The Sen capability approach is a moral framework.

It What people do or can do with the commodities of given

proposes that social arrangements should be evaluated characteristics that they come to possess or control
primarily according to the extent of freedom people have to
promote as well as achieving functions they value. Amartya Sen identifies five sources of disparity between (measured)
Sen’s capability theory approach is a theoretical framework real incomes and actual advantages:
that involves two core normative claims. first, personal heterogeneities, such as those connected with
disability, illness, age, or gender; second, environmental
First, the assumption that freedom to achieve well-being is diversities, such as heating and clothing requirements in the
of primary moral importance. cold, infectious diseases in the tropics, or the impact of
And second, that freedom to achieve well-being must be pollution; third, variations in social climate, such as the
understood in terms of people with capabilities. In other prevalence of crime and violence, and “social capital”; fourth,
words, their real opportunities to do and be what they value. distribution within the family: Economic statistics measure
The approach has been developed into a variety of more incomes received in a family because it is the basic unit of
specific normative theories. Such as those of social justice or shared consumption, but family resources may be distributed
the narratives of development ethics. unevenly, as when girls get less medical attention or
education than boys do. Fifth, differences in relational
It has also given rise to a new highly interdisciplinary perspectives.
literature in the social sciences resulting in new social
statistics and indicators. And to a new policy paradigm used Summary: The two normative claims are:
mainly in developing studies, the so-called “human A. The freedom to achieve well-being is of primary moral
development approach” or human well-being. importance
B. Freedom to achieve well-being must be understood in
The capability approach claims that freedom to achieve well- terms of people with capabilities
being is a matter of what people can do and be. And
therefore, the kind of life they can effectively lead. As Sen The 5 Disparities in Capability Approach are:
argues, people’s commodities or wealth or their mental 1. Personal Heterogeinities
reactions (utility) are an inappropriate angle because they 2. Environmental Diversities
provide limited or indirect information about how life is 3. Variations in Social Climate
going. Sen illustrates his point with the example of a standard 4. Distributions within the Family
bicycle. 5. Differences in Relational Perspectives

This has the characteristics of “transportation”, but whether

it will actually provide transportation will depend on the Three Core Values of Development: by Denis Goulet
characteristics of those trying to use it. It could be considered A. Sustenance
a generally useful tool for most people to extend their B. Self-esteem
mobility. Even if that person by some quirk, finds the bicycle C. Freedom
charming, we should be able to notice within our assessment
system that it still lacks transportation. This mental reaction Traditional Economic Measures
also does not show that the same person would not In strictly economic terms, development has traditionally
appreciate transportation if it were actually available to meant achieving sustained rates of growth of income per
them. capita to enable a nation to expand its output at a rate faster
than the growth rate of its population. Levels and rates of
Theory of capabilities growth of “real” per capita gross national income (GNI)
The capabilities approach goes directly to the quality of life (monetary growth of GNI per capita minus the rate of
that people can actually achieve. This quality of life is inflation) are then used to measure the overall economic
analyzed in terms of the central concepts of “functioning” well-being of a population—how much of real goods and
and “capability”. Sen argues that the correct approach to services is available to the average citizen for consumption
assessing how well people are doing is their ability to live a and investment.
life that we have reason to value, not their wealth of
resources or subjective well-being. But to begin to assess Terms:
how people perform in terms of capacity, we first need to Income per capita
determine which functions are important to the good life and Total gross national income of a country divided by total
how much, or at least we need to specify an assessment population.
procedure to determine this.
Gross national income (GNI)
Capabilities The total domestic and foreign output claimed by residents of
“the freedom that a person has in terms of the choice of a country. It comprises gross domestic product (GDP) plus
functionings, given his personal features (conversion of factor incomes accruing to residents from abroad, less the
characteristics into functionings) and his command over income earned in the domestic economy accruing to persons
commodities.” abroad

Functionings Gross domestic product (GDP)

The total final output of goods and services produced by the today. Its economy failed to grow-- it grew too slowly to even
country’s economy, within the country’s territory, by keep up in the present.
residents and nonresidents, regardless of its allocation - It may also be referred to as an increase in the country’s
between domestic and foreign claims. GDP but little to no improvements can be observed in the
country.
8 Millenium Goals
Characteristics of Developing Countries

1. Lower levels of living and productivity

2. Lower levels of human capital
3. Higher levels of inequality and absolute poverty
4. Higher population growth rates
5. Greater social fractionalization
6. Larger rural populations but rapid rural-to-urban migration
7. Lower levels of industrialization
8. Adverse geography
9. Underdeveloped financial and other markets
10. Lingering colonial impacts such as poor institutions and
often external dependence.

