Certificate No.

AJA19-0226

A PUZZLE TO

“The Philippines is one of

the world’s major
development puzzle. In the
immediate aftermath of
the Pacific war, and
despite extensive wartime
destruction, it has one of
the highest per capita
income in the East Asia;
next to Singapore and
Hongkong, above South
Korea and Taiwan, higher
than Thailand, Indonesia
and China.”

- A. Balisacan,
Oxford University Press 2003

But why our nation fails? What happen to

our economic growth? We made a significant
stride in the last few decades, with an
economist as head of the state, whilst it lacks
fundamental economic indicators compared
to its neighbor countries. These parameters
have been looked based on the developed
country benchmark such as levels of physical
capita per person, human capital (particularly
education) – both primary and secondary
level, nutrition level and others. I do not make
a list of the features of economic development
that goes hand in hand simply to define the
term. We do so because implicitly or explicitly

ECONOMIC
we are looking for explanation from the
puzzle. Is it inadequacy to enforce state
power, inability to contextualize prosperity
and content- policy program to address
poverty that we need?

DEVELOPM
ENT
ALLAN A. LALOSA, LPT,
Economic Development 2019-
2020
College of Bus Mgt &
Accountancy
Eastern Samar State
 LECTURE NOTES

to accompany

ECONOMIC
DEVELOPMENT
1st Semester
Version 1

ALLAN A. LALOSA, LPT, MPA, DM

CBMA, ESSU-Main Campus
Subject: ECONOMIC DEVELOPMENT
Credit: 3

Course Code: ACC 112; BA 222 Total

Hours: 54

Prerequisite/Co-requisite: Basic MacroEcon & Advanced Econ

Course Description: The course introduces students to key concepts of development

economics and the main mechanisms driving economic growth. It covers the main
problems and issues concerning economic development, also by referring to existing
theories and discussing their respective strengths and weaknesses, together with the
ensuing policy implications. Throughout this course, the focus is on two simultaneous
themes: economic theory and its application to development problems; and the
interaction between economic theories and the political arena.

Course Learning Outcomes: The course exposes students to the relevant policy
debates and presents development as a complex issue that goes beyond mere income
growth. Specifically, the students will;
1. Develop a critical understanding of the complex interaction between different facets
of development (poverty and inequality, population growth, natural resources,
international trade, financial development);
2. Explain the main economic drivers of development;
3. Identify and be familiar with the relevant scholarly and policy debates;
4. Recognize that there is not a unique path to economic growth and development;
5. Conclude that right policies are context-specific, by making reference to historical
examples.

Course Requirement: Attendance, quizzes, recitation, assignments, major exams and

case analysis.

POLICIES

1. To ensure successful completion of this course, students are expected to arrive for
class on time and to remain in class until the end of the class session.
2. All students are expected to behave with academic honesty. It is not academically
honest to misrepresent another person’s work as your own, to take credit for
someone else’s words or ideas, to obtain advanced information on confidential test
materials, or to act in a way that might harm another students’ chances for
academic success. These students will automatically have a grade of 5.0 after three
(3) offenses of academic dishonesty.
3. Assignments should be submitted on the set deadline. Late assignments will be
deducted accordingly.
4. All students are expected to take Major Exams (Prelim/Mid-term/Pre-Finals/Finals)
on the specified day. In general, no make-up test or re-test will be given except
when circumstances warrant but with valid supporting documents presented.
1. Group activities will be part of the class participation. Students should participate
actively or get involved in group dynamics and other group assignments.
2. All students are expected to attend classes in the prescribed uniform.
Other course policies will be based on the student handbook.

Strongly recommended: Growth and Development book and videos (read selected
chapters)
Recommended texts:
Todaro, Michael P and Smith, Stephen C., Economic Development, 12th ed. Pearson, 2015
Wayne Nafziger, E., Economic Development, 4th Ed. Cambridge University Press 2005
Das, S., Mourmouras, A., and Rangazas, P., Economic Growth and Development: A
Dynamic Dual Approach, 2nd Ed. Springer, 2018
Aghion, P. & Howitt, P., The Economics of Growth, The MIT Press, Cambridge, 2009
Balisacan, A. M. And Hill, H., The Philippine Economy: Development, Policies, & Challenges,
Oxford, 2003
Norton, G. W., Alwang, J. and Masters, W. A., Economics of Agricultural Development:
World Food Systems and Resource Use, 2nd Ed., Routledge, 2010
Shane, S., Economic Development Through Entrepreneurship Government, University and
Business Linkages, Edward Elgar Publishing 2005
Willis, K., Theories and Practices of Development, 2nd Ed., Routledge, 2005
Lim, T.C., International Political Economy – An Introduction to Approaches, Regimes, and
Issues, Saylor Foundation, 2014
Lord Robbins, The Theory of Economic Development in the History of Economic Thought,
Reprinted, Palgrave MacMillan 2010
Baldwin, Richard, “The Great Convergence”, Harvard University Press, 2016

Online resources:
www.neda.gov.ph
https://psa.gov.ph

https://www.oecd.org/countries/philippines
www.asia.nikkie.com
www.dbm.gov.ph
www.worldbank.org
https://sustainabledevelopment.un.org/sdgs
https://www.migrationpolicy.org/research/shortage-amid-surplus-emigration-and-human-
capital-development-philippines
 STRUCTURE

PART I. Economic Development: Principles and Concepts

1. Introduction
2. Economic Development: Historical Global Perspective
3. Meaning and Measurement of Economic Development / Comparative
view
4. Theories of Economic Growth and Development
5. Models of Development and Underdevelopment

PART II. Problems and Policies: Domestic and International Treaties

1. Poverty, Inequality, and Development
2. 3C’s of Population Growth and Economic Development
3. Urbanization and Rural-Urban Migration: Theory and Policy
4. Human Capital: Education and Health
5. Rural Poverty and Agricultural Transformation
6. Natural Resources and Environment for Sustainable Growth
7. Market, State and Civil Society Roles in Development Policymaking

PART III. MacroEconomics and International Development: Issues and

Policies
1. International Trade Theory & Development Strategy
2. Balance of Payment, Debts, Financial Crises and Stabilization Policies
3. Foreign Finance, Investment, Aid and Conflict: Controversies and
Opportunities
4. Financial and Fiscal Policy for Development

Authors Note

My goal in these notes is to speak about a number of this chicken-and-egg

standpoint, that underdevelopment is seen not as a failure of some basic economic
parameters, or socio-cultural values, but as interpolating “equilibrium” that hangs
together, probably precipitated by inertia or by history.

As planned in developing this material, the objective is to enlighten students a

better understanding of the broad-based economic development paying attention to the
developing countries (DC) where low levels of living are a fact of life. Students will soon
discover the process and the focus in analyzing developing countries in their plight for
growth and development – the role of wealthy nations in directly or indirectly promoting or
hindering development. Conceivably, the more important issues to students in the
developed nations is the rapid development of modern transportation and
communications, innovations and technology that makes the earth shrink that we can
reach the other side of the globe in real time without leaving our sets – people of these
world are more increasingly interdependent. What happens to the health and economic
welfare of poor rural families and many others in the developing nations around the world
will in one way or another, directly or indirectly, affect the health and economic welfare of
families in rich countries, and vice versa. The steady loss of tropical forests contributes to
global warming; new diseases spread much more rapidly thanks to increased human
mobility; economic interdependence steadily grows. It is within this context of a common
future for all humankind in the rapidly shrinking world of the twenty-first century that we
now commence our study of economic development.

These lecture notes gathered majority from Todaro and Smith, and Nafzinger
Economic Development book and other lesson content compiled from various sources in
public domain but not limited to the internet. For the convenience of the users, such as
teachers, professors, students and other sectors of the community, the Eastern Samar
State University has no proprietary right on the same. Provided, that any suggestions or
intended inclusion in the lesson content is welcome and should be addressed to the author
for revision.

May this work help you in your field of endeavor. To my students and would be my
students may you be enlightened with the intricacies of this course as this would help you
a lot of as future businessman or policy maker. Thank you and happy reading.

PART I. Economic Development: Principles and

Concepts

Introduction

In this era of globalization, rapid growth and development, our country the
Philippines swiftly gains its traction yet it will be affected by the coming election results by
2022 that will come to an end. The progress of BUILD, BUILD, BUILD program of the
present government describes as an audacious economic strategy to catch up with its
more vibrant neighbors by 2022 and achieve a high-income economy status for the
generations to come. Our political system is high personalistic that leads to immediate
implications to its policy consistency for growth and development. Investors are more
interested for longer policy certainty than our six-year of regime change. Much of the
likelihood that top leaders and lower levels turn over often and change direction for they
want to leave a mark with their pet projects.

The rapid growth of China, South Asia and Africa, for the first time in the modern
history is attributed to the great poverty reversal as what Acemoglu and Robinson (2012)
call the “reversal of fortune” and slower growth in rich nations has made a key implication
of the mainstream growth models a reality. Solow-Swan growth model predicts poor
countries will tend to grow faster and “catch up” with richer countries this was largely
driven by the reason that they are poor. Creating a new non-OECD middle class and
reducing global inequality is called “absolute convergence” (B. Richards, 2016, The Great
Convergence). This economic convergence (of income, wealth and level of well-being)
leads to the point of view that theorizes poor countries will tend to grow faster, so that
over time rich and poor countries will come together, or “converge”.

Somehow, this does not seem right. We covet to have a theory that is not belittling
or downplaying the role of social, cultural and political factors and does not merely stop
there. We feel the need to know, for example, whether or not low incomes provoke, in
turn, low savings rates that it would be possible to have a genuine chicken-and-egg
illustration. The same is true of demographics— underdevelopment might be a cause of
high population growth rates, just as high population growth rates themselves retard the
development process.

Now back to the puzzle adopted from Balisacan, there is no simple or single theory
suffices. We need to develop a coherent story relating outcomes to an array of external
and internal factors—some narrowly economic, others broader and embedded in political,
historical, and institutional factors.

What is the real meaning of development? Do the Millennium Development? Goals

fit with these meanings? (Read Chapter 1 of Todaro and Smith or Nafzinger)

Economic Development: Historical Global Perspective

One could claim that Adam Smith was the first “development economist” and that
his Wealth of Nations, published in 1776, was the first treatise on economic development,
development economics emerged as a separate sub-discipline within economics in the
1950s and 1960s. The main concern “modernization” (industrialization) and economic
growth rather than distribution and/or poverty alleviation. Underdevelopment was seen as
a “structural” problem; due to market failures the underdeveloped countries were trapped
in “vicious circles of poverty”: a) Missing markets (e.g. savings and credit markets); b)
Market failures (e.g. wage setting in agriculture); c) Poorly working markets (low supply
elasticities).

Capitalism rose in the West from the 15th to 18th centuries with the decline of
feudalism, the breakdown of church authority, strong nation-states supporting free trade,
a liberal ideology tailor made for the bourgeoisie, a price revolution that speeded capital
accumulation, advances in science and technology, and a spirit of rationalism. In the last
one to one and one-half centuries, sustained economic growth occurred primarily in the
capitalist West and Japan. During this period, the economic growth rate of most of these
countries was over 1.5 percent yearly. Thus, the gap between these countries and the
developing countries of Afro-Asia has increased greatly.

During the late 19th century, the Japanese acquired foreign technology, established
a banking system, assisted private business people, aided technical improvement in small
industry, implemented universal education, and kept foreign exchange rates close to
market rates. However, LDCs can learn only limited lessons from Japan, because of its
historically specific conditions and because some components of Japan’s model may have
contributed to its recent growth collapse. The South Korean and Taiwanese approaches
have been similar to those of Japan. Moreover, the Korean–Taiwanese model stressed
government-business cooperation alongside government creation of contested markets
among businesses.

After WWII, countries resorted to ‘development planning’ and ‘import-substituting

industrialization’ (ISI). With pervasive market failures and a small private sector, state-led
development efforts were the primary characteristics of this era. Regardless of theories
people subscribed to, whether they be of ‘balanced-’ or ‘unbalanced-growth’ schools of
thought, ISI was the name of the game. After gaining political independence from colonial
rulers, ISI represented a path to economic independence. Dependency theories supported
the ISI thinking as well.

The 1917 communist revolution in Russia provided an alternative to capitalism as a

road to economic modernization. The state took control of economic planning and capital
accumulation. In only a few decades, Soviet centralized socialism transformed Russia. Yet
the major sources for this rapid growth, increased capital formation and increased labor
participation rates, were exhausted in the decade or two before the collapse of
communism in 1991. China performed better than Russia during its early industrialization,
partly because of China’s institutional changes and market reforms. The economic growth
of developing countries since World War II has been much more rapid than before the war.
Yet, the postwar growth of developing countries has been no faster than the growth of
developed countries. Whether this means convergence or divergence depends on the
time, scope, and definitions.

The Nature of Development Economics

- Traditional economics emphasizes utility, profit maximization, market efficiency,

and determination of equilibrium. It assumes economic “rationality” and a purely
materialistic, individualistic, self-interested orientation toward economic decision
making.
- Political economy attempts to merge economic analysis with practical politics—
to view economic activity in its political context. Social and institutional process
through certain economic groups and political elite-emphasis on the role of
power in economic decision making.
- Development economics. The study of how economies are transformed from
stagnation to growth and from low-income to high-income status, and overcome
problems of absolute poverty. – Todaro
- Economic Development. Activities that lead to greater use of human capital and
natural resources of the nation or community to match global and domestic
markets to build a self-sustaining economic system that fit both the people and
the place. – ALalosa, 2019
 - More developed countries (MDCs). The now economically advanced capitalist
countries of western Europe, North America, Australia, New Zealand, and Japan.
- Less developed countries. A synonym for developing countries.
- Globalization. The increasing integration of national economies into expanding
international markets.
- Social system. The organizational and institutional structure of a society,
including its values, attitudes, power structure, and traditions.

Development economics is greater in scope than traditional neoclassical

economics and political economy. Why Study Development Economics? Remember
that the ultimate purpose of any course in economics, including development eco-nomics,
is to help students think systematically about economic problems and issues, and
formulate judgments and conclusions on the basis of relevant analytical principles and
reliable statistical information.

Comparison-Resistant Services. Comparison-resistant services, like healthcare,

education, and government administration, which comprise more than 10percent of most
countries’ expenditure, distort cross-national, but not necessarily DC-LDC, GNP
comparisons. People do not buy a clearly defined quantity of university education, crime
prevention, health maintenance, and forest management as they do food and clothing.

Purchasing-Power Parity (PPP). Examine alternatives to GNP at existing

exchange rates as a measure to compare economic welfare. Exchange rates omit
nontraded goods, and that the relative prices of nontraded goods to traded goods are
lower in developing than in developed countries. University of Pennsylvania converts a
country’s GNP in its own currency into purchasing-power parity (or international) dollars
(PPP) by measuring the country’s purchasing power relative to all other countries rather
than using the exchange rate. Summers and Heston compute the price level of GNP(P) as
the ratio of the purchasing power parity (PPP) exchange rate to the actual (or market)
exchange rate, where both exchange rates are measured as the domestic-currency price
of the U.S. dollar. (GDP or gross domestic product, sometimes used, is income earned
within a country’s boundaries instead of gross national product, income accruing to a
country’s residents.)

An illustration taken from data in 2003, a Big Mac price of Real 4.55 in Brazil and
$2.71 in the United States meant a PPP of Real 1.68 = $1 compared to the actual
exchange rate of Real 3.07 = $1, so that P was 55percent and the Real (Brazil’s currency)
was undervalued by almost 45percent, indicating hamburgers were cheap in Brazil.
Similarly, the South Korean Big Mac price of Wan 3537 indicates a PPP of Wan 1296 = $1
compared to an exchange rate of Wan 1258 = $1, with P of 1.03 percent. According to
Kravit and Lipsey (1990) margin of error for the worst GDP PPP estimates “is still a small
range of error compared to that stemming from the use of exchange rates to convert own-
currency to common currency measures of output.”

Economies as Social Systems: Need to Go Beyond Basic Economics. By “social

system,” we mean the interdependent relationships between economic and noneconomic
factors. The latter include attitudes toward life, work, and authority; public and private
bureaucratic, legal, and administrative structures; patterns of kinship and religion; cultural
traditions; systems of land tenure; the authority and integrity of government agencies; the
degree of popular participation in development decisions and activities; and the flexibility
or rigidity of economic and social classes. At the international level, we must also consider
the organization and rules of conduct of the global economy—how they were formulated,
who controls them, and who benefits most from them. This is especially true today with
the spread of market economies and the rapid globalization of trade, finance, corporate
boundaries, technology, intellectual property, and labor migration.

The important role of values in economic development. It is concerned with human

beings and the social systems by which they organize their activities to satisfy basic
material needs - it is necessary to recognize from the outset that ethical or normative
value premises about what is or is not desirable are central features of the economic
discipline in general and of development economics in particular. The very concepts of
economic development and modernization represent implicit as well as explicit value
premises about desirable goals for achieving what Mahatma Gandhi once called the
“realization of the human potential.”

Meaning and Measurement of Economic Development /

Comparative view

Traditional economic measures Gross National Income (GNI), Income per

Capita, Utility of that income. In strictly economic terms, development has
traditionally meant achieving sustained rates of growth of income per capita to enable a
nation to expand its output at a rate faster than the growth rate of its population. Levels
and rates of growth of “real” per capita gross national income (GNI) (monetary growth of
GNI per capita minus the rate of inflation) are then used to measure the overall economic
well-being of a population—how much of real goods and services is available to the
average citizen for consumption and investment. Development strategies is more focused
on industrialization, at the expense of agriculture and rural development. It has been seen
as economic phenomenon where overall gains and per capita GNI growth “trickle down to
the masses” resulted to a wider disparity of the economic and social benefit of growth.
Poverty, unemployment, discrimination etc., still a problem in getting the growth job done,
hence, emphasis is measured on increased output – measured by Gross Domestic
Product (GDP). The countries GDP is measured based on total final output of goods and
services produced by the country’s economy, within the country’s territory, by residents
and nonresidents, regardless of its allocation between domestic and foreign claims.

