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Development Economics
Economic Development
Economic Development vs
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Real GDP is a raw
quantitative measure
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Economic development is a qualitative concept
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For econ development to occur you need to have
econ growth (it is a necessary factor)
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How can economic growth turn into economic development?
• The benefits of economic growth will trickle down to all parts of the
population
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There are a number of mechanisms:
▪ People pay more income/profit tax when income/profit rises
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Income tax can sometimes be difficult
to impose, corruption, businesses increasing production/output
should mean greater employment, employee employer wages
tend to be very unequal
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• Vulnerability to international relations – developing countries often
underrepresented within international institutions
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Income levels changing create changes from primary to
tertiary sectors
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Different amount of natural resources
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That has influenced their cultures and institutions and languages
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Religion can play a part
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• Political structure – democracies, monarchies, military rule, single party,
religious states
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Measures  of  Development
GDP is an incomplete measure
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The measure that has been developed by the UN in 1990 by Amartya Sen,
Mahtub Ulhak is called the human development index
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– Still a blunt instrument
• Life expectancy at birth, long life tells you about health care
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It is incomplete because it does not take into account income inequality
There is a measure of HDI, which takes into account gender inequality

Institutional  factors  affecting  development
• Education   à   increases   productivity;   as   it   immediately   improves
communication   skills   therefore   making   simple   tasks   easier
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Universal   education   empowers   females
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 An  improvement  in
education  will  lead  to  an  increase  in  the  health   of   the   population
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  Countries   that   spend   least   on
healthcare  are  developing  countries
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• Infrastructure  à  Social  overhead  capital
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 Modern  communication  systems  mean  there  is  more  freedom
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• Stability  and  corruptionà  MNC  don’t  want  it  takes  things  away  from
productive  and  allocative  efLiciency
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 Its  decay  in  developing
countries  you  move  away  from  productive  efLiciency
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 Its  decay  in  developing
countries  you  move  away  from  productive  efLiciency
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Categorized by
things like hunger and malnutrition, access to clean water and sanitation
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25 a day
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• Relative   poverty   is   a   problem   however   the   elimination   of   absolute
poverty   is   a   major   economical   goal
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• The   vicious   circle   of   poverty   shows   the   cyclical   trap   of   poverty
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The  diagram  below  is  a  typical  cycle  of  poverty:

The  role  of  investment  in  economic  activity  is  dynamic  because  it  has  an  effect  on
aggregate  supply  too
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 If  you
haven’t  got  domestic  savings  there  is  no  investment
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 To  close  a  saving  investment  gap:
• FDI  –  favored  method  as  doesn’t  create  external  debt  as  MNC  will
generally  be  creating  a  proLit
• Foreign  Aid  –  potential  for  corruption
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 May  not
necessarily  help
• Borrowing  –  Large  amounts  of  debt  building  up  can  cause  countries  to
be  affected  adversely

Millennium Development goals
1
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To  achieve  universal  primary  education
3
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To  reduce  child  mortality
5
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To  combat  HIV/AIDS,  malaria,  and  other  diseases
7
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To  develop  a  global  partnership  for  development

Economic  trade  and  International  Development
There  are  some  barriers  for  developing  countries  engaging  in  international  trade:
• Monoculture  à   Where   your   production   base   is   specialized   in   a   narrow
range   of   goods
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  These   goods   are   generally   very   low   value   added
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  The   terms   of   trade   have   generally   been
unfavorable
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• An  unequal  access  to  international  markets  à  there  have  been  signiLicant
reductions  in  tariffs
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 Agriculture  is  the  most
protected   industry   (subsidies   given   to   producers)
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  Tariffs
are   generally   higher   on   processed/Linal   than   on   raw   commodities
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Strategies  for  development
• Import   Substitution   program   à   you   need   to   export   in   order   to   import
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Selective   tarifLing   or   the   use   of   very   high   tariffs   to   deter   foreign
imports
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o Advantages:   Guarantees   domestic   employment
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 Protection  against  TNCs
o Disadvantages:  The  import  substitution  program  is  a  short  run
argument   because   it   will   create   jobs
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 There  is  no  natural  improvement  in
the  competition
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• Engage   in   international   competition   to   promote   exports   sector   and   to
make   the   domestic   sector   more   competitive   when   competing   with
imports
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o A  way  to  do  this  is  have  a  Lloating  exchange  rate
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o Liberalize   capital   Llows   to   attract   FDI
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o Improvements  in  infrastructure
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  This   should   be   a   staged
effect   as   it   encourages   you   to   become   more   competitive   over
time
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  There   is   a   transitional   period   in   which
prices   are   really   high   because   supply   is   low
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o This   strategy   is   very   onerous   as   the   effects   of   it   take   a   while
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Hong  Kong  à

