●​ Resources are scarce (limited), so the goods and

LECTURE 1 - INTRODUCTION TO DEVELOPMENT ECONOMICS services produced must also be limited.

- LECTURE NOTES ●​ Scarcity restricts options and demands choices.
●​ Wants are insatiable/unlimited and innumerable. They
Origin of Economics: are infinite and limited only by imagination.

●​ Economics came from the Greek word Oikonomia or CORE PHILOSOPHY OF ECONOMICS:
Oikonomos meaning household management.
●​ Later, Oikonomos became known as state management ●​ "There is no such thing as free lunch".
when Greek society developed into city-states. ●​ Meaning: In a world of scarce resources, things that seem
●​ Recognized as a distinct discipline in the 18th century. free are not truly free because someone else has to pay for
●​ This happened when Adam Smith (Father of Modern them.
Economics) wrote "An Inquiry into the Nature and
Causes of the Wealth of the Nation" (or "Wealth of 2 Main Branches of Economics:
Nations") in 1776.
●​ Microeconomics: Study of the behavior of individual
Definition of Economics: consumers and firms or industries. Looks at the
specific/small unit of a country.
●​ A Social Science that deals with the efficient allocation ○​ Prefix 'micro' from Greek 'mikro' meaning 'small',
of scarce resources for the satisfaction of human 'specific', or 'one'.
wants. ○​ Sectors: Household and Business/Firm.
●​ Wealth getting and wealth using activities of man. ●​ Macroeconomics: Study of the economy as a whole or
●​ Deals with how human beings organize consumption and the aggregate economy (collection of specific units taken
production activities. as one).
●​ A social science dealing with consumption, production, ○​ Prefix 'macro' from Greek 'makro' meaning 'large'
distribution, and exchange of goods and services. or 'whole'.
●​ The study of how people earn and enjoy life to improve ○​ Sectors: Household, Business, Government, and
societies and make human civilization possible. Rest of the World (ROW)/Foreign Sector.

Significant Concepts from Definitions: Four (4) Basic Economic Problems: Societies must answer these
questions due to scarcity:
1.​ Economics as a Science
2.​ Economics as a Social Science 1.​ What to produce? (Consumption) - Deciding the best
3.​ Scarcity combination of goods and services to meet needs.
4.​ Human wants and needs 2.​ How and how many to produce? (Production) - Deciding
the best combination of factors to create desired output.
Economics as a Science: 3.​ For whom to produce? (Distribution) - Deciding who gets
the output and how much.
●​ Considered a Science because it is a systematic body of 4.​ How will the system accommodate change? (Growth
knowledge. Overtime) - Market systems are dynamic; consumer
●​ Requires a scientific approach and methods for preferences, technology, and resource supplies change.
gathering, presentation, and analysis of data to
understand/solve economic issues. Four Economic Systems: Systems differ in how they answer the
●​ Uses facts and data for description and explanation of basic economic problems.
economic phenomena.
1.​ Traditional Economy:
Positive vs. Normative Economics: ○​ Relies on customary methods (hunting, fishing,
gathering, slash-and-burn agriculture).
●​ Positive Economics: Describes and explains economic ○​ Prevailed throughout most of human history.
phenomena using facts and data. Answers "What is?". ○​ Resources distributed through social relations
○​ Example: After a good harvest, the price of rice (like family ties).
will fall. ○​ Does not promote economic growth. Generates
●​ Normative Economics: Expresses value judgment about minimal waste.
what an economy should be or ought to be. Deals with ○​ Answers to problems: Determined by Tradition
norms. and Customs.
○​ Examples: The price of rice should be low for 2.​ Market Economy:
affordability; The price of rice ought to be high ○​ Decentralized in nature.
enough for farmers to improve incomes. ○​ Allows private individuals and groups to control
production and distribution, not the government.
Economics as a Social Science: ○​ Answers to problems:
■​ What to produce: Determined by
●​ Deals with human society, societal groups, individuals in Consumer’s Preference.
relationships, institutions, and material goods as ■​ How to produce: Determined by
expressions of human cohabitation. Producers - Seeking profit.
●​ Considered a Social Science because it deals with human ■​ For whom to produce: Determined by
behavior, particularly how individuals and society make Purchasing Power.
choices and decisions. 3.​ Command Economy:
○​ Rulers control production and distribution.
Choice and Opportunity Cost: ○​ Significantly limits citizens' freedom and economic
efficiency.
●​ Since resources are limited, producers and consumers ○​ Governing body has total authority.
must make choices between competing alternatives. All ○​ Economic success relies on political decisions.
economic decisions involve choices. ○​ Consumers influence market only through
●​ Opportunity Cost: To get more of one thing, you forgo the shortages and surpluses.
opportunity of getting something else. It is the best ○​ Prices are fixed components, not flexible
alternative that should have been undertaken instead. indicators.
●​ "For every choice we take it entails sacrifices". ○​ Answers to problems: Determined by government
●​ "The cost of what you get/gain is the value of what you preference.
have loss to obtain it". 4.​ Mixed Economy:
○​ Combines aspects from traditional, command,
Economizing Problems: Scarcity and Wants and market economies.
 ○​ Answers to problems: Determined partly by LECTURE 2 - DEVELOPMENT ECONOMICS: ​
Consumer’s preference/Producer’s seeking BASIC CONCEPTS OF NATIONAL INCOME AND OUTPUT, AND
profit/Purchasing power and partly by GROWTH AND DEVELOPMENT
government preference.
History of Development Economics
8 Economic Goals:
●​ Adam Smith: Considered the first development
1.​ Economic growth: Increase in total output produced economist. His Wealth of Nations (1776) was an early
(measured by Real GDP). work on economic development.
2.​ Price level stability: Prevent increases/decreases in the ●​ Systematic study of economic development problems in
general price level. Africa, Asia, and Latin America emerged over the past
3.​ Economic security: Provide for those disabled, chronically almost half century.
ill, aged, handicapped, or otherwise dependent. ●​ W. Arthur Lewis and Theodore Schultz: Received the
4.​ Full employment: Provide suitable jobs for all citizens Nobel Prize in 1979 for foundational work in development
willing and able to work. economics.
5.​ Balance of Trade: Seek a reasonable overall balance in ○​ Schultz: Argued in Transforming Traditional
international trade and financial transactions. Agriculture (1964) that traditional farmers in poor
6.​ Economic Freedom: Guarantee businesses, workers, and countries rationally maximize resource returns and
consumers a high degree of freedom in economic activity. are reluctant to innovate due to low prices and
7.​ Economic Efficiency: Achieve the maximum fulfillment of heavy taxation.
wants using available productive resources. ○​ Lewis: Emphasized that the "fundamental cure for
8.​ Equitable distribution of income: Ensure no group faces poverty is not money but knowledge". His work
poverty while most others enjoy prosperity. highlighted the importance of political, social, and
cultural factors. Pioneered development
economics research in 1977.

