1.

Introducing Economic Development

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.

The Nature of Development Economics

In addition to being concerned with the efficient allocation of existing scarce (or idle)
productive resources and with their sustained growth over time, it must also deal with
the economic, social, political, and institutional mechanisms, both public and private,
necessary to bring about rapid (at least by historical standards) and large-scale
improvements in levels of living for the peoples of Africa, Asia, Latin America, and the
formerly socialist transition economies.
In comparison with the more developed countries (MDCs), in most less developed
countries, commodity and resource markets are typically highly imperfect, consumers
and producers have limited information, major structural changes are taking place in
both the society and the economy, the potential for multiple equilibria rather than a
single equilibrium is more common, and disequilibrium situations often prevail (prices do
not equate supply and demand). In many cases, economic calculations are heavily
influenced by political and social priorities such as unifying the nation, replacing foreign
advisers with local decision makers, resolving tribal or ethnic conflicts, or preserving
religious and cultural traditions. At the individual level, family, clan, religious, or tribal
considerations may take precedence over private, self-interested utility or profit-
maximizing calculations.

The Important Role of Values in Development Economics

Economics is a social science. It is concerned with human beings and the social
systems by which they organize their activities to satisfy basic material needs (e.g.,
food, shelter, clothing) and nonmaterial wants (e.g., education, knowledge, spiritual
fulfillment).
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.

Concepts or goals such as economic and social equality, the elimination of poverty,
universal education, rising levels of living, national independence, modernization of
institutions, rule of law and due process, access to opportunity, political and economic
participation, grassroots democracy, self-reliance, and personal fulfillment all derive
from subjective value judgments about what is good and desirable and what is not. So
too, for that matter, do other values—for example, the sanctity of private property,
however acquired, and the right of individuals to accumulate unlimited personal wealth;
the preservation of traditional hierarchical social institutions and rigid, inegalitarian class
structures; the male head of household as the final authority; and the supposed “natural
right” of some to lead while others follow.

It follows that value premises, however carefully disguised, are an inherent component
of both economic analysis and economic policy. Economics cannot be value-free in the
same sense as, say, physics or chemistry. Thus, the validity of economic analysis and
the correctness of economic prescriptions should always be evaluated in light of the
underlying assumptions or value premises.
Once these subjective values have been agreed on by a nation or, more specifically, by
those who are responsible for national decision making, specific development goals
(e.g., greater income equality) and corresponding public policies (e.g., taxing higher
incomes at higher rates) based on “objective” theoretical and quantitative analyses can
be pursued.
However, where serious value conflicts and disagreements exist among decision
makers, the possibility of a consensus about desirable goals or appropriate policies is
considerably diminished. In either case, it is essential, especially in the field of
development economics, that one’s value premises always be made clear.

Economies as Social Systems: The Need to Go Beyond Simple Economics

Social system – The organizational and institutional structure of a society, including its
values, attitudes, power structure, and traditions.
By “social system,” we mean the interdependent relationships between economic and
noneconomic factors.
Noneconomic factors:
▪ 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
▪ flexibility or rigidity of economic and social classes.
 Clearly, these factors vary widely from one region of the world to another and from
one culture and social setting to another.
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.

Traditional Economic Measures

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.
Income per capita – Total gross national income of a country divided by its total
population.
Levels and rates of growth of “real” per capita gross national income (GNI) 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.
Gross National Income (GNI) – The total domestic and foreign output claimed by
residents of a country. It comprises gross domestic product (GDP) plus factor incomes
accruing to residents from abroad, less the income earned in the domestic economy
accruing to persons abroad.

Gross domestic product (GDP) - The 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.

The New Economic View of Development

The experience of the first decades of post–World War II and postcolonial development
in the 1950s, 1960s, and early 1970s, when many developing nations did reach their
economic growth targets but the levels of living of the masses of people
remained for the most part unchanged, signaled that something was very wrong with
this narrow definition of development. An increasing number of economists and
policymakers clamored for more direct attacks on widespread absolute poverty,
increasingly inequitable income distributions, and rising unemployment. In short, during
the 1970s, economic development came to be redefined in terms of the reduction
or elimination of poverty, inequality, and unemployment within the context of a
growing economy. “Redistribution from growth” became a common slogan.

