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Lecture 1
What is Development Economics (DE)?
• Development Economics is mainly a study of the economic transformation of
those countries which are part of the developing world.
• It takes two strands of thought that for the understanding of DE.
Problems of developing countries are best understood in the context of
international environment.
Growing literature approach to market failure and government intervention.
• It helps us to understand the nature and causes of poverty in low income
countries and transition of societies from primarily rural to primarily
industrial with bulk of resources being utilized to serve service and industrial
sector.
• DE also shares with us theories of the perpetuation of underdevelopment but
non seems to have universal identity.
• It accounts for the upsurge of interest in the new international economic
order.
When we speak of a developed society , we think of people who are well fed and
well clothed.
Physical quality of life be high, and be so uniformly, rather than being restricted to
an incongruously affluent minority.
What is underdevelopment?
Agriculture in the early stages of development does not provide the purchasing
power over industrial goods.
Huge population size combined with low level of human capital formation.
Dependency
System of Governance
In World War II, colonial powers lost their power. They needed
manpower and resources from their colonies, but they were unable
to hold their empire by force.
The process of decolonization became evident. The process further
accelerated due to the start of Cold War.
Between the 16th and 19th centuries, Western Europe witnessed the rise of
strong national states that created the conditions essential for rapid and
cumulative growth under capitalism.
85% of the world’s population shares just 20% of total global output.
There are some measurement issues of income in developing countries e.g under-
reporting of income.
A serious issue comes from the fact that prices for many goods in all countries are
not appropriately reflected in exchange rates.
Distortions in prices can be corrected for by imputing and using appropriate shadow
prices that capture true marginal values and costs.
Historical Experience
Over the period 1960-85, the richest 5% of the world’s nations averaged a per
capita income that was twenty nine (29) times the corresponding figure for the
poorest 5%.
Over the period 1965-90, the per capita incomes of East Asian economies increased
at an annual rate of 5.5%.
Between 1980 and 1993, China’s per capita income grew at an annual rate of 8.2%.
The data of 102 countries reveal that during 1960-85, the per capita growth
averaged 1.9% per year.
In Latin America per capita income fell by 11% during 1980s and sub-Saharan
Africa experienced substantial stagnation and decline of per capita income.
The diverse experience of countries demand an explanation, but this demand is
ambitious.
The observation that several countries have changed relative positions suggests that
there are no ultimate traps to development.
Poor countries seem to have some advantages.
Income distribution in developing countries
It is common place to see enormous wealth coexisting with great poverty.
Many faces of under-development
Human development
A relatively prosperous country may fare poorly on some of the common sense
indicators.
There is an overall co-relation of human development with per capita income, but it
is worthwhile to be sensitive to the outliers.
Index of human development
Direct physical symptoms of under-development are easily observable and
independently measurable.
International agencies and national statistical surveys have been collecting
data on the incidence of malnutrition, life expectancy at birth, infant
mortality rates, literacy rates etc.
Some middle income countries exhibit low human development rates and
vice versa.
HDI has three components: Life expectancy at birth, measure of educational
attainment of society and per capita income.
HDI creates, for each country, a final number that takes a value somewhere
between 0 and 1.
Per capita income and human development
Per capita income, or even the equality of its distribution, does not serve as
its unilateral guarantee of success in ‘human development’.
Per capita GDP still acts as a fairly good proxy for most aspects of development.
It can be argued that rising income levels ultimately and inevitably translate in to
better health, nutritional, and educational standards in a population.
Some structural features
Demographic characteristics: High population growth has two effects:
I) Overall income must grow faster to keep per capita growth at reasonable levels.
II) Overall population is quite young.