Convergent Economy (of incomes, wealth, and levels of well-being). There’s a

“convergence” theory in economics that suggests, over time, that “poor nations should
catch up with rich nations.” The theory argues that countries that are poor will have
higher marginal products of capital (human and physical) and consequently a higher rate
of return to capital – the law of diminishing returns. This means that a dollar (as standard)
of extra savings will have a higher payoff in less developed countries, allowing it grow
faster. The phenomenon: poor countries will end to grow faster (catch-up effect), that
poorer economies' per capita incomes will tend to grow at faster rates than richer
economies. As a result, all economies should eventually converge in terms of per capita
income. Developing countries have the potential to grow at a faster rate than developed
countries because diminishing returns (in particular, to capital) are not as strong as in
capital-rich countries. Furthermore, poorer countries can replicate the production
methods, technologies, and institutions of developed countries. Economic growth
literature the term "convergence" can have two meanings. The first kind un-conditional or
absolute beta-convergence (sometimes called "Sigma-convergence") and "Beta-
convergence". This is not the place to examine the convergence hypothesis in detail, as
my intention is to cover other views of development and you may find and read it in other
books of economic development, I suggest read the book entitle “The Great
Convergence” by Baldwin, Richard.

Better Measure of Economic Development

Using income as a measure of development is a weak tool, and efforts have been
made to replace GNP per capita with a more reliable measure – usually an index of several
economic and social variables.

PHYSICAL QUALITY OF LIFE INDEX (PQLI)

One alternative measure of welfare is the PQLI, which combines three indicators –
infant mortality rate, life expectancy (at age one, to not overlap with infant mortality), and
adult literacy rate, the ability to read and write in any language (in percentage). The first
two variables represent the effects of nutrition, public health, income, and the general
environment. Life expectancy is positively correlated with GNP per capita through the
impact of GNP on incomes of the poor and public spending, especially on health care;
indeed, GNP adds no extra explanation to those of poverty and public health expenditure
(Sen 1999:44; Anand and Ravallion 1993). Infant mortality reflects the availability of clean
water, the condition of the home environment, and the mother’s health. Literacy is a
measure of well-being as well as a requirement for a country’s economic development.
Critics of this measure stress a close correlation between the three PQLI indicators and the
composite index and GNP per capita. For instance, China’s life expectancy and infant
mortality rates, matching those of the United States in 1940, were achieved at a per-
capita income of $490. By contrast, a relatively high per capita does not necessarily reflect
widespread well-being, as in the case of affluent oil countries such as Saudi Arabia and
Oman.

HUMAN DEVELOPMENT INDEX

The UN Development Program (UNDP) defines human development as “a process of

enlarging people’s choices. The most critical ones are to lead along and healthy life, to be
educated and enjoy a decent standard of living” (U.N. Development Program 1990:10).
The HDI summarizes a great deal of social performance in a single composite index
combining three indicators–longevity (a proxy for health and nutrition), education, and
living standards. Educational attainment is a composite of two variables: a two-thirds
weight based on the adult literacy rate (in percentage) and a one-third weight on the
combined primary, secondary, and tertiary gross enrollment rate (in percentage).
Longevity is measured by average life expectancy (in years) at birth, computed by
assuming that babies born in a given year will experience the current death rate of each
age cohort (the first year, second year, third year, and so forth through the nth year)
throughout their life time. The indicator for living standards is based on the logarithm of
per capita GDP in PPP dollars.

The attainment of basic needs is the solution of the limited impact against economic
growth in reducing third-world poverty. Almost 40-50 percent of the population are
experience or living with inadequate basic needs. The basic needs approach is
necessary because of the continuing serious maldistribution of incomes; because
consumers, lacking knowledge about health and nutrition, often make inefficient or unwise
choices in this area; because public services must meet many basic needs, such as
sanitation and water supplies; and because it is difficult to find investments and policies
that uniformly increase the incomes of the poor. The measure of basic-needs approach
shifts attention from maximizing output to minimizing poverty. The stress is not only on
how much is being produced but also on what is being produced, in what ways, for
whom, and with what impact. Is the satisfaction of basic needs is a human right? Is
Development a Freedom and Liberation?

Note: An in-depth discussion of this topic could be found in Chapter 2 of Todaro

and Smith.

Theories of Economic Growth and Development

Theories of Development. To many people, a theory is a contention that is
impractical or has no factual support – unverified hypothesis. For the economist, however,
a theory is a systematic explanation of interrelationships among economic variables, and
its purpose is to explain causal relationships among these variables. Usually a theory is
used not only to understand the world better but also to provide a basis for policy. In any
event, theorists cannot consider all the factors influencing economic growth in a single
theory. They must determine which variables are crucial and which are irrelevant.

Keynesian growth theory (1940-50’s) -process of capital of formation is

determined by savings and investment. The domestic savings are channeled to productive
investments such as manufacturing which result –usually-in high productivity. Growth is
market driven as income levels rise, savings rises and frees capital for alternative
investment

Modernization Theory - this theory suggests that economic dimension alone is

insufficient and adds theories on institutional and social change. In McClelland, Achieving
Society, I suggest that growth and development incorporate non-economic elements such
as social practices, beliefs, values and customs. Further it stresses that diffusion and
speed of change is critical as is removal of various cultural and social barriers. Backward
internal structures-rather than external factors-cause underdevelopment.

NeoLiberal Development Theory- grew in the 1970s and designed to counteract

impact of Keynesianism. It was experimental experience on the new emphasis on supply
side factors in development- private initiatives and market led growth by the developed
countries and adopted by LDC’s. They must move away from demand stimulation (interest
rate manipulation), import substitution, state intervention and centralized planning. The
gradual industrialization with ‘trickle down’ of benefits will reached all social classes, thus
growth and development will be reached in the process.

Popular Development- what is it? It is a development process that avoids ‘grand

theories’ and emphasizes solutions viewed in context of development which is part of
historical process. Context of development is constantly changing in scale and time as
developed countries change especially Europe and the US as they are the benchmark of
growth and development. Popular Development theory accommodates geographical and
historical diversity yet it has of little use to practitioners of development. It stresses local
diversity, human creativity, process of social change through pragmatism, flexibility and
context, not extent of state intervention but comparative advantages of public and private
sectors and their complementarity.

Features of Popular Development and Environment

a. Recognizes high “opportunity costs” associated with irreversible environmental

damage
b. Dealing with environmental problems requires solutions sensitive to local social and
ecological conditions
c. Society and nature relations are affected by variations in class, gender and ethnicity
d. “Reproductive squeeze” forces peasants to intensify production in fragile
environments

Appropriateness of PDE

a. Bottom up approaches (as opposed to top-down) to peoples’ participation are

important in this view
b. How are various social groups and classes affected by rural-urban, core-periphery
and other spatial interactions?
c. Growing importance of “decentralization” of decision-making and authority from
center to periphery

PDE and its Impact

a. How does the power structure affect development?

b. Examine sources of empowerment, inequality and discrimination
c. Need to devise more people centered approaches which stress empowerment and
participation
d. Empowerment as participatory development seeks to engender self-help and self-
reliance but also effective collective decision-making

The new economic view of development leads to in wellbeing, more broadly

understood. Amartya’s “Capability” Approach refers to functionings as an achievement,
capabilities as freedoms enjoyed in terms of functionings. It is development and
happiness – being well and having freedoms of choice or “Beings and Doings”. For
instance, being to live long and being health is an important factor of capability approach,
one cannot help in development and growth if the populace is unhealthy and
malnourished instead it requires policy that will answer the problem and should be
recognized as factor for development. Functionings is what people do or can do with the
commodities of given characteristics that they come to possess or control, while
Capabilities means the freedoms that people have, given their personal features and
their command over commodities.

Economic growth cannot be sensibly treated as an end, and development must be

more concerned with enhancing the lives we lead and freedoms we enjoy. What a person
is, can be, and can does or can do are matters fundamental than things a person
has or feel. It goes beyond the Utility approach - availability of commodities and
consider uses to address “functioning’s” - what a person does (or can do) with
commodities of given characteristics they come to possess or control but rather valued
functioning’s range from very basic - being adequately nourished to very complex - e.g.
being able to take part in community life. Leaders in developing nations hope that their
societies can gain the benefits of development without losing traditional strengths such as
moral values and trust in others—sometimes called social capital.

On Armatya Sen’s detailed Capability Approach the details of disparities between

income and disadvantages are to the following:
 personal heterogeneities;
 environmental diversities;
 variations in social climate;
  intra-household distribution; and
 differences in relational perspectives such as minimal social expectations

The 3 Core Values of Development

Sustenance. The ability to meet basic needs. The basic goods and services, such
as food, clothing, and shelter, that are necessary to sustain an average human being at
the bare mini-mum level of living. When any of this is absent or in critically short supply, a
condition of “absolute underdevelopment” exists. One has to “have enough to be more”,
thus the lessening income inequalities constitute the necessary but not the sufficient
conditions for development.

Self-Esteem. To be a person. The feeling of worthiness that a society enjoys when

its social, political, and economic systems and institutions promote human values such as
respect, dignity, integrity, and self-determination. It may vary society to society and from
culture to culture. “Modernizing values” of developed nations leads to serious cultural
confusion, worthiness and esteem are increasingly conferred nowadays only on countries
that possess economic wealth and technological power—those that have “developed.”

Freedom from Servitude: To be able to choose. A situation in which a society

has at its disposal a variety of alternatives from which to satisfy its wants and individuals
enjoy real choices according to their preferences. Freedom here is to be understood in the
sense of emancipation from alienating material conditions of life and from social servitude
to nature, other people, misery, oppressive institutions, and dogmatic beliefs, especially
that poverty is predestination. Freedom involves an expanded range of choices for
societies and their members together with a minimization of external constraints in the
pursuit of some social goal we call development. According to W. Arthur Lewis, “the
advantage of economic growth is not that wealth increases happiness, but that it
increases the range of human choice. Studies do reveal that some countries that have
achieved high economic growth rates or high incomes, such as China, Malaysia, Saudi
Arabia, and Singapore, have not achieved as much on human freedom criteria.

The Central Role of Women. Development scholars generally view women as

playing the central role in the development drama. To make the biggest impact on
development, society must empower and invest in its women. A depth discussion will be in
Chapters 5 through 9 and 15 of Todaro and Smith.

Models of Development and Underdevelopment

The Four Growth Paradigms
 The Neoclassical Growth Model (Solow-Swan Growth Model). The MIT
economist Robert Solow won a Nobel Prize for his formulation of the neoclassical theory of
growth, which stressed the importance of savings and capital formation for economic
development, and for empirical measures of sources of growth. Solow allowed changes in
wage and interest rates, substitutions of labor and capital for each other, variable factor
proportions, and flexible factor prices. He showed that growth need not be unstable,
because, as the labor force outgrew capital, wages would fall relative to the interest rate,
or if capital outgrew labor, wages would rise.

General Principle: Because aggregate growth refers to increases in total

production, we can visualize growth factors if we examine the factors contributing to
production. We do this in a production function stating the relationship between capacity
output and the volume of various inputs. Solow used Cobb–Douglas production function
(1920s) by the mathematician Charles Cobb and the economist Paul Douglas, to
distinguish among the sources of growth – labor quantity and quality, capital, and
technology.

The equation is
Y =T K α L β

where Y is output or income, T the level of technology, K capital, and L labor. T is

neutral in that it raises output from a given combination of capital and labor without
affecting their relative marginal products. The parameter and exponent α is (Y/Y)/(K/K),
the elasticity (responsiveness) of output with respect to capital (holding labor constant).
(The symbol means increment in, so that, for example, Y/Y is the rate of growth of output
and K/K the rate of growth of capital.) The parameter β is (Y/Y)/(L/L), the elasticity of
output with respect to labor. This model the benchmark for growth analysis is,
paradoxically, its implication that, in the long run, economic growth does not depend on
economic conditions. In particular, economic policy cannot affect a country’s long-run
growth rate.

Criticism: The following points are summary list of the limitations or inadequacy
based on different point of view of economic scholars.
1. It is narrow in scope
2. Economic Development is not continuous process
3. Unrealistic assumption
4. No importance to the role of government
5. Study of developed countries only

The AK Model

Learning by doing formed the basis of the first model of endogenous growth theory,
which is known as the AK model. The AK model assumes that when people accumulate
capital, learning by doing generates technological progress that tends to raise the
marginal product of capital, thus offsetting the tendency for the marginal product to
diminish when technology is unchanged. The model results in a production function of the
form Y = AK, in which the marginal product of capital is equal to the constant A.
The AK model predicts that a country’s long-run growth rate will depend on eco-nomic
factors such as thrift and the efficiency of resource allocation. In subsequent chapters we
will develop alternative models of endogenous growth that emphasize not thrift and
efficiency but creativity and innovation, which we see as the main driving forces behind
economic growth. The most commonly used is the,

Harrod-Domar Model. Aggregate production function has fixed technological

coefficients:

Y =F ( K . L )=min { AK , BL }

where A and B are the fixed coefficients. Under this technology, producing a unit of
output requires 1/A units of capital and 1/B units of labor; if either input falls short of this
minimum requirement, there is no way to compensate by substituting the other input.
With a fixed-coefficient technology, there will either be surplus capital or surplus labor in
the economy, depending on whether the historically given supply of capital is more or less
than (B/A) times the exogenous supply of labor. Where AK < BL, which is the case that
Harrod and Domar emphasize, capital is the limiting factor. Firms will produce the amount
with the given formula,

Y = AK

The problem with the Harrod-Domar model is that it cannot account for the
sustained growth in output per person that has taken place in the world economy since
the industrial revolution.

Other Ak Model are Rowtow’s Stages of Growth Theory Model. Rostow’s

economic model has five stages; its central historical stage is the take-off, a decisive
period of increased investment, rapid growth in leading sectors, and institutional change
during which the major blocks to steady growth are finally overcome. Balance Growth or
the Big Push. Balanced growth advocates argue that a big push is needed to begin
economic development because of indivisibilities in demand and infrastructure. Critics
indicate that most LDCs do not have the resources essential for launching such a big push.
In Kremer’s O-ring theory of development, it emphasizes that production consists of
many tasks, all of which must be successfully completed for the product to have full value
and to prevent coordination failure.

For Lewis, economic growth takes place as a result of growth in the size of the
industrial sector, which saves, relative to the subsistence agricultural sector, which saves
nothing. In the Lewis model, an unlimited supply of surplus farm labor migrates to urban
areas for wages in excess of rural, subsistence wages. This supply of cheap labor to the
industrial sector is the basis for profits and capital accumulation. Fei and Ranis, too,
believe that the capitalist wage will increase before surplus labor is absorbed, unless
agriculture and industry can achieve balanced growth. However, contrary to the Lewis–
Fei–Ranis model, Japan raised its capitalist wage rate before all surplus rural labor was
absorbed. For Baran, the coalition of the bourgeoisie and landed classes, helped by
foreign capitalist governments, is incapable of undertaking the capital formation and
political reform required for rapid economic growth and alleviation of mass poverty.

Critic: AK theory presents a “one-size-fits-all” view of the growth process. It applies

equally to advanced countries that have already accumulated capital and to countries that
are far behind. Like the neoclassical model, it postulates a growth process that is
independent of developments in the rest of the world, except insofar as international trade
changes the conditions for capital accumulation. Yet it is a useful tool for many purposes
when the distinction between innovation and accumulation is of secondary importance.

The Product-Variety Model

General Principle: The second wave of endogenous growth theory consists of

“innovation-based” growth models, which themselves belong to two parallel branches.
One branch is the product-variety model of Romer (1990), in which innovation causes
productivity growth by creating new, but not necessarily improved, varieties of products.
This paradigm grew out of the new theory of international trade and emphasizes the role
of technology spillovers. According to this function, the degree of product variety N t is the
economy’s aggregate productivity parameter, and its growth rate is the economy’s long-
run growth rate of per capita output.

Criticism: Product variety raises the economy’s production potential but when
spread over a number of larger uses exhibit a diminishing return. The model predicts no
important role for exit and turnover; indeed, increased exit can do nothing but reduce the
economy’s GDP, by reducing the variety variable N t that uniquely determines aggregate
productivity. Thus, there is no role for “creative destruction,” the driving force in the
Schumpeterian growth paradigm.

The Schumpeterian Model

General Principle: This paradigm grew out of modern industrial organization

theory and is commonly referred to as Schumpeterian growth theory because it focuses on
quality-improving innovations that render old products obsolete and hence involves the
force that Schumpeter called creative destruction. There are two main inputs to
innovation, namely, the private expenditures made by the prospective innovator and the
stock of innovations that have already been made by past innovators. The latter input
constitutes the publicly available stock of knowledge to which current innovators are
hoping to add. The theory is flexible in modeling the contribution of past innovations. It
encompasses the case of an innovation that leapfrogs the best technology available
before the innovation. Schumpeterian theory provides a framework in which the growth
effects of various policies are highly context-dependent. In particular, the Schumpeterian
apparatus is well suited to analyze how a country’s growth performance will vary with its
proximity to the technological frontier at, to what extent the country will tend to converge
to that frontier, and what kinds of policy changes are needed to sustain convergence as
the country approaches the frontier.

Criticism: We could take as given the critical innovation, that determine a

country’s growth path as given, just as neoclassical theory often takes the critical saving
rate s as given. However, Schumpeterian theory derives these innovation frequencies
endogenously from the profit-maximization problem facing a prospective innovator, just as
the Ramsey model endogenizes s by deriving it from household utility maximization. This
maximization problem and its solution will typically depend upon institutional
characteristics of the economy such as property right protection, the financial system, . . .
and also, upon government policy; moreover, the equilibrium intensity and mix of
innovation will often depend upon institutions and policies in a way that varies with the
country’s distance to the technological frontier.

The Three Objectives of Development

 Increase availability of life-sustaining goods

 Raise levels of living
 Expand range of economic and social choices

What causes underdevelopment?