Definition of Development Economics

●​ Focuses on the economic, social, political, and

institutional mechanisms needed for substantial
improvements in living standards.
●​ Specifically concerned with conditions in Africa, Asia, Latin
America, and formerly socialist economies.
●​ Ultimate goal: Enhance understanding of developing
economies and improve the standard of living for the
majority of the global population.

What is Development?

●​ Traditional Definition (1970 and earlier): National

economies should sustain annual GDP/GNI growth of
5-7% or more, often considering income per capita growth.
●​ During 1970s: Included planned changes in production
and employment structure, like a decline in agriculture and
increase in manufacturing/services.
●​ 1991: Enhanced by non-economic social indicators such
as literacy, education, health, and housing.

Alternative Interpretations of Development

●​ Development as Economic Growth: Often measured by

commodity output rather than people, highlighting a dual
economy (advanced technology export sector vs.
traditional sector with inefficient technology).
●​ Development as Modernization: Focuses on social
changes necessary for economic progress, exploring
transformations in social, psychological, and political
processes. Involves promoting wealth-oriented behaviors
and values, prioritizing profit-seeking, and transitioning from
a commodity-based to a human-centered strategy
(investment in education/skills).
●​ Development as Distributive Justice: Views development
as improving basic needs. Raises issues of social justice
regarding government-provided goods/services, access for
different social classes, and how the burden of
development is shared. Target groups include small
farmers, the landless, and the urban
under-employed/unemployed.