Development must therefore be conceived of as a multidimensional process involving

major changes in social structures, popular attitudes, and national institutions, as
well as the acceleration of economic growth, the reduction of inequality, and the
eradication of poverty.

Development, in its essence, must represent the whole gamut of change by which an
entire social system, tuned to the diverse basic needs and evolving aspirations of
individuals and social groups within that system, moves away from a condition of life
widely perceived as unsatisfactory toward a situation or condition of life regarded as
materially and spiritually better.

Amartya Sen’s “Capability” Approach

Amartya Sen, the 1998 Nobel laureate in economics, argues that the “capability to
function” is what really matters for status as a poor or nonpoor person. As Sen puts it,
“the expansion of commodity productions...are valued, ultimately, not for their own sake,
but as means to human welfare and freedom.”

In effect, Sen argues that poverty cannot be properly measured by income or even
by utility as conventionally understood; what matters fundamentally is not the things a
person has—or the feelings these provide—but what a person is, or can be, and
does, or can do. What matters for well-being is not just the characteristics of
commodities consumed, as in the utility approach, but what use the consumer can and
does make of commodities. For example, a book is of little value to an illiterate person
(except perhaps as cooking fuel or as a status symbol). Or as Sen noted, a person with
a parasitic disease will be less able to extract nourishment from a given quantity of food
than someone without parasites.
To make any sense of the concept of human well-being in general, and poverty in
particular, we need to think beyond the availability of commodities and consider their
use: to address what Sen calls functionings, that is, what a person does (or can do)
with the commodities of given characteristics that they come to possess or
control. Freedom of choice, or control of one’s own life, is itself a central aspect of most
understandings of well-being.
A functioning is a valued “being or doing,” and in Sen’s view, functionings that people
have reason to value can range from being healthy, being well-nourished, and well-
clothed, to being mobile, having self-esteem, and “taking part in the life of the
community.”
Sen identifies five sources of disparity between (measured) real incomes and actual
advantages:
1. Personal heterogeneities, such as those connected with disability, illness, age, or
gender;
2. Environmental diversities, such as heating and clothing requirements in the cold
or infectious diseases in the tropics, or the impact of pollution;
3. Variations in social climate, such as the prevalence of crime and violence, and
“social capital”;
4. Distribution within the family—economic statistics measure incomes received in a
family because it is the basic unit of shared consumption, but family resources
may be distributed unevenly, as when girls get less medical attention or
education than boys do;
5. Differences in relational perspectives, meaning that some goods are essential
because of local customs and conventions. For example, necessaries for being
able, in Adam Smith’s phrase, “to appear in public without shame,” include higher
quality clothing (such as leather shoes) in high-income countries than in low-
income countries.

Sen notes that functioning depends also on (1) “social conventions in force in the
society in which the person lives, (2) the position of the person in the family and in the
society, (3) the presence or absence of festivities such as marriages, seasonal festivals
and other occasions such as funerals, (4) the physical distance from the homes of
friends and relatives..

Development and Happiness

▪ Happiness is part of human well-being, and greater happiness may in itself expand
an individual’s capability to function.
▪ As Amartya Sen has argued, a person may well regard happiness as an important
functioning for her well-being.
▪ In recent years, economists have explored the empirical relationship across
countries and over time between subjectively reported satisfaction and happiness
and factors such as income.
▪ One of the findings is that the average level of happiness or satisfaction increases
with a country’s average income.
▪ Not surprisingly, studies show that financial security is only one factor affecting
happiness.
▪ Richard Layard (British labour economist from the London School of Economics)
identifies seven factors that surveys show affect average national happiness:
✔ family relationships
✔ financial situation
✔ work
✔ community and friends
✔ health
✔ personal freedom
✔ personal values.
▪ In particular, aside from not being poor:
✔ the evidence says people are happier when they are:
★ not unemployed
★ not divorced or separated
★ have high trust of others in society
★ enjoy high government quality with democratic freedoms
★ have religious faith.
The importance of these factors may shed light on why the percentage of
people reporting that they are not happy or satisfied varies so widely
among developing countries with similar incomes.