One can say that it is very easy to focus on characteristics of development but the
truth it is complex and needs a consideration of all the factors that affect its web-like
progression. For example, we know that underdevelopment is usually characterized by:
low per capita incomes, low literacy and educational attainment, lack of basic services-
water and power. But how do we EXPLAIN underdevelopment? Old view that absence of
development caused by certain physical environments, particular cultural traditions and
value systems-environmental and cultural determinism. Lack of natural resources certainly
impediment to development but not impossible- example of Japan. Reasons attributed to
Japanese success and becomes a model for development are:
a. Strong cooperation between government and business
b. Able to adapt to spatial-physical situation and acquire a maritime prowess
c. Early development (Meiji restoration) of transport and banking systems
d. Highly literate population
e. Niche development- technology driven

The need to view development in historical perspective as sequence of dynamic

events-explore roots. Historical records identify other common reasons of
underdevelopment without exception to develop countries such as:
a. instability and other adverse internal situations- political factors (European
hegemony and Roman Empire)
 b. Some truth to these as extended periods of turbulence are not conducive to
development- central African nations with tribal rivalries and ethnic cleansing
(Armerindians during the Rise of US from European migration in re-creating the Old-
World in the New World)
c. Poor physical environment- lack of rainfall, poor soils also may pose barriers to
development (Africa, Middle East and China)

Another Common Explanation of UD

Colonialism as Scapegoat

Colonialism plays a big part of countries growth and development. Studies in

economic history shows that indigenous population was exploited – the case of Philippines,
India, Canada, Australia, Malaysia, Africa and even the US. It affects its colonial countries
in many different ways but not limited to such as traditional way of life and self-sufficient
mode of production have been destroyed; Forced to pay taxes and conscripted labor
practices; Social differentiation increased- disintegrating force; Fatal effects on secondary
(manufacturing) and tertiary (service) sectors- import of cheap goods forced indigenous
artisans out of work; Discouraged modern industrialization. Decolonization opened up
independence during the years 1950, it shows rapid growth and development like the
countries of India, Canada and Australia. It resulted to increase of GDP and sprouting
metropolitan capital and better quality of life. In light of economic transformation of so
many former colonies it creates the conditions for the majority of the world’s population to
become the dominant player. But the downside of this situation is the development of the
ideological remnants of colonialism to individualism adopted from the great -ism of the
European dominance long time ago – mercantilism, capitalism and communism.

Colonialism viewed as the cause of disintegration and decline- how? Because of the
manipulation of the principal/colonizer what occurred in these situations was dependent
not autonomous development. Colonial powers extracted wealth for home country-
Netherlands, France, Great Britain. International division of labor (IDL) and western
dominated trading structure was created to take advantage of colonial authority. IDL
refers to the allocation of tasks among laborers such that each one engages in tasks that
he performs most efficiently and this promotes worker specialization and productivity.

Vicious Circles- Gunnar Myrdal

Attacking vicious circle proponents-do not explain how these magic circles come
into existence. The vicious circle theory indicates that poverty perpetuates itself in
mutually reinforcing vicious circles on both the supply and demand sides. It is a complex
web of interlocking vicious circles each of which constitutes a chain of cause and effect
relationships where one unfavorable circumstance leads to another and produces
downward spiral.

Scenario: High Birth Rate> Large Families>Low PCI> Poverty> Low Output Per
Worker> Low PCI> Low Productivity> Poor Health>Inadequate Housing

Intervention: Remedy > Downward spiral not reversible without massive aid
(Economic Endowment)
Panacea for Vicious Circle

Aid or endowment should be free from vested interest of the principal, instead it would
stimulate growth in modern sector and reduce size of ‘informal’ or traditional sector. Thus,
eliminate dualism and the major causes of unequal distribution of wealth. Foreign aid
would allow countries to increase low levels of productivity

Challenges in the Application of Development Theory

There is no “One Size Fits All” to solve problems related to growth and development
as claimed by some advocates in economic theories or as modeled by developed
countries. It needs understanding of the intricacies of the country’s history, people and
resources. Developing and implementing development program one should consider that:
a. Several theories have been advanced and have been criticized and some also
discredited—to be replaced by other theories
b. Third World is very heterogeneous-dissimilar in terms of population, resources,
climates, culture, economic structure and location
c. Unlikely that one theory will be powerful enough to explain underdevelopment
everywhere
d. Multitude of obstacles to development vary with place and time
e. Underdevelopment must be seen as a product of an array of complex and
continuously changing interactions between: Past and Present; Natural and Human
Environments; External and Internal Conditions
f. Lastly, critical to remember that the above theoretical ideas aid us in asking
pertinent questions

Updates on the World Economic Development: What is going on, and how we will
look at the future?

The Millennium Development Goals and The 2015-2030 Sustainable Development Goals
Millennium Development goals (MDGs): Eight goals adopted by the United Nations in
2000, a blueprint for the next 15 years (to 2015)

 Eradicate extreme poverty and hunger

 Achieve universal primary education
 Promote gender equality and empower women
 Reduce child mortality
 Improve maternal health
 Combat HIV/AIDS, malaria, and other diseases
 Ensure environmental sustainability
  Develop a global partnership for development

Millennium Development Goals (MDGs), adopted by the United Nations in 2000, with Some
Targets that were set for 2015

Table 1.1 Millennium Development Goals and Targets for 2015 (see Table on the next
page)
MDG Retrospective: Glass Half Full Or half empty
 Shorthand: “Halving Poverty” (and Halving Hunger)
 Income poverty target reached – by official definition of fraction living under $1 a
day equivalent (now adjusted to $1.90)
 Progress on hunger (fraction hungry fell from about 23% to 14%) but not halved –
and nearly 900 million still hungry
 Under-5 Mortality dropped about 41%: progress; but not halved, let alone cut by
two-thirds
 Maternal deaths about halved – but not cut by three-quarters
 Clean drinking water target met, and slum target met; but the sanitation goal not
met
 Great progress on several diseases including TB and malaria
 Progress on enrollments, but universal goal not met - 57 million children still not in
primary school – generally the poorest
 Development assistance is now about flat, and probably falling in real terms

Some Criticisms that have been raised concerning the Original MDGs Framework
 Not ambitious enough, it merely projects past rates of improvement
 Goals not prioritized; stove-piped: overlooks goal complementarity
 Setting a specific end date could discourage aid if targets not met
 The $1 a day poverty measure misses’ intensity of poverty
 $1.25 (or $1.90 as purchasing-power adjusted) per day is too low a bar
 Lack of goals on reducing rich country agricultural subsidies, which harm low
income farmers in developing countries
 Nothing on improving legal and human rights of the poor
 No goals for slowing climate change harming developing countries
 Nothing on expanding gender equity outside of / beyond education
 15 years was too long to prod early action and accountability of leaders
 No goal on global social safety net guaranteeing minimums of life
 Did not seem to apply to developed countries except as aid donors
 Question for discussion: To what extent addressed in the new (2015-2030)
Sustainable Development Goals (SDGs)?

Update: Sustainable Development Goals

 Our country’s Domestic and International policy is working toward a harmonious
implementation and transition from LDC to DC dubbed as the “Golden Age of
Industrialization” with the realization of the following:
 Sustainable Development Goals (SDGs) – “Ambisyon Natin 2040”
 Adopted by the UN on 26 Sept. 2015
 To be achieved by 2030
 Features 17 goals, with 169 targets
 https://sustainabledevelopment.un.org/sdgs
 New Underlying Principles:
 Universality principle: Applies to every nation (with action encouraged from
every sector)
 Integration principle: Must achieve all goals; to do so account for their
interrelationships;
 Transformation principle: Not “piecemeal” steps

The 17 Sustainable Development Goals 2015-2030

1. End poverty in all its forms everywhere

2. End hunger, achieve food security and improved nutrition and promote sustainable
agriculture
3. Ensure healthy lives and promote well-being for all at all ages
4. Ensure inclusive & equitable quality education & promote lifelong learning
opportunities for all
5. Achieve gender equality and empower all women and girls
6. Ensure availability and sustainable management of water and sanitation for all
7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Promote sustained, inclusive and sustainable economic growth, full and productive
employment and decent work for all
9. Build resilient infrastructure, promote inclusive and sustainable industrialization,
foster inno-vation
10. Reduce inequality within and among countries
11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Ensure sustainable consumption and production patterns
13. Take urgent action to combat climate change and its impacts
14. Conserve and sustainably use oceans, seas, marine resources for sustainable
development
15. Protect, restore and promote sustainable use of terrestrial ecosystems,
sustainably manage forests, combat desertification, and halt and reverse land
degradation and halt biodiversity loss
16. Promote peaceful and inclusive societies for sustainable development, provide
access to justice for all and build effective, accountable and inclusive institutions at
all levels
17. Strengthen means of implementation and revitalize global partnership for
sustainable development.

Discussion Topic: The SDGs

 What are some key similarities and differences between the SDGs and the earlier
MDGs?
 To what extent do the same criticisms apply to SDGs as were raised in the past
concerning the MDGs?
 If you think one or more criticisms are addressed – at least in part please explain
 Example: How significant is adopting the “Universality” principle?
 If you think a new criticism is relevant – specific to SDGs, or that applies also to
MDGs but not
listed above – please specify; explain
 Regardless of your specific views about the SDGs: do you think it is better to have
these goals
(or perhaps even any goals) than not to specify international development goals?
How, or why
 not?
 Do you have a proposal for how to remedy a problem that you specify or that has
been raised?

Concluding Observations

1. The importance of Development Economics

2. Inclusion of non-economic dimensions in designing development strategies
3. Increasing capabilities to function as a central concept of development –
Development as FREEDOM
4. Achieving the Millennium Development Goals (MDGs) and beyond to the prospective
Sustainable Development Goals (SDGs)
5. “One FUTURE or none at ALL”

The Benefit and Cost of Economic Growth and Development

What distinguishes people from animals is people’s greater control over their
environment and greater freedom of choice, not that they are happier. Control over one’s
environment is arguably as important a goal as happiness, and in order to achieve it,
economic growth is greatly to be desired. Growth decreases famine, starvation, infant
mortality, and death; gives us greater leisure; can enhance art, music, and philosophy;
and gives us the resources to be humanitarian. Economic growth may be especially
beneficial to societies in which political aspirations exceed resources, because it may
forest all what might otherwise prove to be unbearable social tension. Without growth, the
desires of one group can be met only at the expense of others. Finally, economic growth
can assist newly independent countries in mobilizing resources to increase national power.

Growth has its price. One cost may be the acquisitiveness, materialism, and dis-
satisfaction with one’s present state associated with a society’s economic struggles.
Second, the mobility, impersonality, and emphasis on self-reliance associated with
economic growth may destabilize the extended family system, indeed the prevailing social
structure. Third, economic growth, with its dependence on rationalism and the scientific
method for innovation and technical change, is frequently a threat to religious and social
authority. Fourth, economic growth usually requires greater job specialization, which may
be accompanied by greater impersonality, more drab and monotonous tasks, more
discipline, and a loss of craftsmanship. Fifth, in an advanced industrial society, all
institutions and individuals, including artists, tend to be shaped to the needs of economic
growth. Additionally, the larger organizational units concomitant with economic growth are
more likely to lead to bureaucratization, impersonality, communication problems, and the
use of force to keep people in line. Thus, even if a population is seriously committed to
economic growth, its attainment is not likely to be pursued at all costs.

In the face of increasing expectations, few societies can choose stagnation or

retardation. Increasingly, the LDC poor are aware of the opulent lifestyle of rich countries
and the elite. They have noticed the automobiles, houses, and dinner parties of the
affluent; they have seen the way the elite escape the drudgery of backbreaking work and
the uncertain existence of a life of poverty; they have been exposed to new ideas and
values; and they are restless to attain a part of the wealth they observe. So most LDC
populations want economic growth, despite the costs. And LDCs also want better
measures of growth and development. The central focus of our discussion is how LDCs can
achieve and assess their development goals.

Concepts for Review

Absolute Poverty Functionings Less developed countries
Attitudes Globalization (LDCs)
Capabilities Gross domestic product Millennium Development
Developing countries Gross national income Goals (MDGs)
Development (GNI) More developed countries
Development economics Income per capita (MDCs)
Freedom Institutions Political economy
Self-esteem Subsistence economy Traditional economics
Social system Sustenance Values
PART II. Problems and Policies: Domestic and
International Treaties
The aspect of Philippine Development is peculiar that it has the slowest pace of
poverty reduction in recent decades and with the turn of the present century it recorded
the highest incidence of absolute poverty. The country had comparatively low levels of
absolute poverty based on Asian standards, including other dimension of human
underdevelopment such as illiteracy and infant mortality. Ours is more favorable
compared to Thailand and Indonesia (Balisacan, 2003). The slow pace of poverty
reduction and the persistently high level of economic inequality leads us to ask “What has
gone wrong in our development planning and implementation? We will examine the
nature, pattern, characteristics, and causes of poverty and inequality in the Philippines
over the last quarter-century, including factors explaining the provincial differences in the
evolution of the welfare of the poor.

To stabilize the domestic issue of growing population and poverty reduction that
resulted to disparity in income adopted the independent monetary policy. Though we are
considered as small open economy, in the early 1980’s despite of difficulties triggered by
Asian financial crisis our economic team find ways to secure efficient financial
intermediation in an environment that is increasingly one of integration with international
financial markets. The government began to implement a package of economic policy
reforms aimed at greater integration with the world economy. These reforms included
import liberalization and reductions in tariffs, accompanied by liberalization of foreign
direct investment and of the financial and foreign exchange markets. As a result of these
policy adjustments the Philippine economy undoubtedly became more integrated with
the rest of the world, not only in the area of trade in commodities but also in trade in
securities and national currencies.

Poverty, Inequality, and Development

(Read Chapter 10 of Balisacan)

Measuring Inequality and Poverty

  Seven very critical questions about economic growth
-    How relative is inequality, and how is this related to the level of poverty?
-    Who is poor?
-    Who benefits from economic growth?
-    Will rapid growth certainly lead to greater income inequality?
-    What are the benefits of poor growth?
-    Is the level of inequality always bad?
-    What policies can reduce poverty?

How to measure inequality or inequality

Following are some indicators that are often used by researchers to measure inequality
in a country or region.

1. Size distributions (quintiles, deciles)

This measure directly calculates the amount of income received by each
individual or household. How to get income is not a problem. Therefore, economists
tend to rank all individuals based on the income they receive, then divide the total
population into several groups or sizes. Usually the population is divided into 5
groups or quantiles and 10 groups or deciles.

2. Lorenz curves
The Gini index is often displayed along with the Lorenz curve, which illustrates
the relationship between the cumulative share of income and population. G is a gini
index derived from the Lorenz curve by dividing the area bounded by the diagonal
line and the Lorenz curve with the total area on the lower triangle
 3. Gini coefficients and aggregate measures of inequality
Of all the measures of inequality, the Gini index is the one most often used as an
indicator of inequality. One of the highlights of the Gini index is that its very direct
approach to the measure of inequality, contains the difference between each pair of
income, which is by far the most popular measure of economic inequality. In fact,
the observed pairs used in the Gini Index calculation are used to produce the Lorenz
Curve. This is done by plotting the share (cumulative) income and population pairs
in a box.

The value of the Gini index ranges from 0 to 1. The value of 0 indicates that all income
is divided equally among all units of society (perfect equality), while value 1 means that all
income is only owned by one person or one unit in the overall distribution (perfect
inequality).   Low inequality has a Gini index value of 0.4 or below. High inequality if it has
a Gini index above 0.4 in its distribution.

4. Functional distributions
This measure focuses on the share of national income received by each factor of
production. The relevance of functional theory is less sharp, because it does not
take into account the role and influence of forces outside the market.

Absolute Poverty

Absolute poverty is a material shortage experienced by someone who has not yet
been able to fulfill basic needs (clothing, food, shelter, etc.)
Most projections state that the number of people living in poverty will increase over the
past decade before declining for the rest of the century, with the hope that it will
disappear forever with the succession of centuries. This result depends very much on two
factors: first, the rate of economic growth — provided that this is sustainable — and
second, the amount of resources allocated to poverty alleviation programs and the quality
of those programs. Fast and continuous growth, as well as well-designed and timely
poverty alleviation can actually reduce absolute poverty more quickly; but without these
two factors, the goal will not be achieved at all.

Figure 1. Headcount Index. Poverty Incidence

Figure 2. Poverty Incidence in Southeast Asia

 Figure 3. Measuring the Total Poverty Gap (TPG)

Philippine Poverty Situation:

Source: World Bank, Development Research Group. Data are based on primary household survey data obtained from
government statistical agencies and World Bank country departments. Data for high-income economies are from the Luxembourg Income
Study database.

Poverty gap at $5.50 a day (2011 PPP) (%)

The value for Poverty gap at $5.50 a day (2011 PPP) (%) in Philippines was 26.60 as
of 2015. As the graph below shows, over the past 30 years this indicator reached a
maximum value of 43.20 in 1985 and a minimum value of 26.60 in 2015.

Definition: Poverty gap at $5.50 a day (2011 PPP) is the mean shortfall in income or
consumption from the poverty line $5.50 a day (counting the nonpoor as having zero
shortfall), expressed as a percentage of the poverty line. This measure reflects the depth
of poverty as well as its incidence.

Poverty Incidence Formula:

P= ( Qn )∗100
Where:
Q = number of families/individuals with per capita annual income/ expenditure
less than the per capita poverty threshold
n = total number of families/ individuals

Poverty Threshold Formula:

FE
PT =FT /( )
TBE
Where:
 FE = actual food expenditure of families within the +/-ten percentile of the food
threshold
TBE = total basic expenditure of families within the +/- ten percentile of the food
threshold
FT = (cost per capita of the one-day food menu ) x (30.4 days/month)   x 12
months

For further reading related to poverty report of the country and other related
information,
visit https://psa.gov.ph/content/poverty.

Common formula used in Measuring Absolute Poverty

Average poverty gap (APG):

TPG
APG=
N

Where:
N is number of persons in the economy
TPG is total poverty gap
Note: normalized poverty gap, NPG = APG/Y p

Average income shortfall (AIS):

TPG
APG=
H

Where:
H is number of poor persons
TPG is total poverty gap
Note: Normalized income shortfall, NIS = AIS/Y p

The Foster-Greer-Thorbecke (FGT) index:


1 H  Yp  Yi 
P 
N
 
i 1  Yp


Where:
N is the number of persons, H is the number of poor persons, and α ≥0 is a
parameter
When α=0, we get the headcount index measure
When α=2, we get the “P2” measure

The Lorenz Curve

 The Greater the Curvature of the Lorenz Line, the Greater the
Relative Degree of Inequality

The Human Poverty Index (HPI) or Human Poverty Index

With the belief that human poverty must be measured in units of three key
deprivations, namely: life (more than 30% of the population of less developed countries
cannot live more than 40 years), basic education (as measured by the percentage of adult
population illiteracy, with an emphasis on the loss of women's educational rights), as well
as overall economic provisions (measured by the percentage of people who do not have
access to health services and clean water plus the percentage of children under 5 years
who are underweight).     

