Tecnological Progress
- 1. Neutral: when higher outputs are realized with the same inputs, from division of labor.
- 2. Labor-saving: new modern machinery.
- 3. Capital-saving: finding more efficient labor-intensive production so higher populations have work.
Increases in GNI that cannot be attributed to increases in stocks of capital or labor. The residual is responsible for about 50% of historical growth in industrialized nations.
Constant Returns to Scale
Constant returns to scale is an attribute of a production function. A production function exhibits constant returns to scale if changing all inputs by a positive proportional factor has the effect of increasing outputs by that factor.
When an action taken by one firm, worker or organization increases the incentives for other agents to take similar actions. Often involve investments whose return depends on other investments made by different agents. (agent: economic actor, firm, worker or consumer that choose actions to maximize an objective.) Ex: firms will not enter a market where workers don't possess specialized skills, but workers will not acquire these skills if there are no firms to employ them.
The inability of agents to coordinate their actions which would lead to a better outcome for everyone. So instead of settling at a higher equalibrium they settle at a lower one leaving all agents worse off. This sometimes occurs even when agents are fully informed because everyone waits for someone else to make the first move.
A region remains stuck in subsistence agriculture. Agents may be better off specializing, producing more of one good for sale, but without a middleman or market to sell to they continue producing a range of goods only for personal consumption. Investment and specialization must come at the same time, but often there is lag between investment and returns - here government policy can help by coordinating investments.
Benefits an agent receives depend positively on how many other agents can be expected to take the action. The idea is that equilibrium is achieved when all participants are doing what is best for them, given what they expect others to do, which ultimately matches what others actually do.
- When everyone is better off in the equilibrium when more people use the network, the higher rand gives more utility to everyone. Ex. getting a fax machine or email capabilities, the more who take the
- action the better off everyone is who has it, the more useful.
Path Dependence or Investment Coordination
An economy can get stuck in a low growth rate mainly because the economy is expected to have a low investment rate.
Technology Transfer Problem
Amount of effort each firm expends to increase technology depends on the efforts of other firms; bringing modern technology often has a spillover effect - still making better technology available is generally necessary but not a sufficient condition for achieving development goals.
A positive or negative effect from spillover on costs or revenues
The Big Push
Most famous coordination failure model. Shows how the presence of market failurs led to a need for concerted public-policy effort to get economic development underway. Assumptions. 1. Factors - only one factor of production, labor. 2. Factor payments: two sectors traditional receive wage=1, modern sector w>1. 3. Technology: there are N types of products each worker produces one unit and there is a fixed cost, you need a fixed number of worker before any product can be produced 4. Domestic Demand: each good receives a constant and equal share of consumption from national income 5. International supply and demand: the economy is closed. 6. Market Structure: perfect competition in the traditional sector.
Other cases for a Big Push
- 1. Intertemporal effects: when investment is needed in the current period for more efficient production in the next
- 2. Urbanization Effects:
- 3. Infrastructure effects: the building of infrastructure helps defray large costs and encourages others to enter the market at a lower cost, this doesn't always happen because initial investors don't know if firms will use the infrasturcture.
- 4. Training Effects:Underinvestment in training because firms know that workers may be lured away with higher wages from a company that didn't have to pay the cost of training.
Problems with a Super Entrepreneur in the Big Push
- 1. Capital Market Failures: very hard for one person to assemble everything necessary.
- 2. Cost of monitoring Managers: hard to know if people are complying or providing appropriate incentives
- 3. Communication Failures: hard to know who is the right person to take on this role - if there is potential for large returns many people may try to be in charge.
- 4. Limits to knowledge: How can one person know enough about a market to industrialize it.
The idea that poor families are unable to bequeath much if anything to the next generation, that generation will also be stuck in poverty. If schooling could be achieved the poor may be able to escape this trap.
Four Macro Poverty Traps according to Paul Collier
- 1. Conflict
- 2. Natural Resources
- 3. Landlocked with bad neighbors
- 4. Small with bad governance
Measuring Absolute Poverty
- 1. Anonymity: doesn't matter who is poor
- 2. Population independence: shouldn't change with pop. size
- 3. Monotonicity: if you take aid and give it to a poor person, poverty cannot increase
- 4. Distributional sensitivity: measure of poverty must increase if you take money from the poor and give it to someone rich.
Production & Consumption Dynamics
- 1. Increasing returns to scale (i.e., fixed up front investment)
- • Draft oxen come in pairs • Pastoralists must eat while migrating with their herd • Education is marketable in discrete units (degrees)
- 2. Nutrition, health and capital accumulation (e.g.,cognitive development in children)
- 3. Suggest an important role for government policy “Safety nets” to catch “Cargo nets” to lift
Modern production requires that many activites be done well together to have a high value
Workers in high-skill firms paid more than identical workers in low-skill firms • Wages can rapidly increase in overall quality ofworkforce • Being surrounded by high quality coworkersincreases incentive to invest in own skill set • Bottlenecks and weakest links can havemultiplicative effects on productivity • Brain drain…
Total Poverty Gap (TPG)
- Summation formula take (Yp-Yi) + (Yp-Yi) for each person under the poverty line
- H= number of people below poverty line
- Yp = poverty line
- Yi = income of person
- N = total population
Average Poverty Gap (APG)
- Take the total poverty gap and divide by the population
- TPG÷N. This gives you the percentage of the average person living below the poverty line.
Normalized Poverty Gap
- The average poverty gap divided by the poverty line
- This shows how far on average a country is below the poverty line.
A graph to analyze personal income statistics. The greater the degree of inequality, the greater the bend and the closer to the bottom horizontal axis the curve will be.
aggregate inequality measures vary between 0- perfect equality and 1-perfect inequality
When headcount of those in poverty is taken as a percentage of total population (H/N). This measure of poverty does not satisfy the four desirable measures anonymity, population independence, monotonicity and distributional sensitivity
Measures poverty in three dimensions, alpha=0 gives the headcount ration, alpha=1 gives the normalized poverty gap and alpha=2 measures the severity of poverty.
Human Poverty Index
- like the HDI but instead measures key deprivations. A low HPI score is good.
- life: fraction of people unlikely to live past age 40
- basic education: percentage of adults who are illiterate
- economic provisioning: percentage of people without access to clean water+percentage of children underweight
Why should we care about inequality?
- Extreme income inequality leads to inefficiency
- 1. Inequality may lead to an inefficient allocation of assets.
- 2. It undermines social stability and solidarity, and high income facilitates rent seeking
- 3. Generally viewed as unfair – much inequality is based on luck or outside factors.
A graph representing the relationship between a country's income per capita and it's equality or income distribution. As per capita incomes increase the distribution of income first worsens and later improves. Believed to have a dominating influence called "Latin America effect"
Are reduction of poverty and acceleration of growth in conflict?
- 1. Widespread poverty creates conditions in which the poor have no access to credit leaving them and their children few opportunities which leads to smaller per capita growth
- 2. The rich in poor countries are not known for saving and investing
- 3. Low incomes and low levels of living for the poor mean poor health, bad education, and less productivity which means a slower growing economy.
- 4. Raising income levels will stimulate growth the local economy demand will go up.
- 5. Reduction of mass poverty would stimulate economic expansion as a powerful material adn psychological incentive to participate in development.
- Rural - disproportionate number of poor are in rural areas still there tends to be a bias towards directly funds to the modern sector
- Women and children - face the harshest deprivation. Women earn lower wages and often do not have control over the money they make.
- Ethnic Minorities and Indigenous populations - there is a lot of political, social and economic discrimination
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