Hong  Kong  à
• Fixed   exchange   rate   took   our   risk   of   FDI   not   coming   in   as   there   is
certainty  for  investors
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 MTR  à  partly  owned  by  government
Developing  countries  need  to  widen  there  productive  base
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▪ Producer  gets  a  premium  if  its  deemed  organic
▪ Producer  must  give  the  trader  60%  credit
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o It  empowers  developing  countries
o It   increases   the   price   that   may   reduce   the   demand   for   it
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FDI  –  Foreign  Direct  Investment
Foreign   direct   investment   is   a   long-­‐term   investment   made   by   multinational
cooperation’s  in  a  country  other  than  their  host  countries
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  Therefore   all   developing
countries  are  seeking  foreign  direct  investment
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  Therefore   all   developing
countries  are  seeking  foreign  direct  investment
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Advantages  to  developing  countries
• Increases  in  employment  à  there  is  generally  a  low  average  age
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• Tax   revenue   for   the   government
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• Consumers  may  see  an  increase  in  the  choice
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  This   will   be   an   immediate
improvement  in  worldwide  efLiciency
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 So,  the  skilling  up  of  the  workforce  maybe  not  as
big  as  one  would  like  to  see
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 This  takes  away  from  their  long-­‐term  education
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 Transfer  Pricing-­‐
exploring  the  loophole  of  taxation  in  different  countries
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 However  each  case  will  usually  present  a  different
solution
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  E
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  Loan   can   be   aid,
provided  a  concession  is  made  (low  interest,  long  period  of  time  to  repay)
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  It   really   is   a   form   of
alleviating  people  from  suffering  à  for  a  form  of  a  natural  disaster
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 Distributed
through  government  agencies
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  It   is
long  term  and  generates  an  income  stream
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g
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o Tied   Aid   –   Aid   is   given   with   some   strict   conditions
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o Tied   Aid   –   Aid   is   given   with   some   strict   conditions
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o Technical   Aid   –   It   is   giving   the   developing   country   something
they   do   not   have
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Sanitation/healthcare/clean
water/electricity
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Multilateral   aid   is   many   countries   giving   aid   to   many   countries,   usually   through
government  agencies  (World  Bank,  UNICEF,  IMF)

Indebtedness
In  1973  the  Oil  crisis  caused  there  to  be  a  tripling  of  the  price  of  oil
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  World   income   was   redistributed   from   oil
consumers  to  oil  producers
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 At  the
end   of   the   1970s   there   was   a   second   oil   crisis;   sending   many   countries   in   the   world
into  recession
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As  a  proportion  of  earnings  debt  repayments  were  rising
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   By  structuring  highly  conditional  debt,  which
encourages  repayment
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  But   we   can   identify   common
elements  to  structural  adjustment  policies:
• The   IMF   favors   the   model   of   a   free   market   as   this   allocates   efLiciently
resources
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  Competition   exposes   weaknesses
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• Encouraging  FDI
• Balanced   budget   à   cuts   in   government   expenditure
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Privatization  will  lead  to  job  loss
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• Improve   governance   and   reduce   corruption
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• Improve   governance   and   reduce   corruption
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  Governance   means
improving  decision  making  processes
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No  pain  without  gain  argument
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Economists  criticize  SAP
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If   governments   are   spending   money   reducing   debt   they   are   not   spending   money   on
developing
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Interventionist  strategies  are  important  as  a  complement  to  market  strategies

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