Poverty, Inequality, and Social Welfare   

                                                  
            We assume that social welfare depends positively on the level of per capita income
but negatively at the poverty level, as these terms have just been determined. Why should
inequality be our concern relatively? Why should we consider the problem of inequality
above the poverty line? There are three main answers that can answer that question.
            First is extreme income inequality that causes economic inefficiencies. The second
is the imbalance above the poverty line is that extreme income differences weaken social
stability and solidarity.  And finally, extreme inequality is generally seen as unfair. If
everyone has the same income, there will be little incentive to work hard, skill or
be innovative. With the above reasons we can write welfare, namely

W =W (Y , I , P)

with the explanation Y is income per capita, I is welfare, and P is poverty.

Dualistic Development and Shifting Lorenz Curves Some Stylized Typologies

Gary Fields uses the Lorenz curve to analyze 3 cases of dualistic development:
1.  Typology of modern-sector growth enlargement, where two economic
sectors develop by increasing the size of the modern sector and
keeping wages constant in both sectors. 
2.  The typology of modern-sector growth enrichment, where the economy is growing but
the growth that is limited to a fixed number of people in the modern sector, with
both the number of workers and the wages they remain constant in
sectors traditionally. 
3.  Traditional-sector enrichment growth typology, where all benefits from growth are
shared between traditional sector workers, with little or no growth occurring in the
modern sector. Using three special cases and Lorenz curves, the fields show the validity
of the following proportions. 

Using the Lorenz Curve in three special case offer validity of the proposition:
1.   Improved Income Distribution under Traditional-sector growth enlargement.
Results of higher income growth among, equal share of relative
income, and less poverty. 
2.  Worsened Income Distribution under Modern-sector enrichment growth, growth is the
result of revenue higher, the distribution is relatively less equal income, and no
change in poverty. 
3.  Convergence of Modern-sector and Traditional-sector enrichment growth typologies,
absolute  income  increases  and  absolute poverty decreases,  but the 
lorenz curve will always 
cross, indicating that we cannot make a clear
statement about the relative change in inequality: it may increase or worsen. 

Traditional-sector typologies offer predictions differ about what will

happen inequality in the process of economic growth. With the enrichment of the modern
sector, inequality will continue to  increase,  while under  traditional sector 
enrichment,  inequality  will  continue to fall.  Under
magnification modern sector, inequality will spruce up and down if this process
is recognized.  In the very style of development that occurs ,  we will not worry about the
temporary increase in inequality 
because in addition to temporary, it will reflect a process in which citizens, one by
one, reach income above absolute poverty line.

Kuznets's Inverted-U Hypothesis

Kuznets Curve is a graph that reflects the relationship between per capita state income
and equality of income distribution. Kuznets Curve can be produced by a stable process of
growth in the enlargement of the modern sector as a developing country from the
traditional to the modern the modern economy. Enrichment of traditional and modern
sectors will tend to attract inequality in opposing directions, so that changes are clean
ambiguous inequality, and the validity of the Kuznets curve is an empirical question.

Evidence on the Inverted-U Hypothesis

Income per capita is not necessarily related to inequality. the poorest countries, such
as Ethiopia, may have low inequality simply because there is so little income. but even
very poor countries like Mozambique and Zambia have very high inequalities according to
international standards. High- income countries tend to be somewhat more equal than
middle -income countries, but again, there is wide variation in the level of inequality.

In fact, for many countries, there is no special tendency for inequality to change in the
process of economic development. inequality seems to be a rather stable part of a
country's socio-economic makeup, changed significantly only as a result of major
upheavals or systematic policies. Inequality can be gradually reduced through well-
implemented policies to encourage pro-poor growth from time to time.

Growth and Inequality

 The character of economic growth is the distributive implications of economic growth
as reflected in factors such as participation in the process of growth and ownership of
assets. No need for inequality to rise to a higher growth to be maintained.

Absolute Poverty: Extent and Magnitude

Based on research, approximately 1/3 of the poor are residents who are chronically
always poor. Andrew McKay and Bob Baulch estimate that around 300 to 420 million poor
people are chronically poor who live on 1 dollar a day at the end of 1990.

While 2/3 of the other poor people are vulnerable to poverty and can become very poor
over time. This population can be divided into families who usually live poor but
sometimes get enough income to cross the poverty line and families who are not used to
living poor but sometimes experience temporary problems can result in them living below
the poverty line.

Based on income, the definition of ultra-poverty is someone who lives with half a dollar
every day or 54 cents per day in the 1993 dollar. Ultra-poverty can be distinguished from
conventional poverty in terms of:
1. level of deficiency
2. duration of time
3. the vast number of dimensions, such as illiteracy and malnutrition.

Ultra-poverty is a difficult problem to overcome than conventional poverty, where

conventional poverty can be overcome by microfinance and business training. Fazel
Hasan, the founder of the NGO BRAC, concluded that the usual conventional programs
implemented did not reach the ultra-poor.

The prospect of ending poverty depends on two factors:

1. the level of economic growth carried out jointly and sustainably

2. the level of resources earmarked for poverty programs so that the quality of the
program increases.

Wealthier countries have a strong tendency to have a low absolute poverty rate.
Availability of jobs, opportunities for greater entrepreneurship and NGOs that help make
people living in rich countries able to escape poverty. In developing countries, there is
evidence that countries with high per capita income growth among them in the lowest five
income distributions, although the proportion varies. Although we cannot rely on our own
growth to end absolute poverty, it is sustainable by itself to end absolute poverty, end
poverty and be facilitated through wise services and sharing of various sources of
resources provided by economic growth.

Economic Characteristics of High Poverty Groups

a. Rural Poverty

Most poor people usually live in rural areas that usually work in the agricultural sector
and related sectors. About 2/3 of the very poor population has a livelihood from the
agricultural sector such as small farmers and smallholders with small wages. Others live in
cities with livelihoods as unskilled laborers and street vendors.

b. Women and poverty

The majority of the poor in the world are women. The prevalence of women as head of
the household, the low ability to earn income, the stereotype that women are no better
than men and lack access to education, social security, and government employment
programs make the financial position of poor women more unstable than men. In the long
term, the low status of women tends to reduce the rate of economic growth because the
achievement of educators and financial status in the future of children is far more likely to
reflect the spirit of the child.
 Thus the benefits of investment today human resources are more likely to be passed
onto future generations if women are successfully integrated in the process of economic
growth. Remember that human resources may be the most important prerequisite for
growth, education and economic status for women is very important to fulfill long-term
development.

c. Ethnic Minorities, Indigenous Populations, and Poverty

Indigenous people usually face economic and political problems and discrimination.
Domestic conflicts and even wars between citizens were ignited from several ethnic
groups and indigenous people who assumed that they felt rival in obtaining resources and
employment.

d. Poor Countries

Negative relations between poverty and per capita income indicate that if higher
income can be achieved, poverty will decrease, if only the resources are more widely
available to overcome poverty problems and increase the voluntary sector.
We can conclude that higher national income will reduce poverty more easily, while at the
same time, poverty still needs to be addressed directly.

Policy framework for government facing inability of income and poverty.

From the study of Balisacan and Hill, Oxford University Press, 2003 recommends to
consider first and foremost that fiscal resources are scarce. Generous budgets for direct
poverty reduction programs may come at the expense of funding for other development
needs, especially ones that will enhance the capacity of the economy to grow on a
sustained basis. Clearly, the national government has to focus its limited resources on
areas where they will make the biggest dent on poverty. What areas should the national
government spend more on, and what areas should it spend less on?

Lessons from recent experience, both in the Philippines and in numerous other
developing countries, suggest that the following areas should be afforded high
spending priority: rural infra- structure, especially transport, power, and
communications; irrigation, especially small-scale systems; primary education,
especially quality enhancement; technical education and skills development; basic
health care and family planning services, especially in rural areas; targeted
supplementary feeding programs; R&D for agriculture and for small and medium-scale
enterprises; and capability building for local government units (LGUs) and
microfinance providers. The same lessons suggest that the national government
should spend less in the following areas: tertiary education (by implementing cost
recovery); general food price and credit subsidies; livelihood and public-works
equipment programs, except for short-term disaster relief; post-harvest facilities; and
export-processing zones. Spending in these areas is a blunt instrument for achieving
poverty reduction goals.

The development of a country is aimed at reducing poverty, unemployment and

overcoming the income gap. To get the results, the government must know what steps will
be taken by the government, in response to these economic problems. The types of
actions are:
1. Altering Functional distribution
2. Mitigating the size Distribution
3. Reducing the size distribution at the upper levels
4. Moderating (increasing) the size of distribution at the lower levels.

3C’s of Population Growth and Economic Development

The discussion examines how the population situation in many developing countries
affects their chances of becoming more economically developed, and conversely, how
economic development affects population growth. The 3C’s refers to causes,
consequences and controversies of population growth.

The first part of the lesson explores historical and recent population trends and the
changing geographic distribution of the world's people. Interesting statistics include world
population data, distribution by region, and fertility and mortality rates. Key concepts
include:
 The dependency burden.
 The hidden momentum of population growth.
 The demographic transition.

The causes of high fertility in LDCs are explained using the Malthusian and Household
models.
 The Malthusian Population Trap model suggests the population will be forced to live
at the subsistence level of income as population growth outstrips growth in the
supply of food. The solution is to implement birth control measures. Criticisms are
offered and include the failure to take technological progress into account and the
failure to account for the microeconomics of family-size decision making.
 The Microeconomic Theory of Fertility attempts to explain the falling birthrates
associated with stage III of the demographic transition. It is suggested that people
choose how many children to "consume" as part of their utility maximization
problem. Budget constraint indifference curve analysis is presented. Children in
LDCs can be thought of as investment goods. Reasons are offered for why families
in LDCs are having more children, such as the lower opportunity cost of time and a
lack of job and education opportunities for women.

The debate over whether rapid population growth is a genuine problem or constraint in
achieving economic development is discussed.
 Arguments for why population growth is not a problem include identifying
population growth as merely a symptom of widespread poverty and a lack of
alternatives for women, identifying population distribution as the real issue, and
identifying benefits that come with having a larger population such as a larger
domestic market for consumer goods.
 Arguments for why population growth is a problem include reduced family savings
rates, government difficulties in providing basic services to a growing population,
and the need for more rapid growth in GDP to keep up with population growth and
maintain living standards. Population growth as a cause and consequence of
underdevelopment is discussed. Empirical evidence suggests seven negative
consequences of population growth.
 Recent consensus between the two sides is discussed in terms of agreement that
population growth is not the primary cause of low levels of living, agreement that
rapid population growth makes development more difficult to achieve and sustain,
and agreement that many problems can be attributed to population density.

Policy approaches include eliminating absolute poverty, reducing income inequality,

expanding education opportunities for women, providing more job opportunities, and
improving access to health care and clean water. Family planning programs for some
developing countries are presented. It is suggested that the developed countries try to
simplify lifestyles and consumption habits to conserve world resources. 

KEY ISSUES: POPULATION GROWTH AND LIFE QUALITY

The world population in 2009 is estimated at 6.8 billion people. The UN projects the
population will reach more than 9.2 billion by 2050.

The world's population is increasing by more than 75 million people each year. Almost
all of this net population increase is -97% - occurs in developing countries.

The really important question regarding population growth is as follows:

  How can the contemporary population situation in many developing countries
support or otherwise hinder their opportunities to realize development goals, not
only for the present generation but also for future generations?
 What is the impact of development on population growth?

 Some of the major issues relating to the basic questions are as follows:

 Will developing countries be able to improve the standard of living of their

population with their current population growth rates and projections for the future?
 How can developing countries cope with the rapid increase in the number of
workers in the coming decades? Will there be many employment opportunities or
will the unemployment rate soar?
 What are the implications of a higher level of growth for the opportunities of the
world's poor to overcome the suffering they experience in absolute poverty? Will
world food supply and distribution not only meet the needs of the population that is
expected to increase more in the coming decade but also improve the level of
nutrient intake according to the level needed by humans?
 Will developing countries be able to expand the scope and improve the quality of
their health and education service systems so that everyone can have access to
health and basic education services?
 Is there a relationship between poverty and the number of family members?
 Are persistent efforts to increase prosperity among the rich have damaged the
global environment more and hurt the living standards of the poor compared to the
absolute increase in the number of poor people?
POPULATION GROWTH: IN THE PAST, THE TIME AND THE FUTURE
HISTORY OF THE WORLD POPULATION GROWTH

The current population of the world is almost 7 billion people. In the past, there
were not many people. When people first cultivated land to grow crops around 12,000
years ago, the estimated population of the world was no more than 5 million people.

For almost the entire period of existence of mankind on earth until about 300 years
ago, population growth per year was not far from zero (0.02% or 20 people per million). Of
course, this overall growth rate is unstable; a lot of increases and decreases due to natural
disasters and various levels of growth in various regions.

Now, the rate of growth of the world population still shows a high increase in the
course of history, which is 1.1% even though the pace is slowing down.

Now it only takes about 58 years or 2 generations to double the world population.
Moreover, if in the period from the first year of the year to the onset of the world industrial
revolution it took 1,750 years to increase the world population by 480 million people, now
the same additional number of people only takes less than 7 years.

Sudden changes in the overall trend of population growth caused by the ups and
downs of the population are strongly influenced by a combination of kelaperan events,
diseases, lack of nutrition, epidemics, etc. (which results in high and fluctuating mortality
rates). In the 20th century, these conditions could be controlled by technology and
economics so that human morality now reached its lowest point in the history of human
existence.

WORLD POPULATION STRUCTURE

(Insert Table of World Pop. Distrib data for the past 10 yrs)
The distribution of the world's population is very uneven according to geographical
area, fertility and mortality, and age structure.

FERTILITY AND MORTALITY TRENDS

Quantitatively, the rate of population increase is measured as the percentage

increase (reduction) relative to the net population per year due to natural increase and net
national migration.
  Population growth in developing countries depends almost entirely on the
difference between crude birth rates and mortality rates.
 Natural increase: the difference between the birth rate and the death rate in a
given time
 Net International Migration: Difference between people who immigrate into a
country and people who immigrate from a particular country
 Rough birth rate: The number of children born alive each year per 1000
inhabitants
 Death rate: The number of deaths per year per 1000 inhabitants

Demographic Transition

      The demographic transition is a gradual process of decreasing the rate of

population growth. The demographic transition tries to explain why all developed
countries now go through the three stages of the history of modern population which are
more or less the same. From the first stage, the growth stage is almost stagnant, which is
characterized by high birth and death rates. Then it continues in the second stage, where
population growth is rapid with high birth rates and low mortality rates due to better
public health services, healthier food, higher income and other improvements. In the
second stage this marks the beginning of the demographic transition (the transition from
stable or slow population to rapid population growth, then decreased). Finally, entering the
third stage where the State enters a stage of low and stable growth where birth and death
rates are low.

Patterns of Population Growth in LDCs

Birth rates in developing countries generally tend to be high when compared to

developed countries. This is because women in developing countries tend to marry at a
young age. As a result, more families have a longer fertile age. In the 1950s and 1960s,
the second stage of the demographic transition has occurred in almost all developing
countries. The application of technology and the development of public health contribute
to a decrease in the mortality rate. The second stage is characterized by a population
growth rate of more than 2% per year in most developing countries.

The 2 patterns of demographic transition in developing countries could be

illustrated in this way;  In the case of A (referring to a countries population growth
experience), the application of technology and health services to modern society together
with an increase in standard of living is rapid and evenly distributed, resulting in a
decrease in the death rate to only 10 per 1,000 population and the birth rate also
decreases. Some of the countries in case A are examples of Taiwan, Costa Rica, Cuba,
Chile and Sri Lanka.

However, in some developing countries there are those who experience case B.
After experiencing a period of rapid mortality, the death rate cannot go down any
further. Most occur because the country continues to experience absolute poverty, low
living standards and consequences of AIDS. Countries in this case cover many countries in
sub-Saharan Africa and the Middle East, still in stage 2 of their demographic
transition. Even though fertility tends to decline, birth rates still remain very high in these
countries.

Therefore the question arises. When and under what conditions are developing
countries more likely to experience a slower decline in birth rates and population growth?

To answer this question, we will refer to the Malthusian Population Trap model and
the temporary and highly influential neoclassical microeconomic model, namely the theory
of household fertility.

CAUSES OF HIGH FERTILITY IN DEVELOPING COUNTRIES: MALTHUS AND HOUSEHOLD MODELS

 Malthus's population trap is the anticipated threshold level by Thomas Malthus
(1766 - 1834) where population growth will stop on its own when life support resources
(which are calculated according to a countdown) will not be sufficient to meet human
needs whose numbers increase according to the geometry. Malthus stated that a
population explosion would lead to a subsystem. The basic model that summarizes
Malthus's ideas can be obtained by comparing the shape and position of the curves, each
of which represents the rate of population growth and the growth rate of aggregate
income and these two curves are related to the level of income per capita.

According to supporters of the neo Malthus school of thought, poor nations will
never succeed in achieving a higher level of per capita income than the subsystem level
unless they declare preventive checks (birth control) to reduce their population growth
rate. If this is not done immediately then the model Malthus's positive balance of hunger,
disease outbreaks, war, natural disasters that will appear as the main factors inhibiting
population growth.
Countries or regions that feel in the trap of population can actually also come out through
efforts to achieve technological progress that can increase per capita income. In addition,
the country or region can also make changes in economic and cultural institutions ("social
progress") which can reduce population growth rates.

Criticism of the Malthus Model

The model of the Malthus population trap is a simple and interesting theory
regarding the relationship between population growth and economic
development. Unfortunately, the model is based on a number of assumptions that are
apparently exceeded simplistic (oversimplifying the problem) and the hypothesis proposed
is also not proven empirically. We can criticize this model on the following reason that;

1. Malthus’s Theory does not take into account the role and important effects of
technological process.
2. The theory is based on a hypothesis regarding macro relations (large scale)
between the level of population growth and the level of income per capita which
apparently cannot be proven empirically. 

3. The theory is too dependent on economic variables which turned out to be

wrong, namely the level of income per capita, as the main determinant of
population growth. a far more valid approach in order to answer questions about
population and development efforts prioritizing macroeconomic aspects

Microeconomic Theory of Household Fertility

This theory adopts the theory of conventional consumer behavior. Children are

considered as consumer goods (not profitable). Demand for children is a rational economic
choice for consumers. The choice sacrifices other options. The desire to have children is
influenced by income, child prices (living costs) and the desire to consume other goods
(substitution effects and income).

