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Unit 4: Economic Development
INTRODUCTION TO ECONOMIC DEVELOPMENT
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1 Economic growth and development
Growth and Development
Growth:​ increase in real GDP over the previous year
➔ Differentiation between growth of actual production and growth of potential production
➔ Potential output: PPF shifts outwards or LRAS shifts right
➢ Sources:
○ Natural resource base: goods such as land, water, minerals and timber
○ Physical capital
■ Deepening: better
■ Widening: available to move
○ Appropriate technologies
○ Human capital
■ Qualitatively
■ Quantitatively
○ Institutional factors
■ Politics
■ Banking system
■ Infrastructure
■ Public health
■ Education
■ Legal system
Development:​ increase in general living, such as reduced poverty, increasing longevity, health and education, as well as
decreasing unemployment
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Growth without development
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What to produce: limited benefits of LDS production
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Resource extraction
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Agricultural commodities
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How to produce: production and environmental destruction
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Deforestation: sell timber, use space as farmland
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Water pollution: seen as the future’s equivalent of oil/gold
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Air pollution: health strain due to illness of CO2
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For whom: who benefits from production
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Most beneficial if income coefficient is between 25 and 40 (Gini curve) → mirrors
Europe
Growth without development

a
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Income is a necessary, but not sufficient, condition for true development
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Countries with low GDP per capita can score high on development indicators
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Common characteristics of economically less developed countries
Traits associated with poverty
High birth rates / large dependency ratios
Oftentimes 2-3 times as much elsewhere, which leads to large dependency ratios (people not in labor force
compared to those who are) → need to supply dependent population
Low per capita GDP
Development and GDP correlate, so low levels of one usually mean low levels for the other
High agricultural dependence
Agricultural creating 50-80% of jobs, as well as export revenue, is volatile to market changes and weather
conditions
Large urban informal sector
Informal production is not supported by the states, thus not helping the country develop
Poverty cycle
No way to invest → stagnating productivity → low incomes → no way to invest

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3 Diversity among ELDV
Not all LDCs are the same
Differences:
Resource endowments
Some countries have large quantities of natural resources, yet remain in poverty
Others develop without aid of natural resources
Climate
Temperatures affect agricultural ability → influences GDP
History
Colonization had differing effects on countries
Singapore/Hong Kong → beneficial
Vietnam → detrimental
Political systems
Differ political systems influence ability to develop correctly and to gain equally much (powerful)
Degree of political stability
Civil war or interstate conflict interferes with plans for prosperity and development

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4 Single indicators of economic development
Gathering of national data can serve as a baseline indicator to help set an agenda for progress, to see the development over time,
to adjust policies to improve performance, and to allow for cross country comparison
Data must be read cautiously, as it may misrepresent the actuality (incorrect or incomplete data)
Income indicators
GDP per capita is the starting point to understanding development

Per capita GDP vs per capita GNI
○ Per capita allows for more precise comparison
○ GDP higher, yet this is not all paid to FoP (in Luxembourg)
○ Sweden: higher GNI: they are being paid more than what their GDP states
■ Depends on outsourcing and others outsourcing into own country
➢ Purchasing power parity comparison
○ PPP eliminates difference in cost of living → looks at standard of living available for a given amount of
income in a nation (high costs of living → GDP overestimates standard of living and vice versa)
■ Allows for better comparison of actual GDP
Health indicators
➢ Data shows that birth rates and development correlate negatively
○ Questions if this is the cause or the result? Would a country develop if it had a smaller population
■ A deeper understanding of the nation is required
➢ Further data indicates that teenage fertility negatively correlates with longevity
○ Could indicate less development due to higher fertility rate, but could also be a symptom of something else,
such as malaria or high child mortality rate
Education indicators
➢ Education is an important factor as it increases productivity and improves human capital
➢ Considered to be a merit good due to the positive externalities
➢

Note​​: indicators rarely prove cause and effect relationship, but it is a intertwined net of correlations that is represented by the data
→ dangerous to only rely on one factor/indicator

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5 Multiple indicators of economic development
World Bank:​ ​source of development indicators
➔ Breadth of data measured by the World Bank creates a more detailed picture than a single indicator
United Nations​: Millennium Development Goals
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Universal primary education
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Reduce child mortality rate
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Develop global partnership for development
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Combat HIV and other diseases

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6 Composite indicators of economic development
Human Development Index
➔ Used to shift away from a purely growth based model to a broader view to encompass health and education
◆ Long life: life expectancy
◆ Education: primary enrolment ratio, adult literacy rate
◆ SoL: GDP per capita
➔ Variety of information from this set of factors
Gender Inequality Index
➔ Comparison between men and women in
◆ Reproductive health: maternal mortality, adolescent fertility
◆ Empowerment: parliament seats, education levels
◆ Labor maret: women’s participation in the workforce

DOMESTIC AND INTERNATIONAL FACTORS AND ECONOMIC DEVELOPMENT
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1 Domestic factors and economic development
Economic growth only leads to development when incomes rise, education increases, and they can afford health care
➔ This can also work vice versa where education and health care lead to better growth, due to the increased productivity
Domestic obstacles to economic development
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Natural resource trap
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Geography trap
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Education / poor governance trap
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Conflict trap
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Institutional and political obstacles
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Less foreign investment, money hiding from government in foreign systems → less revenue for the
government
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Less investment (investors want certainty that the land will be theirs; farmers + shopkeepers neglect
fields/business)
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Inequality in the distribution of income
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Lack of infrastructure
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Lack of access to credit
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Social and cultural obstacles
a
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Conflict of religion creates economic uncertainty, thus reducing actual development
b
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Objectives of economic growth questioned by members who want a more traditional society,
hindering development
Domestic factors contributing to economic development
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Strong correlation between education and income, due to higher productivity
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Not only the result of development, but leads to it, too → individuals can shift their minds onto something
else if their well being is given
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Allows access to credit for poor country entrepreneurs: they can build up a business with a socially beneficial
purpose, thus also increasing employment

i
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This money comes from individuals from developed countries, who want to help without losing
money
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Great long run potential → pay off for entrepreneur, lender and workers now employed
i
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Reduced fertility rates
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Women in the workforce
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However this does ensure that the IMF is taken seriously, not as a money fountain
◆ Government budget decreases (decrease help in times of need)
◆ Currency floating leads to depreciation (less imports)
◆ Trade liberalization (less government revenue, less protectionist policies)

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2 Foreign debt and its consequences
How it happens
➔ Total amount of debt, both public and private, to external sources
➔ Deficits in current account balanced by this inflow into financial account
◆ Borrow → injection into poverty cycle
Origins of the debt problem
➔ Rise in oil prices following an oil embargo lead to high revenue for OPEC countries, who started lending money to
LDCs so that it would be invested
◆ Mania/rush → no one bothered to check if countries could pay back
Consequences
➔ Development decreases as large amounts of money are spent to repay the debt (or even just the interest of the debt)
Large debt payments → poor credit rating → fewer loans and higher iR → public and private investment reduced → lower
incomes and employment as well as decreased government spending on health and education → less economic growth and
development
HIPC initiative
Heavily Indebted Poor Country initiative to increase stability in those countries (IMF + World Bank lead this)
➔ Relief occured if countries showed they were unable to pay back debt using normal ways as well as meeting
macroeconomic goals for the future



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