New Economic View of Development

●​ Amartya Sen’s Capability Approach: Argues that

"Economic growth cannot be sensibly treated as an end in
itself. Development has to be more concerned with
enhancing the lives we lead and the freedoms we
enjoy”.
○​ Capabilities: Defined as "the freedom that a
person has in terms of the choice of functionings,
given his personal features and his command of
commodities".
 ○​ Well-being: Means being healthy, well-nourished, ○​ Household Final Consumption (C)
highly literate, and having freedom of choice in ○​ Investment or Capital Formation (I): Fixed capital
what one can become and do. Utility (happiness) and change in inventories.
can be relevant to well-being. ○​ Government Consumption and Expenditures (G):
●​ Todaro: Development is a multi-dimensional process Spending on finished products and direct
involving the reorganization and reorientation of the entire purchase of resources (excluding transfer
economic AND social system. payments).
○​ Net Exports (X-M): Difference between exports
Three Objectives of Development and imports.
○​ Formula: GDP = C + I + G + (X-M)
1.​ Increase availability of life-sustaining goods (food, shelter, 2.​ Factor Income Approach: National Income (NI) is the sum
health, protection). of income payments to factors of production (land, labor,
2.​ Raise levels of living (incomes, consumption of food, capital, entrepreneurship):
medical services, education) through relevant economic ○​ Compensation of employees (W)
growth processes. ○​ Rent (R)
3.​ Expand range of economic and social choices by ○​ Interest (i)
enlarging choice variables (e.g., varieties of consumer ○​ Normal profit (NP)
goods/services). ○​ Formula: NI = W + R + i + NP
○​ GDP can be derived from NI by adding Indirect
Three Core Values of Development Economics Business Taxes (IBT), Depreciation (D), and Net
Primary Income (NPI):
1.​ Sustenance: The ability to meet basic needs. ○​ Formula: GDP = NI + IBT + D + NPI
2.​ Self-esteem: To be a Person, having a sense of worth and 3.​ Value Added from Industrial Origin Approach: Reflects
not being used as a tool by others. Development is sectoral contributions by summing the gross value added
legitimized as a goal because it is an important way of originating in various industries. Value added is the
gaining esteem. difference between the value of output and the cost of
3.​ Freedom from Servitude: To be Able to Choose. intermediate inputs at each stage of production.
Economic growth increases the range of human choice.
Origins of GDP
Gross Domestic Product (GDP) as a Measure of Economic
Performance ●​ Modern conception a "product of war".
●​ Simon Kuznets: Credited with an early attempt to estimate
●​ Definition: Measures the total market value of the final national income in 1932 to understand the Great
goods and services produced in the economy in a given Depression. Presented original formulation in 1937 report.
period of time. ●​ John Maynard Keynes: Developed the modern definition
○​ Market value: Production is valued in terms of of GDP during World War II.
market prices because quantities can't be added ●​ Bretton Woods (1944): GDP became the standard tool for
directly. sizing up a country's economy.
○​ Final goods and services: Only final goods are ●​ Beyond GDP Movement: Aims to identify alternative
counted to avoid double counting intermediate indicators for a more holistic view of economic health and
sales. well-being. Includes factors like fairness, equality,
○​ Given period of time: GDP measures production environmental sustainability, happiness, well-being, etc..
within a specific timeframe (e.g., a quarter or a ○​ Bhutan: Since 1971, measured progress using
year). the Gross National Happiness Index.
○​ European Union: Defined social and
Need for National Income Accounting environmental indicators for "beyond GDP" from
2007-2015.
●​ Helpful in Making Comparisons (national/per capita ○​ OECD: Developed the Better Life Index as an
income with other countries). alternative to GDP.
●​ Helpful to Trade Unions (analyzing worker remuneration ○​ Joseph Stiglitz: Emphasized that "what we
based on income distribution). measure informs what we do. And if we're
●​ Measures the Distribution of Income (interest, rent, profit, measuring the wrong thing, we’re going to do the
wages). wrong thing”.
●​ Helpful in Economic Planning (informing planning
commission about available resources). GDP and Welfare / Shortcomings of GDP
●​ Reveals Structural Changes in the economy (shifts in
shares of agriculture, industry, etc.). ●​ GDP is flawed as a measure of human welfare.
●​ Facilitates forecasting the effect of economic policies. ●​ Focuses solely on economic output; fails to account for
negative externalities (like pollution).
Exclusions from GDP ●​ Ignores distribution: Doesn't reflect how wealth is
distributed (can mask inequality).
●​ Intermediate Goods and Services: Used to produce other ●​ Rising GDP per capita is not necessarily pointless, but
goods; excluded to avoid double counting. above a certain level, it doesn't guarantee greater
●​ Second-hand Sales: Items counted when first happiness or well-being.
produced/sold. ●​ Excludes Non-Market Activities (household work,
●​ Non-market Activities: Unpaid work like homemaking, volunteer work, informal economy).
volunteering, caregiving. ●​ Neglects Environmental Impact (degradation, resource
●​ Financial Transactions: Buying/selling stocks, bonds, etc.. depletion).
●​ Underground Economy: Illegal activities and unreported ●​ Doesn't Measure Quality of Life (health, education,
cash transactions. happiness).
●​ Debt repayment and Transfer Payments: Government ●​ Overemphasizes Short-Term Growth.
payments with no goods/services exchanged (social ●​ Does not Account for Informal Economies.
security, welfare, subsidies). ●​ Ignores Technological Advancements (qualitative
●​ Imports: Value of foreign-produced goods/services is not improvements from free/low-cost digital goods).
counted. ●​ Overlooks Welfare Losses (GDP can rise even if social
costs like crime/congestion increase).
Approaches in Estimating GDP
Other Measures of Growth and Development
1.​ Final Expenditure Approach: GDP is the sum of all
expenditures on final goods and services by the four ●​ Inclusive Growth: Promotes equitable opportunities and
sectors: benefits for all economic participants, supporting poor and
 marginalized groups. Emphasizes equity, unlike traditional 4.​ High population growth rates: Higher rates and larger
models. youth populations compared to high-income nations.
●​ Human Development Index (HDI): Measures average 5.​ Greater social fractionalization: Racial/ethnic tensions
achievements in three key dimensions: can escalate conflicts, worsening hunger, malnutrition,
1.​ Life expectancy (long and healthy life). violence.
2.​ Education (literacy rate, enrollment, attendance - 6.​ Large rural populations but rapid rural-to-urban
being knowledgeable). migration: Seeking better income opportunities. Includes
3.​ Per capita income (decent standard of living). labor migration to developed countries, causing brain drain
●​ Economic Freedom Index: Measures the degree of and poor rural growth.
economic freedom based on indicators like Trade Freedom, 7.​ Low levels of industrialization and manufactured
Fiscal Freedom, Property Rights, Freedom from Corruption, exports: Stages of industrialization often fail due to poor
etc.. investment and technological shifts. Preference for
imports/services over enhancing exports/manufacturing.
Unemployment and Inflation: Fiscal and Monetary Policy 8.​ Adverse geography: Geographic factors (landlocked,
conflict zones, climate change, disasters) influence
●​ Policies used to manage the economy. development.
9.​ Underdeveloped financial and other markets: Maturity of
Fiscal Policy financial markets is crucial for economic growth; access to
banks/credit is important.
●​ Involves government spending and taxation . 10.​ Lingering colonial impacts: Former colonies still bear
●​ Expansionary Fiscal Policy: Aims to reduce effects of colonialism (resource exploitation, transformed
unemployment . Tools: increasing government spending systems). Many remain economically dependent, some
and/or decreasing taxes . Shifts the Aggregate Demand paying colonial taxes.
(AD) curve right, increasing real GDP, lowering
unemployment, but may cause inflation .
●​ Contractionary Fiscal Policy: Aims to reduce inflation .
Tools: decreasing government spending and/or increasing
taxes . Shifts the AD curve left, decreasing inflation, but
may increase unemployment .
●​ Can lead to a Crowding-Out Effect .