1. Demand for children is positively related to income

2. Demand for children is negatively related to the relative price (maintenance costs)
of children and preferences for other items.

Mathematically, this relationship can be expressed by a formula

Cd =   f (Y, P c , P x , t x ), x = 1, ..., n
Where :
C d = request for child
Y = RT income
that is, the higher the income, the demand for children increases
P c = net price of child
that is to say, the higher the cost of buying and maintaining children,
the demand for children decreases
 P x = price of other goods
that is, the higher the price of other goods, the demand for children
increases
t x is the preference for other items
that is, the higher the preference for other items, the demand for
children decreases

There are two things that are taken into account in having children:

1. Opportunity costs are in the form of rationing of time spent on nurturing the child so
that time is wasted on productive things.
2. Child education costs. If the child is a little likely to be schooled high.

With the better level of education of women, they have the potential to make greater
contributions to the family so that the time spent raising children is limited so the desire to
have children is reduced. Importance of Birth rates among the poor will decrease if:
1.    Women's education level increases.
2.    Employment opportunities for women in non-agricultural areas increase.
3.    Income increases (job opportunities create income redistribution).
4.    Health services and provision of nutrition are increasing.
5.    Guarantee system and old age benefits.
6.    Expanding opportunities to get education

Implications for Development and fertility

All that has been discussed so far can be summarized by arguing that the influence
of social and economic progress in reducing fertility in developing countries will be very
large   when the majority of the population and especially the very poor are equally
benefited. economy. In particular the following socio-economic changes can be realized
will reduce birth rates in very poor circles:

 Improving women's education and changes in their roles and status

 Increased employment opportunities outside the agricultural sector for
women. Karna emphasizes the opportunity to take care of children.
 Increase the level of family income
 Reduction in child mortality.
 Development of a system of benefits like the elderly and other social security
systems outside the extended family network to reduce the economic dependence
of parents, especially women, on their children.
 Expanded school opportunities

In short, the program to expand employment, education and health opportunities

for the poor, in general and women in particular, will not only contribute to their economic
and psychological well-being (i.e. to improve their lives) but   will also provide a greater
impetus to have smaller family

CONSEQUENCES OF HIGH FERTILITY: SOME DIFFERENT OPINIONS

Economic scholars and policy makers slow economic growth is attributed to

population issues where there are several conflicting perspectives. The following are some
of the main arguments that support and oppose the idea that the consequences of rapid
population growth can lead to serious development problems.

First argument: This is not a real problem

We can identify three general arguments from people who claim that population
growth is not a problem:
 The problem is not population growth but other problems.
 Population growth is a false problem deliberately created by international agencies
and institutions dominated by rich countries so that developing countries remain in
a state of dependency
 For many developing countries and developing regions, population growth is
desirable.
many observers from both rich and poor countries argue that the real problem is not
population growth, but one or all of the following four.

1.   Underdevelopment
2.   Depletion of natural resources and environmental damage.
3.   Distribution of population
4.   Placement of women's position at a lower place.

Second argument: This is a deliberately engineered issue.

                The second argument denies the importance of population growth as the main
problem of development closely related to the theory of neo-colonial
dependence. Basically, arguing that overconcern in countries rich in population growth
from poor countries is truly an attempt by rich countries to hold back the growth of poor
countries in order to maintain the international status quo that is beneficial for rich
countries 'private interests'. The radical version of neo marxist suppression of the
population by rich countries is an attempt at racism and genocide to reduce the number of
relative or absolute poor people, some of whom are non-white world citizens who are
considered to threaten the welfare of the wealthy people who are generally white.

Third argument: This is a Desired Phenomenon

                The third argument believes that population growth is an important ingredient in

promoting economic development. Larger populations will produce economies of scale
production, lower production costs, and a lower supply of labor costs. They also argue that
free markets and human ingenuity will solve every and all problems that arise from
population growth. On the agricultural side, a larger population can cultivate a wider area
than if only a few people. In many countries only a small amount of all potential land is
planted, and low rural population density is seen as a serious weakness to increase
agricultural output. Military and political power also need many people to protect the
country.

Fourth argument: Population growth is indeed the real problem.

The fourth argument supports the need to control population growth because of its
negative consequences. generally based on the following three arguments.

Hardline argument: global population and crisis: extreme opinion views population
as a problem, too large population growth is seen as the cause of almost all world
economic and social problems.

Theoretical argumentation: the population cycle of poverty and the need for family
planning programs: the population poverty cycle is the main argument of economists who
view that population growth that is too fast will have negative consequences for the
economy, so developing countries must really pay attention. Basically, it is a simplification
of the standard solow type neoclassical growth equation by using the standard production
function "adalah"  output is a function of capital, labor, resources, and technology. With
the basis of a fixed resource base we can get the results with the following formula.   with
y: the growth rate of GNI, l: the rate of growth of the capital stock, α: the output elasticity
(usually found constant), t: the effect of technological change (solow residue in empirical
studies of sources of economic growth.

Another empirical argument: seven negative consequences of population growth:

seven potential consequences of population growth are:

1.      Economic growth: population growth can lower per capita income in almost all
developing countries.
2.     Poverty and inequality: the negative consequences of rapid population growth
have befallen almost all poor people because the mecca made does not survive.
 3.     Education: the higher population growth, the costs for education issued by the
government will be depleted and will reduce quality for the quantity of
education.
4.     Health: high fertility will harm the health of mothers and children because the
close distance of pregnancy and high fertility increases the health risks for
mothers and children   during pregnancy
5.     Food: produce lots of population, the greater the need for food, if it is not
balanced with production and fulfillment of food needs, food shortages can
occur.
6.     Environment: the environment will also be threatened because of the
expansion of settlements and also the disposal of wastes that can endanger the
environment.
7.     International migration: this is considered to be possible both legal and illegal
because of the need for work or other things that result in migration from
developing countries to developed countries.

Towards a Consensus

3 conflicting arguments which are important components of consensus:

1.    Population growth is not the main cause of low living conditions, extreme
inequality
2.   Population problems are not only one number but involve quality of life and
material well-being
3.   Rapid population growth does not function to intensify the problem of
underdevelopment and make the development prospects far more remote.

SOME POLICY APPROACHES

3 policy areas that can have important influences both directly and indirectly for the
world population now and later:

1.   General and specific   policies of developing country governments to be able

to   initiate, influence and possibly even control the growth and distribution of
occupations.
2.  General and special policies of developed country governments to be able to reduce
consumption that is not their proportional world resources are limited and promote a
more equitable distribution of the benefits of global economic progress.
3.  General and specific policies that developed country governments and international
aid agencies can begin to help developing countries achieve their population goals

What Developing Countries Can Do

1.   Give persuasion to have smaller families through the   media and the educational
process, both formal (school system) and informal (adult education).
2.   Improve family planning programs to provide health and contraceptive services to
encourage desired behavior. Like publicly sponsored   or officially supported programs
now in most developing countries.
3.   Manipulate economic incentives and disincentives to have children - for example,
through the elimination or reduction of maternity subsidies, reduction or elimination of
financial incentives, or the imposition of fines for having children exceeding a certain
amount.
4.   Try to force people to have smaller families through the power of state laws and fines.

What Can Advanced Countries Do

Developed countries can simplify their lifestyles and consumption habits, others
are   positive (if possible), internal policies that rich countries can adopt to reduce world
population problems today will liberalize legal conditions for poor international
immigration, unskilled workers and families they are from Africa, Asia and Latin America to
North America, Europe, Japan and Australia.
 How Developed Countries Can Help Developing Countries to Populate
Problem Solving Programs

Two activities that can directly alleviate fertility problems that can be assisted by
developed countries, international donor agencies, and non-governmental organizations:

1.  The first is   through research   on fertility control technology, contraceptive pills,

modern uterine contraception (IUD), voluntary sterilization procedures, and, especially
in the age of AIDS, effective barrier contraception. Research has been going on in this
area for several years, almost all of which is funded by international donors, private
foundations, and aid agencies from developed countries. Further efforts to improve the
effectiveness of contraceptive technology and minimize health risks must be
encouraged.
2.  The second region includes financial assistance from developed countries for family
planning, public education and national population policy research activities in
developing countries

Urbanization and Rural-Urban Migration: Theory and Policy

The chapter discusses the related problems of urbanization and migration. Key topics
include:
 Urbanization trends and projections
 The role of cities and of the informal sector of the economy
 Urban unemployment
 Todaro’s migration model
 Policy options for limiting rural-urban migration

The urbanization problem is described using data on urban population growth over the
past 50 years. Urban population growth is generally far more rapid than total population
growth, with about half the urban growth accounted for by migrants from the rural areas.
Developing country cities are growing far more rapidly than those in the developed
countries. Shantytowns and similar makeshift settlements represent over one-third of
developing country urban residents.

The chapter explores the consequences of public policies favoring large cities at the
expense of small towns and villages. In addition, it explores the dualistic pattern of urban
development, where a modern formal sector exists alongside a large urban informal
sector. About half of the urban labor force works in the informal sector, often with low
wages and no fringe benefits. Characteristics of urban informal sector jobs include:
 low skill
 low productivity
 self-employment
 lack of complementary inputs
 jobs in petty sales and services
 recent migrants facing social and economic adjustments

Given constraints on modern sector growth, the text argues that this sector should be
promoted as a major source of employment and income for the urban labor force. This
sector already generates up to a third of urban income, generates demand for unskilled
labor, and adopts appropriate technology. An improvement in the infrastructure and credit
available to this sector could generate large benefits in terms of increases in income and
jobs for the poor. On the downside, promoting this sector runs the risk of encouraging
more migration unless more resources are devoted to the rural sector at the same time.

The pros and cons of rural-urban migration are reviewed. Migration is viewed as both a
symptom and contributor to underdevelopment, much as population growth is. Todaro’s
migration model helps explain why it is rational for rural residents moving to crowded
cities, where unemployment is high and the probability of finding jobs is low. The model is
based on differences in expected income between the urban and rural sectors. High urban
unemployment is inevitable given the large expected income differentials between the
rural and urban sectors which exist in many LDCs. A diagrammatic presentation of the
model is included.
Highlights of Todaro’s migration model include:
 The need to reduce the urban bias of development strategies and encourage
integrated rural development. This will reduce the wage differential between the
urban and rural area.
 Creating urban jobs is an insufficient solution to the urban unemployment problem
because more migration is induced
 Expanding education opportunities often results in more urban migration
 Urban wage subsidies are counterproductive as they encourage more migration by
increasing the probability of finding a job

Policy options for reducing migration and increasing employment follow from Todaro’s
migration model conclusions. They include creating an appropriate rural-urban economic
balance, expanding small scale labor intensive industries, eliminating factor price
distortions, and reducing population growth. 

The Migration and Urbanization Dilemma

One of the most complex and sensitive development process dilemmas is migration
and urbanization, yes, it is a symptom of the movement of large numbers of people from
rural areas to cities that are increasingly popping up in Africa, Asia and Australia and Latin
America that has never happened before in history. The world population in 2050 is
expected to reach more than 9 billion, and the most dramatic population growth will occur
more in various cities in developing countries.

Urbanization: Trends and Projections

The positive relationship between urbanization and per capita income is the
clearest and most prominent "special fact" of the development process. Generally, the
more developed a country is based on per capita income, the greater the number of
inhabitants who inhabit urban areas. Although urbanization is closely related to economic
growth, the fact is that urbanization is happening in all countries. It doesn't matter
whether the country has a high or low income and whether the growth is positive or
negative. In short, urbanization is taking place in all countries in the world at different
rates.

Why do more people choose to settle in urban areas? This is what is called an
urban bias. An idea that almost all developing country governments implement
development policies that are more in favor of the urban sector, resulting in a large gap
between the urban economy and the rural economy.

The important question regarding urban agglomeration that has never happened
before is: how will all these cities manage such a large concentration of the population
economically, environmentally, and politically. Its size is so large that the city's economy
will shrink due to the cost of managing overcrowding. The rapid population growth that
causes the accumulation of people will far exceed the growth of the human and physical
infrastructure needed to simply live a fairly efficient economic life and orderly social and
political relations, let alone comfort for its inhabitants.
Although population growth and increasing rural urban migration are the main cause of
the explosion in urban slums and slums, the government is also responsible for the
situation. With widespread dissatisfaction caused by the experience of rapid urban growth
in developing countries, an important issue that needs to be addressed is the extent to
which developing country governments can formulate development policies that can truly
have a definite impact on trends and character of urban growth.

Role of the City

The urban area has played a very constructive role in the economies of developed
countries today, and this region still has large and untouched potential to produce similar
things in developing countries. What explains the relationship between economic growth
and urbanization? In general, cities are formed because they provide advantages or cost
efficiency advantages for producers and consumers through what is called an
agglomeration economy.

The agglomeration economy is the advantage or cost efficiency obtained by

producers to consumers from locations in large or medium cities, which are tangible
urbanization and localization economies. The urbanization economy is the result of
agglomeration related to the general growth of concentrated geographic areas. While the
localization economy is the result of agglomeration obtained by economic sectors, such as
financing and motor vehicles, when the sector grows and develops in an area.

Industrial District

The economic definition of a city is "an area with relatively high population density,
and has a number of closely related activities." Companies generally also prefer to be in a
location that allows them to learn from other companies doing similar work. This
knowledge impact is the economic benefit of agglomeration, part of the benefits of
localization which is referred to as: industrial district. Where exactly the location of the
industry is not a problem.

Industrial groups are common in developing countries. From those at various

stages of industrial development, from home industries to technologically advanced
manufacturing industries. However, the dynamics of these groups differ because they tend
to specialize in a field. In some cases, traditional specialization has developed into more
advanced business groups.
This business group resembles a district in a developed country, but requires adequate
financing to invest in core companies that use capital goods on a large scale.

In a study of six representative business groups in Africa, Dorothy McCormick

concluded that, "basic business groups prepare roads; the industrialization group initiated
the process of specialization, differentiation, and technological development; and
sophisticated industry groups produce competitive products in the wider market. In some
cases, evidence shows that coordination failure is not addressed, so the government can
play an active role in setting policies to encourage the improvement of business groups. In
other cases, it is precisely the government that causes the stagnation of business groups
because it implements rigid and irrational regulations, the consequences of which are far
more damaging than indifference to business groups in the informal sector.

Efficient Urban Scale

Efficient urban scale can be achieved for a number of closely related industrial
cities, such as industries that have strong links from upstream to downstream. One
notable exception is the possibility of the effects of technological progress. However, there
are also important congestion costs such as the higher the urban area, the higher the cost
of real estate.

In a competitive market mechanism, if workers in a large city with higher wages but
with a high cost of living will not be materially more fortunate than workers with equal
education, experience, abilities, and health who live in a small city with lower wages and
lower living costs.

Problems caused by giant cities

The main transportation routes in developing countries are generally a legacy of the
colonial era. Drainage routes made in the colonial era emphasized the ease of drainage of
natural resources in the colonies. Usually, the capital city is located close to the exit of this
system, which is the waterfront. This transportation system is referred to as a "hub-and-
spoke" system.

The differentiated flat area approach emphasizes the impact of historical heritage
that still exists today. This approach is able to explain the way we find cities that are too
large in developing countries and suggest urban decentralization policies that can be
applied to help find solutions to the problem.

Sometimes an urban core becomes too large, so it can no longer maintain the cost
of industries located in that place at the minimum level. In developing countries,
governments tend to be less involved in spreading economic activities with more
manageable measures or if they are indeed involved, often less effective. For example,
the government wants to spread the industry without considering the nature of
agglomeration; by providing incentives but no attempt to group a number of related
industries.

Main City Bias

The main city bias (first-city bias) is a form of urban bias that often causes
considerable disruption. The largest city of a country will receive a share of private
investment in a proportion greater than that given to the second largest city and other
smaller cities. The effect, the main city has a large population and economic activity.

The cause of the emergence of a giant city

Overall, the larger cities are a result of a combination of hub-and-spoke

transportation systems and the location of political capital in the largest cities. This is
further strengthened by the political culture of rent-seeking and the failure of the capital
market which makes the development of new urban centers unable to be done by the
market. Paul Krugman stressed the effect of industrialization on import substitution with
tight protection, as well as population and economic activities that have incentives to
concentrate in one city, mostly to reduce transportation costs. Political economic factors
that cause the growing size of the national capital are companies that will benefit more
from being in locations where they have easy access to government officials to operate.

Urban Informal Sector

The informal sector is part of the economies of developing countries characterized

by the existence of individual or family competitive small businesses, grocery trade and
trivial services, labor-intensive, without any barriers to entry, as well as with factor-
determined product and product prices.

The existence of an informal sector that is not terrorized, not regulated, and all legal
although not registered was recognized in the 1970s based on observations in several
developing countries, which shows that the growing number of urban workers is
apparently not apparent in the unemployment statistics of the modern formal sector.

Policies for the Urban Informal Sector

In relation to other sectors, the informal sector is related to the rural sector in the
sense that this sector allows excess labor to escape extreme poverty and
underemployment in the village, despite having to live their lives and working conditions
and income that is often not far away better. The income of informal sector workers is still
higher than that of workers in the poorest rural areas, despite the continuing migration
from rural to urban areas.

The important role played by the informal sector in providing income opportunities
for the poor is clear. However, there is a question about whether the informal sector is just
a foundation to the formal sector and if so is a transitional stage that must be made as
comfortable as possible without perpetuating its existence until finally absorbed by the
formal sector, or whether this sector will continue to exist and should instead be increased
as a source of employment and main income for urban labor.

Arguments that can support efforts to improve the informal sector are:
1. Scattered evidence shows that the informal sector produces surpluses even in a
hostile policy environment that prevents this sector from obtaining benefits provided to
the formal sector.
2. Low capital intensity and only a small part of the capital required by the formal sector
to employ a worker in the informal sector, means that there will be substantial savings
for developing countries that are often disrupted by capital shortages.
3. Training and apprenticeship with relatively much smaller costs
4. Generate a demand for semi-skilled and unskilled labor whose supply is increasing.

Women in the Informal Sector

In some regions of the world, women dominate migrants from rural to urban areas
and may even make up the majority of the urban population. This change in the
composition of migration flows has important economic and demographic implications for
urban areas in developing countries.