These economies are then classified as

A. low-income countries (LICs), <976
B. lowermiddle-income countries (LMCs),
C. upper-middle-income countries (UMCs), 976<N>11,906
D. highincome OECD countries,
E. and other high-income countries. (Often, LMCs and UMCs
are informally grouped as the middle-income countries.)

Three Criterias for the Least Developed Countries:

A. Low Income
B. Low Human Capital
Three Objectives of Development C. High Economic Vulnerability

1. To increase the availability and widen the distribution of Three Facets of Development
basic life-sustaining goods such as food, shelter, health, and A. Real Income per Capita adjusted for PPP
protection. B. Health as Measured by Life Expectancy,
2. To raise levels of living, including, in addition to higher Undernourishment, and Child Mortality
incomes, the provision of more jobs, better education, and C. Educational Attainments as Measured by Literacy and
greater attention to cultural and Principles and Concepts Schooling
human values, all of which will serve not only to enhance
material well-being but also to generate greater individual Terms:
and national self-esteem. Gross national income (GNI) The total domestic and foreign
3. To expand the range of economic and social choices output claimed by residents of a country, consisting of gross
available to individuals and nations by freeing them from domestic product (GDP) plus factor incomes earned by
servitude and dependence not only in relation to other foreign residents, minus income earned in the domestic
people and nation-states but also to the forces of ignorance economy by nonresidents.
and human misery. Value added The portion of a product’s final value that is
added at each stage of production.
Economic Sectors Depreciation (of the capital stock) The wearing out of
Sector - A subset (part) of an economy, with four usages in equipment, buildings, infrastructure, and other forms of
economic development: capital, reflected in write-offs to the value of the capital
A. Technology (modern and traditional sectors); stock.
B. Activity (industry or product sectors); Capital stock The total amount of physical goods existing at a
C. Trade (export sector); and particular time that have been produced for use in the
D. Sphere (private and public sectors) production of other goods and services.
Gross domestic product (GDP) The total final output of goods
Case Study: Brazil as the country with growth but no and services produced by the country’s economy within the
development country’s territory by residents and nonresidents, regardless
- Brazil is underdeveloped because the dynamic of the of its allocation between domestic and foreign claims.
colonial, sugar, gold, and slavery did not create a positive
impact on the country in the past, still bringing its burden
Purchasing power parity (PPP) Calculation of GNI using a As Rostow wrote in the opening chapter of The Stages of
common set of international prices for all goods and services, Economic Growth:
to provide more accurate comparisons of living standards
‘’This book presents an economic historian’s way of
generalizing the sweep of modern history. . . . It is possible to
The HDI ranks countries into four groups: low human identify all societies, in their economic dimensions, as lying
development (0.0 to 0.499), medium human development within one of five categories: the traditional society, the
(0.50 to 0.799), high human development (0.80 to 0.90), and preconditions for take-off into self-sustaining growth, the
very high human development (0.90 to 1.0). take-off, the drive to maturity, and the age of high mass
consumption. . . . These stages are not merely descriptive.
Human capital Productive investments in people, such as They are not merely a way of generalizing certain factual
skills, values, and health resulting from expenditures on observations about the sequence of development of modern
education, on-the-job training programs, and medical care. societies. They have an inner logic and continuity. . . . They
constitute, in the end, both a theory about economic growth
Chapter 3: Classic Theories of Development and a more general, if still highly partial, theory about
Every nation strives after development. Economic progress is modern history as a whole.’’
an essential component, but it is not the only component. As
noted in Chapter 1, development is not purely an economic The advanced countries, it was argued, had all passed the
phenomenon. In an ultimate sense, it must encompass more stage of “takeoff into self-sustaining growth,” and the
than the material and financial side of people’s lives, to underdeveloped countries that were still in either the
expand human freedoms. traditional society or the “preconditions” stage had only to
follow a certain set of rules of development to take off in
This linear-stages approach was largely replaced in the 1970s their turn into self-sustaining economic growth.
by two competing schools of thought. The first, which One of the principal strategies of development necessary for
focused on theories and patterns of structural change, used any takeoff was the mobilization of domestic and foreign
modern economic theory and statistical analysis in an saving in order to generate sufficient investment to
attempt to portray the internal process of structural change accelerate economic growth. The economic mechanism by
that a “typical” developing country must undergo if it is to which more investment leads to more growth can be
succeed in generating and sustaining rapid economic growth. described in terms of the Harrod-Domar growth model,
The second, the international-dependence revolution, was today often referred to as the AK model because it is based
more radical and more political. It viewed on a linear production function with output given by the
underdevelopment in terms of international and domestic capital stock K times a constant, often labeled A. In one form
power relationships, institutional and structural economic or another, it has frequently been applied to policy issues
rigidities, and the resulting proliferation of dual economies facing developing countries, such as in the two-gap model
and dual societies both within and among the nations of the examined in Chapter 14.
world. Dependence theories tended to emphasize external
and internal institutional and political constraints on
economic development.