Monetary Policy

●​ Managed by the Central Bank; affects the money supply

and interest rates.
●​ Easy Monetary Policy (Expansionary): Aims to reduce
unemployment during recessions. Increases the money
supply by: Buying government securities, lowering reserve
requirements, reducing the discount rate. Leads to lower
interest rates, boosts investment/AD/real GDP, shifts AD
right, decreases unemployment, but may cause inflation.
●​ Tight Monetary Policy (Contractionary): Aims to reduce
inflation. Decreases the money supply by: Selling
government securities, increasing reserve requirements,
increasing the discount rate. Leads to higher interest rates,
discourages investment/AD, restrains inflation, shifts AD
left, but may increase unemployment.
●​ Affects net exports through the Net Export Effect:
○​ Easy policy: Lower interest rates -> less demand
for domestic currency -> depreciation -> increased
exports -> increased AD.
○​ Tight policy: Higher interest rates -> attract capital
inflows -> increased demand for domestic
currency -> appreciation -> higher imports, lower
exports.

Comparative Economic Development

●​ World divided into developed (Global North, First World)

and developing (Global South, Third World) countries.
●​ Historically, First World (US, Western Europe) advocated
capitalism, Second World (USSR, Eastern Europe)
socialism, Third World (Asia, Africa, Latin America, former
colonies) not aligned.
●​ Inequality is real and undeniable.
●​ World Bank Classification based on GNI per capita:
○​ Lower income: $1,025 and less.
○​ Lower middle-income: $1,026 to $4,035.
○​ Upper middle-income: $4,036 to $12,475.
○​ High income: $12,476 and above.