Because these female-headed household members generally work in the informal

sector whose productivity is low and have a higher dependency burden, they tend to be
poorer and less malnourished, less likely to have formal education and often unreachable
by government services.

Even though the track record of women was amazing in the context of paying off
credit, their chances of getting credit remained limited. Most financial institutions extend
credit to the formal sector so that women generally cannot get loans, even if the loans are
very small. To get rid of women and their children from the pitiful poverty, it is necessary
to have an effort to integrate women into the mainstream of the economy. In order for
women to benefit from development programs, the policy plan to be implemented must
take into account the special conditions faced by women.

Migration and Development

As stated earlier, rural-urban migration has taken place dramatically, and urban
development has played an important role in economic development. The impact of
migration on the development process is actually far broader than the impact on the
increasingly severe open and veiled unemployment in urban areas.

We must realize that the imbalance between the large number of people who
migrate and limited employment is a symptom of underdevelopment and also contributes
to that underdevelopment. One simple but important step to emphasize the phenomenon
of migration is to realize that every economic and social policy that influences the
migration process directly or indirectly.

The most important type of migration from a long-term development perspective is

rural-urban migration. Rural-urban migration is the most important migration with the
potential benefits of development from the economic activities of large cities due to
economic agglomeration and a number of other factors.

Apart from differences in wages, age and education - migration is also partly due to
marriage; follow the family who emigrated; distance and relocation costs; famine, disease,
violence and other disasters; and the relative position or status in the community of origin,
where those with lower social status are more likely to migrate.

Economic Theory of Rural-Urban Migration

Theories that explain the paradoxical relationship between accelerating rural-

urban migration in the context of increasing unemployment in cities are known as the
Todaro migration model and its equilibrium form as the Harris Todaro model.

The Todaro migration model is a theory that explains rural-urban migration is a

rational economic process, apart from high unemployment in urban areas. Migrants
calculate (in present value) the expected income from working in the city (or its
equivalent) and migrate if the expected income by working in the city exceeds the
average income in the countryside.

The Harris Todaro model is an equilibrium version based on the Todaro migration
model, which predicts that the expected income is the result of a comparison between the
rural and urban sectors when taking into account informal sector activities and open
unemployment.

Rural-urban migration is not a process that takes into account the ratio between
wage rates in the city and in the village as expressed by the competitive model, but rather
calculates the ratio between the expected income in rural and urban areas. Expected
income in urban areas is indeed so high that migration will continue despite high
unemployment in cities.

The Todaro migration model has 4 basic characteristics, this are:

1. Migration is driven by rational economic considerations but also considers

psychological aspects.
2. The decision to migrate depends on the difference / difference between rural and
urban wages.
3. Employment in cities is inversely related to the level of rural disturbance
4. The high unemployment rate in urban areas is a result of unbalanced economic areas
in villages and urban areas that are correct.

5 Policy Implications

1. The imbalance of urban rural employment opportunities is caused by development

strategies that have an urban bias.
2. Procurement of employment in urban areas is not an adequate solution
3. The expansion of education that is done haphazardly only adds to unemployment
4. Wage subsidies and traditional pricing of rare factors can be counter-productive.
5. Integrated rural development programs must be encouraged

Comprehensive Strategy on migration and employment

1. Creating a balance between the rural economy and the urban economy
2. Expanding labor-intensive small-scale industries
3. Eliminating factor price distortion
4. Choose the appropriate labor-intensive production technology
5. Modifying the relationship between education and employment
6. Reducing the rate of population growth
7. Decentralize authority to the cities and surrounding areas

Human Capital: Education and Health

The Significance of Education and Health

Education and health are two basic things of development goals. Human resources
are an original inherent capital in humans, unlike external capital, so education and health
can be seen as vital components of growth and development, because it involves matters
that are inherent in human beings themselves.
In developing countries, the distribution of education and health is as important as
the distribution of income. For some people who are lucky, they will get health and
education that is quite high, while the poor do not get access to these two things.

Education and Health as a Joint Investment for Development

The greater the health capital, the greater the return on investment in education.
Because, the more healthy people are, the higher the presence of education will be, so
that it will increase investment in a growing field due to high participation in education.
 The greater educational capital can increase the return on investment in health.
Because education is synonymous with increasing expertise, so the higher investment in
education will cause workers to have more abilities, so that it will improve the level of
health that can increase investment in health.

Health and Education Improvement: Why Increasing Income alone Is Not Enough

The high income logically will be able to increase the level of education and health
in a person. But, there is a lot of evidence that proves that the increase in income is not
accompanied by improving the level of health or education, this is because a lot of
additional income is used for consumption other than nutritious food and education.
Therefore, education and health must be the main focus of development.

Next, health and education also have a close relationship. The higher the education
of a mother, the health of her child will be more guaranteed. Due to the high level of
education will cause a mother to get the latest information about nutrition and health of
her child.

After knowing the importance of the relationship between health, education, and
income, the government is also the main responsibility of the government. Because
income is not the most important thing, but health and education are also very important,
considering that not all people have access to both facilities.

Invest in Education and Health: The Human Capital Approach

Human capital includes education, health, and other human capacities which, if
increased, can increase productivity. An increase in these factors will make human capital
attached to him will be even higher. However, this increase does not necessarily mean
that it is profitable, but it can also bring trade-offs or human problems themselves.

In general, studying at a higher level will definitely sacrifice time. Though this time
can be used to make money directly. But, with increasing levels of education, it will
increase income levels as well, so people in this case have to choose, will use their time to
directly make money, or sacrifice their time to go to a higher level which will increase
future income. But in general, being patient to study higher will bring higher total profits.
Formally, the income gains obtained by someone can be written as follows:

Et = income with additional education

N = Income without additional education
t = year
i = discount rate

So it can be concluded that in general improving education at the expense of time

that can be used to get money, on average will be more profitable than directly working.

Child Labor

Child labor is a widespread problem throughout developing countries. If a child

under 15 years of age works, their school will be disrupted or not even go to school at all,
their health will be disrupted, and their physical growth will be hampered. The
International Labor Office, which is a UN body that plays an important role in the issue of
child labor, said that in 2008 there were 306 million children in the age range 5 to 17
years doing certain types of work and 215 million of them were classified as child laborers
because they were still are underage but doing work that can threaten their health, safety
or morals.

In the child labor model, we make two important assumptions. First, households
with a high income are not likely to get their children to work. Second, child workers and
adult workers substitute one another. In fact, children are not as productive as adults, and
adults can do whatever work children can do. The above statement is not an assumption,
but findings in many studies in various countries regarding the productivity of child labor.

So, what are effective ways to reduce the number of child workers? In this context,
there are dominant approaches taken in international policy. The four main approaches in
the formulation of development policies are:

 Recognizing that child labor is a reflection of poverty, thus recommending a

focus on poverty reduction efforts.
 Promote the application of strategies that can attract children to schools that
include expanding the procurement of new school units, and conditional cash
transfers so parents are encouraged to send their children to school.
 Sees that child labor is unavoidable, at least in the short term, and puts forward
ways to alleviate it, such as through arrangements that can prevent bullying
and providing support services for working children.
 Supports the prohibition of child labor, but if it cannot be done due to plural
equilibrium problems, this approach will be softened by only banning the worst
child labor activities. (most often associated with ILO).

Gender Gaps: Discrimination in Education and Health

Gender disparities in education often occur in many developing countries, because

young women receive less education than young men. Most people who are illiterate are
women. Very large gender disparities in education occur in the least developed countries
in Africa and also relatively large in India.

Efforts are made to reduce this gap, through increasing education for women
because it will increase productivity levels, result in greater labor force participation,
postponement of marriage, reduction in fertility rates, and improvement of health in child
intake.

Gender disparities in health often occur in developing countries, such as

discrimination in care for women. A number of studies states that bringing a boy to the
hospital will be easier than bringing a girl.

Education and Development System

The relationship between job opportunities and demand for education

 The level of education that someone will receive even though many are influenced
by many factors, but in rice lines is almost the same as the demand and supply in
the commodity and service markets.

The demand for education is derived demand (derived demand), namely the
individual's desire to obtain a higher income by receiving the highest education possible.

In terms of demand there are two principles that influence:

 Expectations for students who are educated to have jobs with high incomes and
benefit individually for students and their families (private benefits of education).
·
 Education costs that must be borne, both direct and indirect costs.

In terms of supply:
 The supply quantity of education is often influenced by political interests that have
nothing to do with education. In the end the level of supply of education is strongly
influenced by the ability of the government to provide facilities for education
because of the budgetary constraints the government has for education.

Four variables that influence the demand for education

  Difference or differentiation of wages and / or income between urban and rural
communities
 The probability or possibility of getting a job with educational facilities
 Direct costs borne by the individual or family
 Indirect costs or opportunity costs of education

Current conditions in developing countries make us assume that demand for

tertiary education will increase. This happens because workers with higher quality
education will be more sought after than those with less education. The demand for higher
education will continue to increase because employment opportunities with lower
education will be shifted by individuals with higher education.

Developing countries continue to expand education facilities to the extreme without

considering financial and social aspects. The existence of education certification or
diploma priority that makes it difficult for the poor to get a good education.

Social Benefits and Costs versus Individual Benefits and Costs

Social costs of education are costs that must be borne by the community as a whole
as a result of meeting the demand for education expansion and increasing along with the
high level of education. Individual education costs are costs that must be borne by
individuals or their families to obtain education and these costs will increase slowly or
even decrease.

Individual benefits and costs

Always increasing along with the increasingly high level of education. So, even
though the costs incurred by individuals are getting higher due to the high level of
education that is followed, it will still get greater benefits than the costs incurred.

Social benefits and costs

In the beginning (basic education) provided great social benefits because the
process taught basic skills such as reading, writing, counting, and other basic abilities.

The social cost curve will surpass its benefits when entering secondary and tertiary
education. The social cost curve will increase significantly due to the high costs incurred
for secondary and tertiary education. However, the condition that occurs is that the
community continues to be encouraged to receive the highest education possible without
considering the possibility of unemployment or scarce employment despite having a high
education degree. This is also supported by policies that are not appropriate by the
government.

The expansion of education also affects the economy in the aggregate;

1. The creation of a productive workforce because of having good knowledge and

skills.
2. Availability of employment opportunities for services and other commodities that
support the implementation of education
3. The creation of educated groups who have good knowledge to fill existing
vacancies, whether governmental, public, or private.
4. The availability of training and education programs that will encourage
development and modernization in every level of society.

Distribution of Education

Like the Lorenz curve, we can also model the Lorenz curve for the distribution of
education. Inequality in education tends to decrease when the average time to get an
education increases. The quality of education in countries with greater income tends to be
better compared to low-income countries. Research by Jere Behrman and Nancy Birdsall
shows that what determines productivity and income differences is the quality of
education (facilities, curriculum, and teaching staff) not just the quantity.

Education, Income Inequality, and Poverty.

Studies show that the education system in various developing countries sometimes
does not reduce inequality, but instead worsens inequality. Individual costs for basic
education for residents with low incomes are relatively more expensive compared to
residents with relatively higher incomes. Individual benefits for poor families are smaller
than the costs to be borne. With the opportunity cost, they will choose to employ their
children rather than send them to school. By utilizing their child labor, the family might get
more income and reduce the cost of sending their child to school. Higher education is filled
by individuals with high incomes. Though higher education is subsidized by the
government more. So, people with low incomes do not enjoy the subsidies that should be
enjoyed.

Education, Internal Migration, and Intellectual Drainage.

Education is one of the factors driving internal migration. The study states that
there is a positive correlation between the attainment of the educational level of the
individual and the magnitude of the tendency of people to migrate.

Migration is carried out is expected to improve welfare to seek wages or higher in

the city by offering education that has been carried out previously. However, what often
happens is that rural residents without education capital continue to try their luck in the
hope of getting a high salary or wage. while rivals already have higher education degrees,
this will certainly increase unemployment in urban areas and expand urban slums.
Professional individuals such as academics, technicians, scientists, and others who have
pursued higher education actually migrated abroad in the hope of finding a better job.
Though it should be able to build their own regions that may still be far from prosperous.
This is usually called intellectual exhaustion. Triggers from this intellectual drainage
usually occur because of poor facilities in their own country.

Health and Development System

Understanding health according to the World Health Organization (WHO) is a

condition of physical, mental, and social well-being, and not merely disease-free and
physical weakness.

Burden of disease

Developed countries more easily overcome the problem of disease than developing
countries. Developing countries have a greater burden to overcome the problem of
disease. One disease that is actually experienced is poverty. Poverty can make people
vulnerable to disease disorders. There are many diseases that can kill humans. Especially
if the disease is combined with other diseases, it can cause death. There are three major
diseases that haunt developing countries. The three diseases are AIDS, Malaria, and
parasitic worms.

AIDS: This disease is also a leading killer. AIDS threatens to stop or even reverse
the progress of economic and human development. In low-income countries the average
chance of survival is under one year.

Malaria causes 1 million deaths every year. Most of those who suffer from malaria
are children from poor African families. One way that can be taken is to use a vaccine. But
because malaria victims tend to be from low-income countries it is very difficult to buy
vaccines at high prices.
Parasitic worms and neglected tropical diseases. Many health challenges in
developing countries. One of them is from parasitic worms. The disease caused by
parasitic worms affects about 2 billion people and 300 million of them suffer severe.
 The benefits of expanding support for other health programs besides HIV / AIDS,
including nutrition for children and neglected tropical diseases, are very high. From this
high level of support comes a strong synergy. With a strong synergy, habits will be formed
to improve the quality of life.

Health, Productivity and Policy

Productivity: Healthy people will get higher wages. If someone is healthy then
their level of productivity can be perfect. Higher productivity allows them to get better
wages. Health and nutrition affect employment, productivity and wages.

Health system policies: Health systems are all activities whose main purpose is
to improve, restore and maintain health.

Five performance indicators to measure the health system:

1. Overall level of health of the population

2. Health inequality in population
3. Health system responses
4. Distribution of responses in the population
5. The level of distribution or fairness of the health system costs in the population.

The formal implementation of public health programs has played an important role
in developing countries. However, this policy often applies to rich and well-connected
people. Often also misused for the benefit of certain groups. If the health system policy
can run well and on target, economic development can run well in line with policies that
are right on target.

Rural Poverty and Agricultural Transformation

Agricultural Transformation and Rural Development

I. Significance of Agricultural Sector Progress and Rural Development

An economic development strategy that is based on agricultural and employment

priorities requires at least three basic complementary elements, namely:

1. Increasing output growth through a series of technological, institutional, and

price incentives specifically designed to increase the productivity of
smallholders;
2. Increased domestic demand for agricultural output resulting from urban
development strategies oriented to labor development efforts; and
3. Diversification of rural development activities that are labor intensive.

Without integrated rural development, industrial growth will not run smoothly and in
turn, all inequality will exacerbate the problem of poverty, income inequality and
unemployment.

II. Agricultural Sector Growth: Past and Present Challenges

The United Nations World Food Organization has repeatedly warned of catastrophic
food shortages. The main cause of the deteriorating performance of agriculture in third
world countries is the neglect of this very important sector in the formulation of
development priorities by the governments of developing countries themselves.

The first step that must be taken in order to better understand the things needed
for the success of agricultural and rural development is an effort to comprehensively
understand the nature or nature of the agricultural system in various regions of the very
diverse third world countries, especially regarding economic aspects that depend in the
process of transition from subsistence farming to commercial farming.

III. Structure of the Agrarian System in Developing Countries

Three Agricultural Systems

            The first step to understanding what is needed to promote growth and encourage
development in rural areas is to understand the problems of the agrarian system in
various developing countries and the economic aspects that underlie the shift in patterns
from subsistence agriculture, ie agricultural products only to meet their own needs, to
commercial agriculture. In 2008, agricultural economist from the World Bank named Alain
de Janvry and his colleagues made a World Development Report, one of which states that
besides the advancement of the agrarian system in developing countries, there are three
different situations behind it.

First, agriculture is still a major factor contributing to economic growth in agrarian

countries. This is indicated by the large influence of the agricultural sector on Gross
Domestic Income (GDP). The World Bank estimates that agriculture contributes 32% to
GDP growth on average in agrarian countries, where around 417 million inhabitants live.
More than two-thirds of the population lives in villages, such as the sub-desert population
of the Sahara, Africa, Laos and Senegal.

            Second, most of the world's rural population - around 2.2 billion - live in a country
that is transforming, with an indicator of the percentage of poor people in rural areas
being very high (around 80%) but the agricultural sector only plays a small role in GDP
growth (around 7%) . This happened to countries in Southeast Asia, North Africa, and the
Middle East, and Guatemala. Third, urban countries, where rural-urban migration has
reached a point where poor populations can be found in cities, and the agricultural sector
contributes a smaller contribution to output growth. This has happened in Latin American
and Caribbean countries, as well as in Eastern Europe and Central Asia with a rural
population of around 225 million.

            In addition, regional differences within a country also play an equally important
role. For example in India there are regions that have different backgrounds, for example
modern Punjab and Bihar which are still semi-feudal. Or in Indonesia, for example the Java
region which is very modern with strong agriculture and Kalimantan which is still not very
advanced.

Farmer-style farming in Latin America, Asia and Africa

            In most developing countries, historical factors play an important role in land
tenure for both small and large farmers. This is true in Latin America and some countries
in Asia. In Africa, historical factors and the availability of unused land produce different
patterns and structures of agriculture. Although farmers have struggled to defend their
lives and the behavior of poor farmers in Asia and Latin America, the agrarian system in
the country remains different from one another.

Agriculture patterns in Latin America: Progress and Challenges against Poverty

In Latin America, as in Asia and Africa, agrarian structures are not only part of the
production system but also the basis of economic, social and political organization in rural
life as a whole. Agrarian structures have existed in Latin America since the colonial period
and are still developing in some regions with a system of agricultural dualism called
latifundiominifundio. Latifundios is a large area of agricultural land ownership, and can
provide employment for more than 12 people, although some units a business can
accommodate employees up to thousands of workers. Minifundios is the smallest
agricultural business unit that can only accommodate one family (2 workers), with income
patterns, market access, and technology levels and certain amounts of capital that differ
according to each country or region.
 Areas with poor agricultural land conditions, with a high number of minorities, tend
to have high levels of poverty. Extreme inequality in rural areas also occurs. This is caused
by the difficulty of accessing credit for the poor and the power of the elite is very strong so
that facilities the state can be controlled only for them. Moreover, the urbanization of the
educated is still high, so that the population in the villages that still exist are only those
who are old, androgynous, and only the natives. These factors are still a problem in middle
income countries in Latin America and require treatment from the community and local
government.