A functional economic relationship in which the growth rate

of gross domestic product (g) depends directly on the
national net savings rate (s) and inversely on the national
capital-output ratio (c).
Rostow’s Stages of Growth The most influential and
outspoken advocate of the stages-of-growth model of Every economy must save a certain proportion of its national
development was the American economic historian Walt W. income, if only to replace worn-out or impaired capital goods
Rostow. According to Rostow, the transition from (buildings, equipment, and materials). However, in order to
underdevelopment to development can be described in grow, new investments representing net additions to the
terms of a series of steps or stages through which all capital stock are necessary. If we assume that there is some
countries must proceed. direct economic relationship between the size of the total
capital stock, K, and total GDP, Y—for example, if $3 of
capital is always necessary to produce an annual $1 stream of
GDP—it follows that any net additions to the capital stock in
the form of new investment will bring about corresponding
increases in the flow of national output, GDP. Surplus labor The excess supply of labor over and above the
quantity demanded at the going free-market wage rate. In
Structural-change theory focuses on the mechanism by the Lewis two-sector model of economic development,
which underdeveloped economies transform their domestic surplus labor refers to the portion of the rural labor force
economic structures from a heavy emphasis on traditional whose marginal productivity is zero or negative.
subsistence agriculture to a more modern, more urbanized,
and more industrially diverse manufacturing and service Production function A technological or engineering
economy. It employs the tools of neoclassical price and relationship between the quantity of a good produced and
resource allocation theory and modern econometrics to the quantity of inputs required to produce it.
describe how this transformation process takes place. Two
well-known representative examples of the structural-change Average product Total output or product divided by total
approach are the “two-sector surplus labor” theoretical factor input (e.g., the average product of labor is equal to
model of W. Arthur Lewis and the “patterns of development” total output divided by the total amount of labor used to
empirical analysis of Hollis B. Chenery and his coauthors. produce that output). Marginal product The increase in total
output resulting from the use of one additional unit of a
Structural-change theory The hypothesis that variable factor of production (such as labor or capital). In the
undevelopment is due to under utilization of resources Lewis twosector model, surplus labor is defined as workers
arising from structural or institutional factors that have their whose marginal product is zero.
origins in both domestic and international dualism
development, therefore requires more than just accelerated Criticisms of the Lewis Model
capital formation. Although the Lewis two-sector development model is simple
and roughly reflects the historical experience of economic
Structural transformation The process of transforming an growth in the West, four of its key assumptions do not fit the
economy in such a way that the contribution to national institutional and economic realities of most contemporary
income by the manufacturing sector eventually surpasses the developing countries. First, the model implicitly assumes that
contribution by the agricultural sector. More generally, a the rate of labor transfer and employment creation in the
major alteration in the industrial composition of any modern sector is proportional to the rate of modernsector
economy. capital accumulation. The faster the rate of capital
accumulation, the higher the growth rate of the modern