Characteristics of Developing Countries

1.​ Low levels of standard of living and productivity: Many

skilled workers are underemployed.
2.​ Low levels of human capital: Low literacy, limited
education access, malnourishment, difficult healthcare
access.
3.​ High levels of income inequality and absolute poverty:
Evident contrast between wealth (high-rise condos) and
poverty (slums).
LECTURE 3 PART 1 - DEVELOPMENT ECONOMICS: A BRIEF ○​ MDGs focused mainly on fighting poverty, but a
HISTORY OF THE SUSTAINABLE DEVELOPMENT GOALS broader approach for sustainable development
(SDGS) was needed.

Purpose of Goal-Based Development Creation of the SDGs (2012-2015)

●​ Setting clear targets ●​ Governments proposed SDGs, modeled after the success
●​ Directs governments, businesses, and individuals of the MDGs.
toward a common direction. ●​ Proposed as the next step at the Rio+20 Summit (2012).
●​ Aims to drive progress by setting specific targets. ●​ Negotiation Process:
○​ Started with ~300 proposed goals.
Origins of the SDGs ○​ Condensed into 17 high-priority goals.
○​ These 17 goals focus on prosperity, people, and
●​ Inspired by goal-based development and the success of the planet.
the Millennium Development Goals (MDGs). ●​ Adoption: Officially adopted by 193 UN member states on
●​ SDGs aim to create a world of shared prosperity, social September 25, 2015.
inclusion, and environmental sustainability. ●​ Goals are embedded within Agenda 2030.
●​ Built upon ideas recognizing the link between economic
growth and environmental sustainability. The Paris Climate Agreement (2015)

Key Influences & Milestones ●​ Finalized on December 12, 2015.

●​ Closely linked to SDG 13 (Climate Action).
●​ John F. Kennedy's Influence: Emphasized defining goals ●​ Together, the SDGs and the Paris Agreement form the
clearly so people can see it, draw hope, and move overarching framework for global sustainable
toward it. development.
●​ The Stockholm Conference (1972) (UN Conference on
the Human Environment): First major international Agenda 2030
environmental meeting. Recognized the conflict between
economic growth and environmental sustainability. ●​ Includes the 17 Sustainable Development Goals and 169
Highlighted environmental risks from unchecked human targets .
activity. ●​ Requires urgent global cooperation to meet the goals
●​ "Limits to Growth" (1972): Predicted that continuous and Paris Agreement targets .
economic growth with existing technology would cause ●​ The challenge is understanding what is needed to achieve
overwhelming environmental strain. these goals by 2030 .
●​ The Brundtland Commission (1987): Popularized
sustainable development. Defined sustainable
development as meeting the needs of the present without
compromising future generations' ability to meet their own
needs. Introduced intergenerational justice.
●​ The Earth Summit (Rio de Janeiro, 1992) (UN
Conference on Environment and Development):
Embraced sustainable development globally. Adopted
three major treaties:
○​ UN Framework Convention on Climate Change
(UNFCCC)
○​ UN Convention to Combat Desertification
○​ Convention on Biological Diversity
●​ Millennium Development Goals (MDGs, 2000): Launched
in 2000. Focused on tackling global poverty and other
critical issues. Established measurable, universally
agreed objectives.

Millennium Development Goals (MDGs) - 2000-2015

●​ Key Focus Areas:

○​ Preventing deadly diseases.
○​ Expanding access to primary education.
○​ Tackling extreme poverty and hunger.
●​ Key Progress Achieved:
○​ Reduced Extreme Poverty: Over 1 billion people
lifted out since 1990.
○​ Improved Child Survival: Mortality dropped by
more than half since 1990.
○​ Combatting Diseases: HIV/AIDS infections fell by
almost 40% since 2000. Made huge strides
against HIV/AIDS, malaria, and tuberculosis.
○​ Increased Education Access: Out-of-school
children dropped by more than half since 1990.
Inspired investment in primary education.
○​ Significant improvements in maternal health.
○​ Access to water and sanitation significantly
improved.
○​ Created a global movement for improving
education and health outcomes.
●​ Limitations (Grim Realization Leading to SDGs):
○​ The concept of sustainable development hadn't
fully taken hold.
○​ The three multilateral agreements from the
Earth Summit were not fully implemented.
 L3 PART 2 - DEVELOPMENT ECONOMICS: GROWTH AND formation.​
DEVELOPMENT THEORIES
●​ Proponents prefer to "let the facts speak for themselves".​
Post World War II Context:
○​ a. Lewis Theory of Economic Development /
●​ Struggle to rebuild. Two-sector surplus model: Formulated by W.
●​ Post-war economic boom. Arthur Lewis.​
●​ Increased demand for consumer goods.
●​ Flowing foreign aid to countries like the Philippines. ■​ Describes the structural transformation
●​ Philippines context: Bell Trade Act (No Import duties for US of a subsistence economy.
products). ■​ Two sectors: an overpopulated rural
sector (zero marginal labor productivity)
Development as Growth: and a high-productivity industrial
sector.
●​ Post-War interest in poor nations; economists lacked a ■​ Growth happens through the transfer of
framework for largely agrarian countries without modern labor from the traditional to the modern
structures. sector.
■​ Traditional sector has excess labor (more
Classic Theories of Economic Development: Four Approaches people than needed).
■​ This excess labor moves to the modern
I. Linear Stages of Growth Model sector, attracted by higher wages. Growth
continues until surplus labor is absorbed
●​ Strands of Thought: Influenced by initiatives like the by the industrial sector.
Marshall Plan (U.S. aid to war-torn European countries). ■​ Criticisms:
Believed all modern industrial nations were once ■​ Assumes labor transfer &
underdeveloped agrarian societies.​ employment creation are
proportional to capital
●​ Core Idea: Development follows a series of stages all accumulation, but profits might
countries must progress through to transition from be invested in labor-saving
underdevelopment to a fully developed economy. equipment.
Developed countries have passed all stages; ■​ Contemporary research shows
underdeveloped countries in traditional/preconditions little surplus labor in rural areas
stages should follow development rules to become (except some countries like
self-sustaining.​ China).
■​ Urban surplus labor exists.
●​ Key Strategy (aligned with Harrod-Domar): Mobilizing ■​ Wages increase even with
domestic and foreign savings to generate investments unemployment.
is key to reaching "take-off".​ ○​ b. Patterns of Development Analysis: Empirical
work by Hollis Chenery and colleagues.​
○​ a. Rostow's Stages of Growth: Proposed by
Walt W. Rostow. Development is a staged ■​ Studies countries at different income
process. levels to identify key features of the
○​ b. Harrod-Domar Growth Model: Explores the development process.
connection between investment and economic ■​ Economy's structures transform to enable
growth. new industries as growth engines.
■​ To grow, economies must SAVE and Requires capital accumulation and
INVEST. structural changes.
■​ Other factors include labor force growth ■​ Constraints:
and technological progress. ■​ Internal factors: resources,
■​ Rostow and others defined take-off as population size, government
being able to save 15-20% of GDP. policies.
Countries saving this much would ■​ External factors: access to
develop faster. capital, technology, trade
■​ Problem: Low level of new capital (countries are part of an
formation in most poor countries. international system).
■​ Answer: Achieved through foreign aid ■​ Identified Features: Shift from
or private foreign investment (justified agriculture to industry, accumulation of
Marshall Plan for the developing world). physical and human capital, changes in
■​ Key Concept: Capital-output ratio - consumer demand (basic to
amount of capital needed to produce one manufactured), growth of cities/urban
unit of output. A high ratio requires more industries, decline in family
capital for production and can impede size/population growth.
growth. Increased investment usually ■​ Major Hypothesis: Development is an
boosts growth, but high capital-output identifiable process with similar features
ratios can limit this. across all countries.
●​ Criticisms:​ ■​ Problem/Limitations: Doesn't account
for differences and various influencing
○​ The mechanisms don't always work. factors. Emphasizing patterns over theory
○​ More savings and investment are NOT might lead to incorrect causality
sufficient. conclusions.
○​ It worked for Europe because necessary ■​ Optimism: Assumes the "correct" policy
structural, institutional, and attitudinal conditions mix will produce beneficial patterns.
were present.
III. International-Dependence Revolution
II. Theories and Patterns of Structural Change
●​ Gained support in the 1970s due to disenchantment with
●​ Core Idea: Underdevelopment results from stages and structural-change models. Resurgence in the
underutilization of resources due to structural or 21st century.​
institutional factors (domestic and international dualism).
Development needs more than just accelerated capital ●​ Core Idea: Developing countries are caught in a
dependence and dominance relationship with wealthier
nations due to institutional, political, and economic ○​ c. Dualistic Development Thesis:​
rigidities, making self-reliance difficult.​
■​Dualism: Divergence between rich and
○​ Dependence: Reliance of developing countries on poor (nations, peoples, sectors) on
developed-country economic policies, systems, various levels.
technology, attitudes, consumption patterns, etc., ■​ 4 Key Arguments:
to stimulate their own growth.​ 1.​ Different sets of conditions
coexist (wealth/poverty,
○​ Dominance: Developed countries have much modern/traditional sectors,
greater power in international economic decisions elites/populace,
(e.g., commodity prices).​ industrialized/agrarian nations).
2.​ This coexistence is enduring,
○​ a. Neocolonial Dependence Model:​ not temporary, and unlikely to
improve.