Fragmentation and Subdivision of Farmers' Lands in Asia

The main problem in agriculture in Asia is the large number of people working on
very narrow land. As the 20th century progressed, rural conditions in the Asian region
worsened. Prof. Gunnar Myrdal identifies three interrelated elements and forms traditional
land ownership patterns, which are divided into:

1. European oppression.
2. Introduction of economic transactions that use money on a large scale as well as
increasing the power of money owners who act as loan sharks.
3. Asia's population growth rate is very fast.

Subsistence Agriculture and Aquaculture in Africa

As is the case in Asia and Latin America the pattern of subsistence farming on a
narrow plot of land is the daily way of life of most farming families in Africa. However, the
structure and organization of the economic system is very different. Most farmers in the
tropical regions of Africa still direct their agricultural products to subsistence life, except in
ex-colonial plantation areas. Because the main input variables in African agriculture are
rural families and labor, the agricultural system in Africa is dominated by three main
characteristics:

1. The importance of subsistence farming is still very important for rural

communities.
2. The existence or availability of a piece of land whose area exceeds enough to
meet basic needs that still allow the continuation of shifting farming patterns and
to make land not an instrument of economic and political power for the owner.
3. There is a right for every family to use the land and water in and around the area
of their hometown, and absolutely cannot be touched by other families even
though they come from one tribe.

Subsistence farming is a traditional African culture and has low productivity, this is
the result of a combination of historical factors that prevent output growth:

1. Although there is a lot of potential land that has not been touched, only a small
and certain area can be managed by a farming family using only traditional tools.
The use of animals as agricultural aids is also not possible due to interference
from natural factors, such as dry weather and infectious diseases, as well as
human factors that have not been able to manage these animals.

2. With a small agricultural management area and using traditional tools, this area
tends to be cultivated intensively. As a result, there is a diminishing return on the
increase in labor. Soil fertility will also run out along with the use of the land. Here,
farmers in Africa only use animal manure to restore their soil fertility and then the
land is planted again.

3. Labor is a scarce input during the busy season of planting and harvest. At the
same time, most of these workers do not have sufficient skills. Because in Africa
rain rarely occurs, demand for labor during the rainy season will grow very high,
exceeding all available labor supply.

IV. The Important Role of Women

 The main problem that occurs at this time, especially in Asia and Africa, is the role
of women in the agricultural sector. In some cases, women perform around 70 percent of
agricultural work, and in one case even almost 80 percent of all work. In general, what is
done is manual labor using equipment that is too simple or even primitive and requires a
lot of time, just to meet the subsistence needs of the family, such as pulling weeds,
planting seeds, and harvesting crops for immediate consumption. men or husbands trying
to find odd jobs on plantations or in cities. During this time women have made a large and
important contribution to the agricultural economy, especially in the food crop sector
which is fast making money.

In various regions in developing countries, women's efforts for hours every day in
producing commercial plant products still do not get rewards or wages. While the source
of income from commercial agricultural production increases, women's control over
economic resources is precisely This is due to the fact that most household resources,
such as land and other inputs are diverted from the cultivation of garden crops to
commercial agricultural production.

Development programs carried out by developing country governments have so far

only focused on men, so that inequality in access to various economic resources between
men and women is increasingly greater. Therefore, women's contribution to family income
has naturally declined.

Government-sponsored programs have not given adequate attention to women. In

many developing countries, a woman can only make a contract or economic transaction if
accompanied by the husband's signature. Very few women are involved in training and
education programs organized by the government. Various cultural and social constraints
still hamper women's integration into agricultural development programs in many
developing countries. In general, women's involvement in various development projects
and welfare improvement programs are still very limited; so it is not surprising that many
of the projects or programs themselves fail to achieve their goals. It is no less important
that all kinds of women's businesses are still deemed unnecessary in return or reward,
even though men's sweat drops are rewarded.

The importance of the economic roles and functions of women is evidenced by the
very impressive success of development programs that involve their full participation. In
connection with the importance of the role of women in increasing the prosperity of
agricultural communities, any development program or project must involve them so that
women also receive benefits and opportunities equal to those received by men.

V. Microeconomics of Farmer Behavior and Agricultural Development

 Transition of Farmer's Own Livelihood to a Specialized Commercial Farmer

There are three general stages in the evolution of agricultural production. The first
stage is pure, low-productivity, most farmers who support themselves (subsistence), this is
still commonly done in Africa. The second stage is called diverse or mixed family
agriculture where a small portion of production is used as self-consumption and some is
sold to the commercial sector. The third stage represents modern farmers, who are
exclusively involved in the high-productivity of agricultural specialization in the
commercial market.

 Subsistence Agriculture: Risk Reluctance, Uncertainty, and Survival

In classical subsistence agriculture, most output is produced for family consumption

purposes. Output and productivity are low, and use simple farming tools. Capital used for
minimal investment; land and labor are the main factors of production. Underemployed
labor is most of the year and only works during the harvest season.

The traditional theory of two neoclassical factors provides some insight into the
agricultural subsistence economy, where land is fixed in number, labor is the only input
variable, and maximizes profit. But unfortunately, this theory does not explain why small
farmers often oppose technological innovations that can help in agriculture and the
introduction of new seeds. According to the theory, in general people will tend to use
production methods that increase output with given costs or minimize costs with a certain
level of output, but this theory is based on the assumption that farmers have a "perfect
understanding". Therefore, this theory fails to be applied to the subsistence agricultural
environment. Moreover, if access to information is imperfect, the costs that must be paid
to obtain information will be more expensive.

Subsistence agriculture can then be said to be a business that has a high risk and
uncertainty. In areas where agriculture is very small and harvests are highly dependent on
rainfall, the average output will be low, and in bad years, farmers will be in danger of
starvation. In these circumstances, farmers will think more about survival compared to the
benefits obtained. Thus farmers will be reluctant to leave the traditional technology that
they use and replace it with new ones because even though the benefits obtained may be
high, the risks imposed will be higher as well.

Economy of Revenue Sharing and Interrelated Market Factors

Revenue sharing occurs when farmers use other people's land (landowners) instead
of a portion of the food output. The share of landowners can vary depending on the
availability of local labor and other inputs. Alfred Marshall observes that the production
sharing system will cause inefficiency because when farmers are only paid a portion of
their marginal yield, rationally, the efforts made will decrease. This view was then
challenged by Steven Cheung with his theory called the monitoring approach, which
according to Steven Cheung, profit-maximizing landowners would issue contracts that
required adequate effort and determination of output distribution. If the land owner's work
is not comparable with the results obtained, then he will be replaced with another owner
who is willing to work hard.

Screening hypothesis is the view that people with higher ability will tend to prefer
pure rental agreements, because then farmers who have high ability (high-ability farmer)
will get the full value of their marginal products.

However, Radwan Ali Shaban identified farmers who harvest from their own land
with farmers who use the production sharing contract system. He found that farmers with
production sharing contracts would use less input and would produce less output
compared to those who used their own land.

The final approach suggests that revenue sharing is relatively effective. If the
landlord pays the tenant fairly, and it will be efficient if the tenant gives his best effort.

Interrelated market factors are circumstances where the supply function is

interdependent, usually caused by a variety of different inputs provided by the same
supplier.

 Transition to Diversified Farming

Mixed farming illustrates logically the transition phase from subsistence farming
towards agriculture with specialized production because in small farmers, exclusive
dependence on a particular crop can be more dangerous than pure subsistence, because
the risk of price fluctuations is also entered into natural uncertainty. At this stage, the
main crop yields no longer dominates agricultural output.

The success or failure of the business depends not only on the ability and skills of
farmers in increasing their productivity but also on the social, commercial and institutional
conditions.

 From Diversity to Specialization: Modern Commercial Agriculture

Specialized agriculture is the last and most advanced stage of individual ownership
in a mixed market economy. In specialized agriculture, the availability of food for families
and market surpluses is no longer the primary goal, but rather a pure economic benefit. In
short, all production for the market.

VI. Basic Needs of Agricultural Strategy and Village Development

Improving Small Scale Agriculture

 In most developing countries, technology and innovation are prerequisites for
continuous improvement in output and productivity levels.
 Institutional policies and price fixing to create economic incentives
 Adapting to new opportunities and obstacles

Village Development Conditions

There are three conclusions regarding the realization of people-oriented agricultural

and rural development strategies, namely:
 Land renewal
 Supporting policies
 Integrated development objectivity

Natural Resources and Environment for Sustainable Growth

The basic issues

1.  The world's population depends on the environment directly.

2.  Poverty and a decrease in environmental conditions can result in people ignoring the
environment, using it carelessly. And ends with lack.
3.  This has a major impact on developing countries because of the costs of revitalization,
high health and reduced productivity of these resources.
4.  The biggest contributor to damage is developed countries with their production
activities, but conversely, a large impact will attack developing countries.
5.  Unfortunately, the costs incurred by this environment from the beginning are not
calculated in GNI.

Sustainable Development and Environmental Accounting Needs

1.  Sustainability in principle is to meet the needs of the present by not sacrificing the
needs of the future.
2.  Natural wealth and other forms of capital can substitute only to a certain extent
(limited). After reaching a certain level, these capitals become complementary to each
other.
3.  Growth and quality of life in the future depend on the quality of the
environment. Therefore, the government implements "environmental accounting" in its
policies.

Population, Resources and the Environment

1.  In many poor countries, increasing population density contributes to the degradation of
resources which in fact is needed by the population to survive.
2.  In order to meet the growing needs in developing countries, the destruction of nature
must be stopped and resources that have productivity available are maximized to be
more beneficial for the people of that country.

Poverty and the environment

1.  Poor people are the main victims of environmental degradation. They usually live on
land that is no longer habitable (for example polluted places) because it is cheaper and
because they do not have the political power to stop pollution in their homes, the poor
cannot escape the poverty trap they experience.
2.  For environmental regulations to be successfully implemented in developing countries,
the policy must primarily focus on issues concerning land unavailability, poverty and
difficult access to institutional resources.

Growth vs. Environment

1.   Many believe that as per capita income rises, pollution and other forms of
environmental degradation will first increase, then decrease in the form of the letter U,
this opinion is known as the Environmental Kuznets Curve.
2.  According to the opinion above, along with increasing per capita income, people will
increasingly have the awareness and willingness to pay for environmental protection.
3.  Many countries implement a " Green Growth" policy that involves the use of low
emissions of gas in production activities in their countries.
Urban Development and the Environment

 Research shows that urban environments deteriorate faster than urban population
growth, with marginal cost increases for the New York environment increasing over time.

Global Environment and Economy

1.   By using resources more efficiently, some environmental changes can be profitable,
and others can only cost a small amount.
2.  Funding efforts to improve the environment should be like budgeting for other social
programs such as education, health facilities and employment, because its
implementation is very important for environmental preservation, both local and global.
3.  It is still a matter of global debate how the costs of preservation of this environment
should be divided.

Natural Resources as a Way Out of Poverty

1.  More than half of the population in developing countries that are economically active
depends on agriculture, hunting, animal husbandry, fisheries and forestry.
2. In many countries, the poor lose their access to natural resources owned by their
countries, due to privatization or management of corrupt resources.
3.  One solution offered is " pro-poor governance", namely empowering the poor   and
affirming the rights of the poor.

Village and Environmental Development

1.  Economic needs often force small farmers to use resources in ways that can cause
them to meet current needs, but reduce the productivity of resources for the future.
2.  Factors in the poverty cycle of rural areas and natural damage are ongoing poverty
and deforestation.
3.  Environmental degradation starting at a local scale can quickly spread and become a
regional problem.
4.  Natural disasters caused by environmental degradation can greatly impact the
agricultural economy both on a local and regional scale.

 Global Warming and Climate Change: Scope, Mitigation, and Adaptation

1.   Reach of Problems
a.  The Intergovernmental Panel on Climate Change (IPCC) announced that the impact
of environmental change is most felt in poor and developing countries.
b.  The consequences obtained are heat waves, heat waves, floods originating from
heavy rain, drought, loss of various types of animals, loss of agriculture and fisheries.
c.  Country Coverage:
 Africa à Water shortages by 2020, coral damage.
 Asia à angina Tipon. Melting glaciers and rising sea levels cause flooding in the
rainy season. In the drought season, water drought will occur resulting in a shortage
of clean water and decreased agricultural productivity.
 South America à land degradation and animal and plant diversity.
 d.  Environmental damage will affect the whole world, but the poorest country because
it depends directly on natural products, especially agriculture.

2.   Mitigation

a.  Strategies to reduce the impact of environmental destruction have been carried

out. One of them is an effort to reduce carbon gas through using more efficient
production technology and regulation.
b.  The disposal of carbon gases results in the greenhouse effect. The greenhouse effect
will be felt by people around the world.
c.  Global warming is not a problem of one of the world alone, but all of them. Not only
developing countries, but developed countries as the biggest contributors to
emissions are trying to reduce their emission levels.
d.  Various agreements and conferences were held to make these agreements among
various countries.

3.   Adaptation

a.  Significant environmental changes cannot be stopped anymore, developing countries

in particular are required to adapt the principle of environmentally friendly for
profitable growth.
b.  The UNDP identifies that adaptation is "a process by which strategies to moderate,
cope with and take advantage of the consequences of climatic events are enhanced,
developed and implemented."
c.  Adaptation has two things:
 Planned through regulations and policies.
 Autonomy through household, agricultural, and corporate behavior.

Economic Models and Environmental Issues

1.   Personal ownership resources

a.  Market failure can lead to inefficiency
b.  This happens because of the inability of a market economy to function
efficiently due to:
 Failure of competition
 The existence of public goods
 Externalities
 Incomplete information
 Common goods
c.  Total Benefit is the total of all net profits of consumers. This will be
maximum if the marginal cost is the same as the marginal benefit.
d.  Consumer surplus, producer surplus - the ability to buy and sell both
consumers and producers exceeds prices set in the market.
e.  Scarcity Rent: If the number of goods is limited, the owner of the
production factor can allocate the use now and in the future. The income
received by raising the relative price compared to the normal price due to
the limited quantity and sacrifice to delay the consumption of the goods.
f.  This can be done because of the existence of property rights, recognition
to use and utilize tangible and intangible objects.
g.  Achieved with 4 conditions:
 Universality
 Exclusivity
 Transferability
 Enforceability

2.  General ownership resources

a.  Public ownership is publicly owned and freely available to all

b.  Neoclassical theory suggests that in the absence of scarcity rents,
inefficiencies will arise.
 c.  An example is the case of agricultural land which is public ownership. The
company, to increase its profit, will hire workers when the marginal
product of the worker is the same as the salary. However, if the number of
workers continues to increase, the land will not be able to provide the
same productivity and even output which tends to decrease.

3.  Public goods and Bads

a.  Externalities are benefits and costs borne by 3rd parties.
b.  Internalization is the process of inserting costs and costs into the parties
involved in the economic process.
c.  Public goods problem # 1: Free Rider

Urban Development and Environment

1.  Environmental problems and urban slums

a.   Characteristics: Families work long hours, income is uncertain, and
difficult trade-offs must be made between expenditures on nutrition,
medical care, and education.
b.   Typical urban slum:
                                    i.   Air pollution
                                   ii.   Children safety is not guaranteed by playing freely on the road
and in an environment that is not conducive.

2.  Industrialization and urban air pollution

a.   According to the World Bank, pollution levels for the worst quartile of
high-income cities are better than for the best quartile of low-income
cities.  Indeed, at higher incomes, it is easier to afford expensive clean
technologies.
b.  This results in social costs to the community, to internalize the tax held.
3.  Problems of congestion, clean water and sanitation.

Local and Global Costs Due to Rainforest Destruction

Changes in land use patterns in developing countries currently produce the largest
contribution in the global concentration of greenhouse   gases. It is estimated that
deforestation alone contributes to 20% of carbon dioxide emissions worldwide. In addition,
faster extinctions threaten biodiversity, with around 12% of the world’s bird species, 24%
of mammal species, and 30% of the world's fish species in vulnerable or endangered
stages, most of which live in rain forests.

Of the majority of tropical rain forests that have been destroyed, around 60% of the
area is used for agriculture by small farmers. In the past, rainforest settlement programs
were regularly encouraged and funded by governments in several developing countries,
often with assistance from international development banks, which cost a lot of
money   and caused natural damage. It is believed that reducing the   rate of
concentration of greenhouse gases and protecting biodiversity will benefit everyone. Thus,
preservation of the rainforest is a public good.

Long-term solutions include increasing accessibility of alternative fuels, managing

sustainable logging schemes, and providing economic opportunities for   the poor who are
now dependent on encroachment on fragile forest areas. Developing countries can
increase the efficient use of their rainforest economy by managing it and by developing
alternative markets for other rainforest products. Most of the wood that is burned to clear
cultivation land can be harvested for additional income.

The international community must also help with this conservation effort. By
reducing trade barriers to alternative goods that reduce environmental damage,
developed countries reduce developing countries' dependence on unsustainable
production methods. Funds for the preservation and maintenance of tropical forests are
needed to ensure the success of conservation programs that provide global public goods.
 Expansion of forest use and deforestation is a strange target for industrial policy,
from a fiscal point of view, this provides a rational economic reason to eliminate subsidies
and tax breaks to do so.

Policy Options for Developed and Developing Countries

What can be done by developing countries?

 Appropriate pricing of resources

Government pricing policies, including subsidies, that can worsen resource scarcity
or encourage unsustainable production methods. Often government programs that are
actually designed to reduce the lives of the poorest people have little impact on poverty
and actually exacerbate existing inequality. High-income households are the dominant
beneficiaries of energy, water and agricultural subsidies that are environmentally
destructive. Although eliminating improper subsidies is a relatively cost-effective way to
protect the environment, this effort carries a high political risk when the ruling elite will
lose valuable government transfers.

 Community involvement

Programs to improve environmental conditions are likely to be very effective when

run together with community networks, ensuring program design is consistent with local
and national goals. The experience of a number of development agencies shows that
grassroots efforts are more cost effective because they usually use low-cost alternatives
and provide jobs for local residents.