Lewis two-sector model A theory of development in which sector and the faster the rate of new job creation. But what if
surplus labor from the traditional agricultural sector is capitalist profits are reinvested in more sophisticated
transferred to the modern industrial sector, the growth of laborsaving capital equipment rather than just duplicating
which absorbs the surplus labor, promotes industrialization, the existing capital, as is implicitly assumed in the Lewis
and stimulates sustained development. model? (We are, of course, here accepting the debatable
Basic Model One of the best-known early theoretical models assumption that capitalist profits are in fact reinvested in the
of development that focused on the structural local economy and not sent abroad as a form of “capital
transformation of a primarily subsistence economy was that flight” to be added to the deposits of Western banks.) Figure
formulated by Nobel laureate W. Arthur Lewis in the 3.2 reproduces the lower, modern-sector diagram of Figure
mid1950s and later modified, formalized, and extended by 3.1a, only this time the labor demand curves do not shift
John Fei and Gustav Ranis. uniformly outward but in fact cross. Demand curve D2(KM2)
The Lewis two-sector model became the general theory of has a greater negative slope than D2(KM1) to reflect the fact
the development process in surplus-labor developing that additions to the capital stock embody laborsaving
nations during most of the 1960s and early 1970s, and it is technical progress—that is, KM2 technology requires much
sometimes still applied, particularly to study the recent less labor per unit of output than KM1 technology does.
growth experience in China and labor markets in other
developing countries. Patterns-of-development analysis An attempt to identify
characteristic features of the internal process of structural
In the Lewis model, the underdeveloped economy consists of transformation that a “typical” developing economy
two sectors: a traditional, overpopulated rural subsistence undergoes as it generates and sustains modern economic
sector characterized by zero marginal labor productivity—a growth and development.
situation that permits Lewis to classify this as surplus labor in
the sense that it can be withdrawn from the traditional The structural changes that we have described are the
agricultural sector without any loss of output—and a high- “average” patterns of development Chenery and colleagues
productivity modern urban industrial sector into which labor observed among countries in time-series and cross-sectional
from the subsistence sector is gradually transferred. The analyses. The major hypothesis of the structural-change
primary focus of the model is on both the process of labor model is that development is an identifiable process of
transfer and the growth of output and employment in the growth and change whose main features are similar in all
modern sector. (The modern sector could include modern countries. However, as mentioned earlier, the model does
agriculture, but we will call the sector “industrial” as a recognize that differences can arise among countries in the
shorthand). Both labor transfer and modern-sector pace and pattern of development, depending on their
employment growth are brought about by output expansion particular set of circumstances. Factors influencing the
in that sector. development process include a country’s resource
endowment and size, its government’s policies and as they often are on mainstream, neoclassical (or perhaps
objectives, the availability of external capital and technology, Lewis-type surplus-labor or Chenery-type structural-change)
and the international trade environment. models, in many cases merely serve the vested interests of
Neocolonial Dependence Model existing power groups, both domestic and international.