■​ Main Proposition: Underdevelopment 3.​ Disparities in
exists due to continuing exploitative superiority/inferiority are not
policies of former colonial rulers decreasing and may be
toward less-developed countries. widening.
■​ "Periphery" to "Core" flow: Resources 4.​ Dominant, wealthier elements
flow from poor/underdeveloped states often do little to "trickle down"
("periphery") to wealthy states ("core"), benefits and may even further
enriching the core at the expense of the suppress disadvantaged
periphery. sectors.
■​ Rich and poor nations coexist in an ●​ Weaknesses (of International-Dependence Models):​
international system dominated by
unequal power relationships between ○​ Appealing explanation but no insight on how
the "center" (developed) and "periphery" countries initiate and sustain development.
(developing). This makes self-reliance ○​ Actual experience of countries pursuing
difficult or impossible. revolutionary/state-run strategies has been mostly
■​ Indirect Outgrowth of Marxist negative.
Thought: Underdevelopment is seen as ○​ Based on dependency theory, countries might
a result of the historical evolution of an pursue autarky (inwardly directed development) or
unequal international capitalist trade only with other developing countries.
system.
■​ A small elite ruling class in developing IV. Neoclassical, Free Market Counterrevolution
countries (landlords, entrepreneurs, etc.)
maintains this system, knowingly or ●​ Emerged in the 1980s alongside conservative governments
unknowingly. These elites are rewarded in Western countries.​
or influenced by powerful international
interest groups linked to wealthy nations. ●​ Neoclassicists on boards of international agencies (World
Their actions often block genuine Bank, IMF) gained influence.​
reform, perpetuating underdevelopment.
■​ This system is largely shaped by ●​ Developed nations favored supply-side policies, rational
external forces, not internal conditions. expectations, privatization.​
■​ Breaking Free: May require
revolutionary struggles or substantial ●​ Developing countries pushed for freer markets,
restructuring of the global capitalist dismantling public ownership, statist planning,
system. government regulation.​
■​ Theotonio Dos Santos: Describes
dependence as a "conditioning situation" ●​ Arguments:​
where the development of dependent
nations is linked to the expansion of ○​ Underdevelopment resulted from poor resource
dominant countries. Dominant countries allocation due to incorrect pricing policies and
exploit and extract surplus due to state intervention (corruption, inefficiency, lack of
technological, commercial, capital, and incentives).
sociopolitical advantages. This is rooted ○​ State intervention slows economic growth.
in the international division of labor. ○​ Economic efficiency and growth stimulated by free
■​ Pope John Paul II: Highlighted markets, privatizing state enterprises,
economic, financial, social mechanisms expanding exports, eliminating
(controlled by individuals but operating regulation/price distortions.
automatically) that intensify wealth for a ○​ Allow the "magic of the marketplace" and the
few and reinforce poverty for the rest. "invisible hand" to guide resource allocation and
These mechanisms, influenced by stimulate development.
developed countries, constrain ●​ 3 Component Approaches:​
less-developed economies.
○​ b. False-Paradigm Model:​ ○​ Free-market approach: Markets alone are
efficient; competition is effective; technology/info
■​ Less-Radical Perspective: are free/costless; government is
Underdevelopment is a consequence of counterproductive.Public choice approach:
misguided and inappropriate advice Government does
from well-meaning, but uniformed/biased, ○​ nothing right due to selfish interests; leads to
advisors from developed country resource misallocation.
agencies. ○​ Market-friendly approach: Acknowledges market
■​ These policies often serve the vested imperfections and need for government
interests of established power groups intervention for market-friendly actions (social
(domestic and international). services, climate for private enterprise); accepts
■​ Many developing country market failures.
intellectuals/officials are trained in ●​ Traditional Neoclassical Growth Theory:​
foreign, "irrelevant" Western frameworks
not aligned with their societies' needs. ○​ Liberalization: Opening markets to draw
investment and increase capital accumulation rate.
 ○​ Solow neoclassical growth model: Economies LECTURE 4: POVERTY, INCOME INEQUALITY, DISTRIBUTION,
should converge to the same income level if they AND MOBILITY
have the same rates of savings, depreciation,
labor force, and productivity growth. Key Concepts & Definitions:
○​ Source of output growth: Labor quantity/quality,
increase in capital, technology improvement. ●​ Poverty: The deprivation of basic needs like food, shelter,
○​ Openness: Encourages access to foreign money, and clothing. Can be understood as a lack of
production ideas and technological progress. money or broader barriers to everyday life. May include
●​ Conclusions:​ social, economic, and political elements.
●​ Absolute Poverty: The situation of being unable or barely
○​ Finger-pointing between dependence theorists able to meet essential goods and services, including food,
(underdevelopment is externally induced) and clothing, and shelter.
neoclassical revisionists (blame government ●​ Relative Poverty: A condition where a person's income is
intervention, bad policies). insufficient to maintain the average standard of living in
○​ Market price allocation might be better than state their society.
intervention, but developing economies have ●​ Inequality: Refers to disparities in the distribution of
different structures: competitive free markets often economic assets and income.
don't exist, information is limited, markets are ●​ Economic Inequality: Disparities in wealth or income.
fragmented. Refers to the distribution of attributes like income or wealth
○​ The "invisible hand" often lifts those already across citizens within or between countries.
well-off, failing the majority. ●​ Income Inequality: A wide gap between the money earned
○​ In environments with widespread institutional by the richest people in an economy compared to the
rigidity and severe socioeconomic inequality, poorest. Income includes wages, investment earnings, rent,
both markets and governments will typically and real estate sales. It is the disproportionate distribution
fail. of total national income among households or an extreme
disparity with a high concentration of income in the hands
Reconciling Differences: of a small percentage of the population.