 Clearer rights and ownership of resources

Investments in household sanitation and water facilities as well as improvements to

agricultural land often represent a lifetime of savings for the poor, where the loss of such
investment can have adverse economic consequences for households. Therefore, lack of
guarantees of ownership of rural or urban property can hamper investment in
environmental improvement. Legalizing ownership can improve living conditions for the
poor and increase agricultural investment.

 Programs to improve economic alternatives for the poor

Government programs need to make agricultural credit and inputs that add value to
land accessible to small farmers. By providing rural economic opportunities outside the
home, the government can also create alternative employment opportunities so that those
who are very poor do not need to work on marginal land.

 Improvement of women's economic status

Improving educational opportunities for women and increasing their economic

alternative choices will increase the opportunity cost of women's time and may cause a
decrease in the desired family size. Better education also tends to increase women's
access to information about nutrition and children's health.

 Industrial emissions reduction policies

A number of policy options are available for developing country governments with
the aim of reducing pollution, including emission taxes, tradable emission permits, quotas,
and standards. The first two policies are more effective, because they tend to provide
rewards for producers who are more efficient, and easier to enforce. But it is precisely the
government-run industry that is the most difficult to regulate.

 Take a proactive attitude towards climate change and environmental

destruction
 Developing countries can implement and continuously improve   early warning
systems to anticipate environmental emergencies, encourage reforestation, restore
natural barrier ecosystems, enhance micro insurance programs, and build storm shelters,
flood barriers, and protect roads and bridges.

What can be done by developed countries to help developing countries?

 Trade policy

Removing trade barriers to developing country exports by stimulating   economic

growth in developing countries, and encouraging rural development in order to
significantly reduce absolute poverty.

 Providing debt relief

Large debt payers have drastically drained the funds available to developing
countries' domestic social programs, including programs designed to alleviate poverty and
reduce   environmental damage. Debt relief can be used to achieve sustainable
development. And through a debt swap program for nature, namely the exchange of
foreign debt held by an organization with a larger amount of domestic debt, which is used
to finance the preservation of natural or environmental resources in the debtor country.

 Development assistance 

Substantial new development is needed in developing countries to achieve

sustainable development. This investment will be used for various poverty alleviation
programs, providing services, and encouraging sustainable production patterns.

What can be done by developed countries for the global environment?

Most of the consumption in developed countries is only a waste. Responsible

consumption   by developed countries will not only set a good example, but also
ecologically is a must.

 Emission control

By proving their real commitment in creating a cleaner environment. Because they

are still the main polluters of the sea and the air, the developed countries must take the
lead in changing the patterns of global production in the present and the future.

 Research and development

Increasing public support for tighter environmental regulations in developed

countries will result in the development of cheaper emission reduction technologies and
cleaner production processes. At present, many clean technologies are still too expensive
for developing country industries. Therefore, it is very unrealistic to expect low-income
countries to reach the applicable standards in high-income countries. Making emissions
technologies cleaner and more affordable for developing countries can help limit the main
sources of global emissions.

 Import restrictions

Through imports of products that are often associated with production processes
that are not environmentally friendly, developed countries have created indirect, but
enormous negative impacts on the global environment. It is also important to ensure that
the restrictions imposed by the government or society are not disguised protectionism
against developing countries and to ensure that the poor are given the opportunity to
maintain their livelihoods through environmental wealth in a sustainable and equitable
way. 
Market, State and Civil Society Roles in Development
Policymaking
Questions for balance

National government plays an important role in the success of developing countries

in East Asia. National governments in Africa, Latin America, the Caribbean, and other
transition countries are more likely to hinder rather than assist and restrain than facilitate
development and growth. This chapter will explain the balance of relations between
countries and markets in the development process as well as the rules and limits of
planning and development policy making as a practice by developing countries.

Development Planning: Concepts and rationale

Mystical national planning is widely believed to be an important or even the only

institutional and organizational mechanism for dealing with major development obstacles
and resilience to high levels of economic growth. The development policy framework can
play an important role in accelerating economic growth, reducing poverty, and achieving
human developing goals.

The nature of development planning

- Economic planning: a deliberate and conscious effort by the state to formulate a decision
on how factors of production should be allocated between different uses or industries, thus
determining how many goods and services should be produced in one or more periods

- Economic plan: document a written statement containing government policy decisions on

resources that must be allocated to various uses so as to achieve the targeted level of
economic growth and other objectives over a specified period.

- Comprehensive plan: an economic plan that sets targets to cover all major sectors of the
national economy.

- Partial plan: a plan that only covers a sector in the economy. Example: agriculture.

- Planning process: procedures for describing and implementing economic plans.

Most development plans have been formulated and carried out within the framework of
the mixed economies of the developing world. A mixed economic system has the
characteristics that some resources can be owned and operated privately and partly
owned and operated by the government. The rationale for development planning - market
failures, resource allocation and mobilization, manners and psychological influence,
foreign aid.

Development planning process: some basic models

Three stages of planning:

1. Aggregate growth model

An economic model that describes economic growth in one or several sectors uses a
limit number variable. For planning purposes, the Harrod-Domar model has been typically
formulated along the following lines. We start with the assumption that the ratio of total
output to reproducible capital is constant so that

K ( t ) =cY (t )

K (t): capital stock at time t

Y (t): total output (GDP) at time t
c : the average and marginal capital-output ratio
 We assume next that a constant share (s) of output (Y) is always saved (S) so that:

I ( t )=K ( t=1 )−K ( t )+ δK ( t )=sY =S (t)

I (t): investment at time t

s: the savings rate
S : national savings
δ: the depreciation rate

If g is the targeted rate of output growth, then:

Y ( t+1 ) −Y (t) ∆ Y (t )
g= =
Y (t) Y (t)

then capital must be growing at the same rate because from first equation we know
that:

∆ K c ∆Y
= =¿ ¿
K K

Using second equation above, we therefore arrive once again at the basic Harrod-
Domar
growth formula (with the capital depreciation parameter):

sY −δK s
g= = −δ
K c

Finally, because output growth can also be expressed as the sum of labor force
growth (n) and the rate of growth of labor productivity (p), the previous equation can be
rewritten
for planning purposes as:

s
n+ p= −δ
c

n: the labor force growth rate

p: the growth rate of labor productivity

Development policymaking does not take productivity as exogenous but is actively

focused on raising it. Thus, expected rate of labor force and productivity growth (labor
force growth can be calculated from readily available demographic information, and
productivity growth estimates are usually based either on extrapolations of past trends or
on an assumed constant rate of increase), the above equation can then be used to
estimate whether domestic savings will be sufficient to provide an adequate number of
new employment opportunities to a growing labor force. One way of doing this is
to disaggregate the overall savings function (S = sY) into at least two component sources
of saving, normally, the propensity to save out of wage income, W, and profit income, π.
Thus, we define
W + π =Y

Where W and are wage and profit incomes.

s π π + s w W =I

Where s sand sW are the marginal proportions to save from wage income and profit.
We arrive at a modified Harrod-Domar growth equation
 c ( g +δ )=( s π−s w ) ( Yπ )+s W

which can then serve as a formula for ascertaining the adequacy of current saving out of
profit and wage income. For example, if a 4% growth rate is desired and if δ = 0.03, c =
3.0, and π>Y = 0.5, the above equation reduces to 0.42 = sπ + sW. If savings out of
capital income amount to 25%, wage earners must save at a 17% rate to achieve the
targeted rate of growth. In the absence of such a savings rate out of labor income, the
government could pursue a variety of policies to raise domestic saving or seek foreign
assistance.

2. Multi-sector models and sectoral projections

Input-output model i (industrial model): a model that divides economy into sectors
and tracks the interindustry flow of purchases (inputs) and sales (outputs).

Input-output analysis is usually expanded into two ways. The first is by entering
data on payment factors, sources of household income, and patterns of consumption of
household goods through social groups (such as urban and rural households), a social
accounting matrix (SAM) is created. A SAM therefore provides a broad and detailed
quantitative description of interrelationship in an economy as they exist at a point in time,
making it suitable as a tool for evaluating the impact of alternative development policies.
SAM often goes on to explain in more detail with computable general equilibrium (CGE)
models, which assumes that households maximize utilities and companies maximize
profits.

3. Project appraisal and social cost-benefit analysis

Project appraisal: quantitative analysis of the desirability relationship (profit) from

investing a given sum of private or public funds in alternative projects.

Methodology:

Cost-benefit analysis: a tool of economic analysis in which the actual and potential
private and social costs of various economic decisions are considered with the actual and
potential private and social benefits.

Social benefits are the difference between social benefits and social costs, both
directly and indirectly.

Calculate social benefits:

1. Specify the objective function to be maximized — ordinarily, net social benefits — with
some measure of how different benefits
2. To arrive at calculations of net social benefits, we need social measures of the unit
values of all project inputs and outputs. Such social measures are often called
accounting prices or shadow prices of inputs and outputs to distinguish them from
actual market prices. The greater the divergence between shadow and market prices,
the greater the need for social cost-benefit analysis in arriving at public investment
decision rules.
3. Finally, we need some decision criterion to reduce the stream of projected social
benefits and cost flows to an index, the value of which can then be used to select or
reject a project or rank it relative to alternative projects.

Setting objectives

Given the difficulty of attaching numerical values to such objectives as national

cohesion, self-reliance, political stability, modernization, and quality of life, economic
planners typically measure the social worth of a project in terms of the degree to which it
contributes to the net flow of future goods and services in the economy—that is, by its
impact on future levels of consumption.
Computing Shadow Prices and Social Discount Rates

The core of social cost-benefit analysis is the calculation or estimation of the prices
to be used in determining the true value of benefits and the real magnitude of costs. Five
such reasons, in particular, are often cited.

1. Inflation and currency overvaluation. Many developing countries are still

beset by inflation and varying degrees of price controls. Controlled prices do not
typically reflect the real opportunity cost to society of producing these goods and
services. With inflation and unaltered foreign exchange rates, the domestic
currency becomes overvalued. Exchange rate is the rate at which the domestic
currency may be converted into (sold for) a foreign currency such as the U.S.
dollar.

2. Wage rates, capital costs, and unemployment. Almost all developing

countries exhibit factor price distortions resulting in modern-sector wage rates
exceeding the social opportunity cost (or shadow price) of labor and interest
rates understating the social opportunity cost of capital. This leads to widespread
unemployment and underemployment and the excessive capital intensity of
industrial production technologies. If governments were to use unadjusted
market prices for labor and capital in calculating the costs of alternative public
investment projects, they would underestimate the real costs of capital-intensive
projects and tend to promote these at the expense of the socially less costly
labor-intensive projects that would be more favorable to the poor.

3. Tariffs, quotas, subsidies, and import substitution. The existence of high

tariffs, in combination with import quotas and overvalued exchange rates,
discriminates against the agricultural export sector and favors the import
substituting manufacturing sector. It also encourages socially wasteful rent
seeking on the part of competing exporters and importers. They vie with each
other (often through bribes and threats as well as direct lobbying efforts) to
capture the extra profits that can accrue to traders with import licenses, export
subsidies, tariff protection, and industrial preferences. Rent seeking refers to
efforts by individuals and businesses to capture the economic rent arising from
price distortions and physical controls caused by excessive government
intervention, such as licenses, quotas, interest rate ceilings, and exchange
control.

4. Savings deficiency. Given the substantial pressures for providing higher

immediate consumption levels to the masses of poor people, the level and rate of
domestic savings in most developing countries is often thought to be suboptimal.
According to this argument, governments should use a discount rate that is lower
than the market rate of interest in order to promote projects that have a longer
payoff period and generate a higher stream of investible surpluses in the future.

5. The social rate of discount. In our discussion of the shadow price of savings,
we mentioned the need for governments to choose appropriate discount rates in
calculating the worth of project benefits and costs that occur over time. Social
rate of discount is the rate at which a society discounts potential future social
benefits to find out whether such benefits are worth their present social cost. The
social rate of discount (also sometimes referred to as social time preference) is
essentially a price of time—the rate used to calculate the net present value of a
time stream of project benefits and costs, where the net present value (NPV) is
calculated as

Bt −C t
NPV =∑ ¿
t
¿¿
where Bt is the expected benefit of the project at time t,
C t is the expected cost both evaluated using shadow prices), and
r is the government’s social rate of discount.
 Net Present Value (NPV) is the value of a future stream of net benefits
discounted to the present by means of an appropriate discount (interest)
rate.

Choosing projects: some decision criteria

Normally, economists advocate using the NPV rule in choosing investment projects;
that is, projects should be accepted or rejected according to whether their NPV is positive
or negative. As noted, however, NPV calculations are very sensitive to the choice of a
social discount rate. An alternative approach is to calculate the discount rate that gives
the project an NPV of zero; compare this internal rate of return with either a
predetermined social discount rate or, with less justification, an estimate of either the
marginal product of capital in the economy or the market rate of interest; and choose
projects whose internal rates exceed the predetermined or market rate. This approach is
widely used in evaluating educational investments.

Internal rate of return is the discount rate that causes a project to have a net
present value of zero, used to rank projects in comparison with market rates of interest.

Conclusions: planning models and plan consistency

The process of formulating a comprehensive, detailed development plan is

obviously a more complicated process than that described by our three-stage approach. It
involves a constant dialogue and feedback mechanism between national leaders who set
priorities and planners, statisticians, research workers, and departmental or ministry
officials. Internal rivalries and conflicting objectives (not to mention political pressure from
powerful vested-interest groups) are always to be reckoned with.

Market over planning: Government Failure and Preferences

Problems of Plan Implementation and Plan Failure

The results of development planning have generally been disappointing. The broad
rejection of comprehensive development planning based on poor performance has had a
number of practical results, the most important of which is adoption in most developing
countries from more market-oriented economic systems. To take a particular case about
the arguments of market failure and the alleged role of government in reconciling the
difference between assessing the private and social benefits of benefits and costs, the
experience of government policy in many developing countries has been one that often
exacerbates rather than reconciles the deviation of government failure rather than this
market failure. . For example, public policy has raised wage rates above labor ' s shadow
price or the value of scarcity by various instruments such as minimum wage laws, binding
wages for the level of education, and the level of remuneration structuring at a higher
level on the basis of the international salary scale. Plans are often too ambitious. They try
to achieve too many goals at once without consideration that some goals will compete or
even conflict. They are often grandiose in design but are vague about specific policies to
achieve their stated goals. The economic value of the development plan depends to a
large extent on the quality and reliability of the statistical data that is based. Because
most developing countries have an open economy dependent on changes in international
trade, aid, "heat" speculative capital inflows and foreign private investment, it becomes
very difficult for them to be involved in even short term forecasting, let alone long-term
plans. The institutional weaknesses of the planning process in most developing countries
include the separation of planning bodies from day to day decisions to make government
machinery; the failure of planners, administrators, and political leaders to engage in
ongoing dialogue and internal communication about goals and strategies
 The market includes many positive things, at least those that provide the goods
consumers want, where and when they want, and provide incentives for innovation.
Deception, corruption, monopoly, and other market failures do not disappear with a wave
of neoclassical wands. Nathan Keyfitz and Robert Dorfman have identified 14 institutional
and cultural requirements for effective private market operations. Given the existence of
these institutional and cultural preconditions, a functioning market system requires at
least 11 markets that facilitate legal and economic practices. It is clear that market reform
involves more than just eliminating price distortions, privatization of public companies,
and declaring a free market. For most of the 1980s and until the 1990s, called the
Washington Consensus on development policy holding power. This consensus, packaged
by John Williamson, reflects a free market approach to development followed in the
following years by the IMF, World Bank, and US Government Agencies. The Washington
consensus also focuses on a free market approach, even in areas where market failure is
prevalent, such as the financial sector. In recent years, major changes in the world view of
the Washington Consensus have occurred in Washington and elsewhere. even in areas
where market failure is prevalent, such as the financial sector. In recent years, major
changes in the world view of the Washington Consensus have occurred in Washington and
elsewhere. even in areas where market failure is prevalent, such as the financial sector. In
recent years, major changes in the world view of the Washington Consensus have
occurred in Washington and elsewhere.

Development of Political Economy: Theories of Policy Formulation and Reform

Until now, there are 2 extreme views that dominate the discussion about the role of
government in development economics:

1. Effective governance is not only concerned with facing market failures but, it may also
achieve economic development.
2. People in government (politicians and bureaucrats) act selfishly and selfishly like
company owners, but the shortcomings in the market cannot hold them.

Understanding voter patterns in policy improvement

If voters are risk-averse, they might reject the policy if they see that they will incur
risks to all who are harmed as a result of the policy. If voters are risk-neutral, they might
choose policies that do not benefit the majority. If a minority knows that the policy will
benefit him then they will vote for the policy. Policy improvements usually occur after a
crisis.

Institution: formal and informal regulations in the economic game

Path dependency: conditions where the past conditions of individuals or the economy
affect future conditions.

Democracy vs. Autocracy: which facilitates acceleration of growth?

Democracy is a system of government whose highest power is in the hands of the

people while the autocracy of its highest power is in the hands of one person (dictator).
Development policies in democracies are more short-term because there is a period of
elections while autocracy is longer so that they can be sustained. But dictators can use
state power to limit individual incomes. According to Amartya Sen, market freedom and
politics are valuable for the results of development for personal rights and also
complement economic development. However, democracy is good for broader
development goals such as equity, education, health, and hunger prevention.

Development Roles of NGOs and The Broader Citizen Sector

Development success depends not only on the high enthusiasm of the private
sector and the efficiency of the public sector, but also the citizen sector. Non Government
Organizations (NGOs) are non-profit organizations that are often involved in providing
financial and technical assistance in developing countries.

Seven comparative advantages of NGOs:

1. Innovation
2. Program Flexibility
3. Specialized technical knowledge
4. Targeted local public goods
5. Common-property resource management design and implementation
6. Trust and credibility
7. Representation and advocacy

But NGOs can also cause Voluntary failure, which is the inability of NGOs and
citizens in general to efficiently achieve social goals in their areas that are expected to
have a comparative advantage.

Trends in Government and Remedies

1. Overcoming the problem of corruption

2. Decentralization
3. Post-participatory development

PART III. MacroEconomics and International

Development: Issues and Policies
International Trade Theory & Development Strategy
Balance of Payment, Debts, Financial Crises and Stabilization
Policies
Foreign Finance, Investment, Aid and Conflict: Controversies
and Opportunities
Financial and Fiscal Policy for Development