▪ The government of Bhutan’s attempt to make “gross national happiness” rather than
gross national income its measure of development progress has attracted
considerable attention.
▪ Its indicators extend beyond traditional notions of happiness to include capabilities
such as health, education, and freedom. Happiness is not the only dimension of
subjective well-being of importance.

Video: Economy of Francesco: Happiness, Education and Relational Goods

https://youtu.be/b-MvEFLK9yc
Assignment 1
Three Core Values of Development
What constitutes the good life?
3 basic components or core values serve as a conceptual basis and practical guideline
for understanding the inner meaning of development.
1. Sustenance - The Ability to Meet Basic Needs
Sustenance: The basic goods and services, such as food, clothing, and shelter, that are
necessary to sustain an average human being at the bare minimum level of living.
All people have certain basic needs without which life would be impossible. These life-
sustaining basic human needs include food, shelter, health, and protection. When any
of these is absent or in critically short supply, a condition of “absolute
underdevelopment” exists.
A basic function of all economic activity, therefore, is to provide as many people as
possible with the means of overcoming the helplessness and misery arising from a lack
of food, shelter, health, and protection. To this extent, we may claim that economic
development is a necessary condition for the improvement in the quality of life
that is development. Without sustained and continuous economic progress at the
individual as well as the societal level, the realization of the human potential would not
be possible. One clearly has to “have enough in order to be more.”
Rising per capita incomes, the elimination of absolute poverty, greater employment
opportunities, and lessening income inequalities therefore constitute the necessary but
not the sufficient conditions for development.

2. Self-esteem - To Be a Person
Self-esteem: 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
A second universal component of the good life is self-esteem—a sense of worth and
self-respect, of not being used as a tool by others for their own ends.
All peoples and societies seek some basic form of self-esteem, although they may call it
authenticity, identity, dignity, respect, honor, or recognition.
The nature and form of this self-esteem may vary from society to society and from
culture to culture. However, with the proliferation of the “modernizing values” of
developed nations, many societies in developing countries that have had a profound
sense of their own worth suffer from serious cultural confusion when they come in
contact with economically and technologically advanced societies. This is because
national prosperity has become an almost universal measure of worth.
Due to the significance attached to material values in developed nations, worthiness
and esteem are nowadays increasingly conferred only on countries that possess
economic wealth and technological power—those that have “developed.”

3. Freedom from Servitude - To Be Able to Choose

Freedom: 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.
A third and final universal value should constitute the meaning of development is the
concept of human freedom.
▪ 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.
▪ W. Arthur Lewis (economist and professor at Princeton University) stressed the
relationship between economic growth and freedom from servitude when he
concluded that “the advantage of economic growth is not that wealth increases
happiness, but that it increases the range of human choice.”
▪ Wealth can enable people to gain greater control over nature and the physical
environment (e.g., through the production of food, clothing, and shelter) than they
would have if they remained poor. It also gives them the freedom to choose greater
leisure, to have more goods and services, or to deny the importance of these
material wants and choose to live a life of spiritual contemplation.
▪ The concept of human freedom also encompasses various components of political
freedom, including personal security, the rule of law, freedom of expression, political
participation, and equality of opportunity

The Three Objectives of Development

1. To increase the availability and widen the distribution of basic life-sustaining goods
such as food, shelter, health, and protection

2. To raise levels of living, including, in addition to higher incomes, the provision of

more jobs, better education, and greater attention to cultural and human values, all
of which will serve not only to enhance material well-being but also to generate
greater individual and national self-esteem
3. To expand the range of economic and social choices available to individuals and
nations by freeing them from servitude and dependence, not only in relation to other
people and nation-states, but also to the forces of ignorance and human misery.