Economic Development(Tragakes Chapter 16 pages 436-448)

Economic Growth and Economic Development

Economic Growth – the increase in output and incomes over time; often measured on a per capita basis

Causes of economic growth:

1. Investment in physical capital, human capital and social

capital

2. Increase in labor and/or land

3. Increase use of technology

4. New and improved technology

5. Increase in productivity

Economic Development – the process that leads to improved standards of living for a population as a whole;

Process where increases in real per capita output and incomes are accompanied by improvements in standards of living of the population and reductions in poverty, increased access to goods and services that satisfy the basic needs, increasing employment opportunities and reduction in unemployment, and reductions of serious inequalities in incomes and wealth.

Increasing levels of output and incomes resulting from economic growth mean that societies can better satisfy the needs and wants of their populations and secure improvements in the standards of living.

Human development – Process of :

● Increasing life sustenance

● Increasing self-esteem

● Expanding freedom

Multidimensional Nature of Economic Development

1. Reducing widespread poverty

Poverty – Inability to satisfy minimal consumption needs

2. Raising living standards

3. Reducing income inequalities

4. Increasing employment opportunities

A → B : No economic growth with some developmentB → C : Economic growth with no developmentB → D or E : Economic growth with development

Sources of Economic Growth

Natural factors – Quantity and/or quality of land or raw materials

Human factors (labor) – Quantity and/or quality of human capital

Physical capital and technological factors – Quantity and/or quality of physical capital

Development and use of new technologies – can improve the quality of physical capital; Technology that is well suited for developed countries may not be well suited for developing countries.

Appropriate technology – technology that is well suited to the economic, geographical, ecological, and climate conditions

Institutional factors that contribute to development

Institution – The rules, organizations and social norms that facilitate coordination of human action

Economic, legal, and social institutions that influence economic growth:

1. Banking system

2. Education system

3. Health care

4. Infrastructure

5. Political stability

Economic Growth and Economic Development

Although economic growth is usually necessary for economic development, limited economic development can occur without economic growth. In order to have economic development without economic growth, resources must be allocated from industrial goods to merit goods.

Common characteristics of economically less developed countries

Low levels of GDP/GNI per capita - Economically less developed countries are countries with GNI per capita levels below a certain level. Within the 3 groups of economically less developed countries, there are huge differences in income levels High levels of poverty● Almost all extreme poverty and most moderate poverty are

concentrated in less developed countries.● However, there are huge differences between countries in

amounts of poverty, in terms of absolute number and the proportion of a country’s population that is poor.

Relatively large agricultural sector● Large urban informal sectors

Formal sector - The part of an economy that is registered and legally regulated;

Informal sector - The part of an economy that lies outside the formal economy, and refers to economic activities that are unregistered and legally unregulated

Poverty

One cause of poverty is poverty itself. When conditions of poverty feed on themselves it creates more poverty, it develops into the poverty cycle. Poor people spend all their money on necessities, leaving little to no money left for their saving; therefore they will most likely not be able to make investment in physical, human and natural capital, which are needed in order to come out of their state of poverty.

The Poverty Cycle

Breaking from the Cycle

To break out of a poverty trap, Intervention of the government is required to:● Undertake investments in human capital (health services,

education, nutrition), in physical capital in the form of infrastructure (sanitation, water supplied, ie.,)

● Take steps to ensure that poor people can participate in private sector activities (such as borrowing from finance private investments)

*Escaping from poverty cycle is possible only if resources are suffice, or provided from the foreign aid.*

Diverse characteristics of economically less developed countries

Economically less developed countries differ in many important aspects such as:1. Resource Endowments

Economically less developed countries tend to have more labour resources relative to capital (Because of the abundance of labour, this makes labour price to become lower than capital), which is in contrary to more developed countries.

The amount of resource endowment varies in each country (natural [fixed], human, capital); this forms the basis of comparative advantage between countries.

2. Climate

Climate differences determine the type/method of agricultural production, animal husbandry, and labor productivity

Example:Tropical and subtropical climates typically lowers soil quality and have negative effects on human and animal health.

Economically less developed countries tend to have tropical or subtropical climates while economically developed countries tend to have temperate climates.

3. History

Developing countries are often former colonies of European countries. While these countries were colonies, systems were put in place that focus on extracting resources rather than encouraging economic development. Even after these countries achieved independence, these systems are still in place and are difficult to reform.

4. Political System - A set of legal institutions that define how government is structured and functions

Political structure, the relationship between various groups within a society and the degree of political power they control, is crucial to economic development. Without the support of these groups of people, it is difficult to carry out an effective development program.

5. Political Stability - Stable government and its ability to withstand forcible removal from power

Political stability often leads to higher rates of growth and improved development because:1. Stable government is required for effective government

decision-making and for implementing economic policies that can lead to a stable economy

2. Political instability creates uncertainty in economic policy, property rights, expropriation, and taxation. All of these make investment more risky for both foreign and domestic investors, thereby reducing investment

3. Political instability leads to outflow of financial capital as people move their financial assets to foreign countries for financial safety. This deprives the country of financial resources and contributes to balance of payment deficit

4. Political instability increases vulnerability to hunger and famine because it deprives governments of the capacity to provide relief which is diverted to military or political activities

Example:1984-85 famine in Ethiopia was caused by internal war and violence brought by drought. This resulted in the deaths of over 1 million people.

International development goals

[The Current State] The UN hosted the largest meeting of world leaders in Sep, 2000, and adopted the Millennium Declaration, a global statement of commitment to eliminate ● extreme poverty● hunger● disease● environmental damageby using development strategies based on the needs of the poor, human rights and sustainable development.

The Millennium Declaration is different from the earlier year in that

● specific goals called “Millennium Development Goals”● its targets are to be achieved within 15 years● It specifies to indicators to be used to monitor

countries’ progress towards achieving the goals