A model whose main proposition is that underdevelopment In addition, according to this argument, leading university
exists in developing countries because of continuing intellectuals, trade unionists, high-level government
exploitative economic, political, and cultural policies of economists, and other civil servants all get their training in
former colonial rulers toward less developed countries. developed-country institutions where they are unwittingly
served an unhealthy dose of alien concepts and elegant but
The first major stream, which we call the neocolonial inapplicable theoretical models. Having little or no really
dependence model, is an indirect outgrowth of Marxist useful knowledge to enable them to come to grips in an
thinking. It attributes the existence and continuance of effective way with real development problems, they often
underdevelopment primarily to the historical evolution of a tend to become unknowing or reluctant apologists for the
highly unequal international capitalist system of rich country– existing system of elitist policies and institutional structures.
poor country relationships. Whether because rich nations are
intentionally exploitative or unintentionally neglectful, the Dualistic Development Thesis
coexistence of rich and poor nations in an international Implicit in structural-change theories and explicit in
system dominated by such unequal power relationships international-dependence theories is the notion of a world of
between the center (the developed countries) and the dual societies, of rich nations and poor nations and, in the
periphery (the developing countries) renders attempts by developing countries, pockets of wealth within broad areas of
poor nations to be self-reliant and independent difficult and poverty. Dualism is a concept widely discussed in
sometimes even impossible. Certain groups in the developing development economics. It represents the existence and
countries (including landlords, entrepreneurs, military rulers, persistence of substantial and even increasing divergences
merchants, salaried public officials, and trade union leaders) between rich and poor nations and rich and poor peoples on
who enjoy high incomes, social status, and political power. various levels. Specifically, although research continues, the
traditional concept of dualism embraces four key arguments:
The elites’ activities and viewpoints often serve to inhibit any 1. Different sets of conditions, of which some are “superior”
genuine reform efforts that might benefit the wider and others “inferior,” can coexist in a given space. Examples
population and in some cases actually lead to even lower of this element of dualism.
levels of living and to the perpetuation of underdevelopment. 2. This coexistence is chronic and not merely transitional. It is
In short, the neo-Marxist, neocolonial view of not due to a temporary phenomenon, in which case time
underdevelopment attributes a large part of the developing could eliminate the discrepancy between superior and
world’s continuing poverty to the existence and policies of inferior elements. In other words, the international
the industrial capitalist countries of the northern hemisphere coexistence of wealth and poverty is not simply a historical
and their extensions in the form of small but powerful elite or phenomenon that will be rectified in time. Although both the
comprador groups in the less developed countries. stages-of-growth theory and the structural-change models
implicitly make such an assumption, to proponents of the
False Paradigm Model dualistic development thesis, the facts of growing
international inequalities seem to refute it.
False-paradigm model The proposition that developing 3. Not only do the degrees of superiority or inferiority fail to
countries have failed to develop because their development show any signs of diminishing, but they even have an
strategies (usually given to them by Western economists) inherent tendency to increase. For example, the productivity
have been based on an incorrect model of development, one gap between workers in developed countries and their
that, for example, overstressed capital accumulation or counterparts in most developing countries seems to widen
market liberalization without giving due consideration to with each passing year.
needed social and institutional change. 4. The interrelations between the superior and inferior
elements are such that the existence of the superior
A second and less radical international-dependence approach elements does little or nothing to pull up the inferior
to development, which we might call the false-paradigm element, let alone “trickle down” to it. In fact, it may actually
model, attributes underdevelopment to faulty and serve to push it down—to “develop its underdevelopment.”
inappropriate advice provided by well-meaning but often
uninformed, biased, and ethnocentric international “expert” Neo-classical Counterrevolution
advisers from developed-country assistance agencies and The 1980s resurgence of neoclassical free-market orientation
multinational donor organizations. These experts are said to toward development problems and policies, counter to the
offer complex but ultimately misleading models of interventionist dependence revolution of the 1970s.
development that often lead to inappropriate or incorrect
policies. Because of institutional factors such as the central Public-choice theory (new political economy approach) The
and remarkably resilient role of traditional social structures theory that self-interest guides all individual behavior and
(tribe, caste, class, etc.), the highly unequal ownership of land that governments are inefficient and corrupt because people
and other property rights, the disproportionate control by use government to pursue their own agendas.
local elites over domestic and international financial assets,
and the very unequal access to credit, these policies, based
Solow neoclassical growth model Growth model in which
there are diminishing returns to each factor of production
but constant returns to scale. Exogenous technological
change generates longterm economic growth.

In summary, each of the approaches to understanding

development has something to offer. Their respective
contributions will become clear later in the book when we
explore in detail both the origins of and possible solutions to
a wide range of problems such as poverty, population
growth, unemployment, rural development, international
trade, and the environment. They also inform contemporary
models of development and underdevelopment, to which we
turn in the next chapter.

A dual society contains two worlds in one: the Third World

and the First World coexist within the same nation, under the
same authorities and the same flag.

Coordination Failure A situation in which the inability of

agents to coordinate their behavior (choices) leads to an
outcome (equilibrium) that leaves all agents worse off than in
an alternative situation that is also an equilibrium.

The big push model is a concept in development economics

or welfare economics that emphasizes that a firm's decision
whether to industrialize or not depends on its expectations of
what other firms will do.

It assumes economies of scale and oligopolistic market

structure and explains when industrialization would happen.
It addresses coordination issues and problems present in
multiple equilibria.