●​ Each approach has strengths and weaknesses. Eight Critical Questions about Distribution and Development:
●​ Study of economic development is challenging due to
ideological, theoretical, empirical controversies. Evolving 1.​ How best to measure inequality and poverty?
insights. 2.​ What is the extent of relative inequality in developing
●​ Consensus on Significance from Each Approach: countries, and how is it related to poverty?
○​ Linear stages: Crucial role of savings and 3.​ Who are the poor, and what are their economic
investment. characteristics?
○​ Two-sector model: Transfer of resources from 4.​ What determines the nature of economic growth (who
low to high productivity activities, linkages benefits and why)?
between traditional & modern sectors. 5.​ Are rapid economic growth and more equal income
○​ Dependence theory: Importance of the world distribution compatible or conflicting? Can lessening
economy and developed world decisions affecting disparities contribute to higher growth?
developing economies. 6.​ Do the poor benefit from growth, and does this depend on
○​ Neoclassical: Efficient production, proper price the type of growth? What can be done to help the poor
systems. benefit more?
7.​ What is so bad about extreme inequality?
8.​ What policies are required to reduce the magnitude and
extent of absolute poverty?

Measuring Inequality:

●​ The first step to understanding economic inequality is

knowing how to measure it.
●​ Economists distinguish between two principal measures:
○​ A. Personal or Size Distribution of Income:
Examines individual households and their total
earnings. Income can be grouped (quartiles,
deciles, quintiles). Income sources can include
employment, interest, profits, rents, gifts, or
inheritance. This measure doesn't consider how
income is received or factors like
location/occupation.
○​ B. Functional/Distributive Factor Share
Distribution of Income: Focuses on the income
going to each factor of production (labor, profit,
rent, interest) regardless of factor ownership.
●​ Measurement Tools (Size Distribution):
○​ Kuznets Ratio (KR): Measures the ratio of
income going to the highest-earning households
(top 20%) to income going to the lowest-earning
households (lowest 20% or 40%). A value closer
to 1 indicates more equal distribution.
■​ Example: If top 20% have 51% and
bottom 40% have 14%, KR = 51%/14% =
3.64. Top 20% earn 3.64 times more than
bottom 40%.
■​ Example: If top 20% have 51% and
bottom 20% have 5%, KR = 51%/5% =
10.2. Top 20% earn 10.20 times more
than bottom 20%.
○​ Lorenz Curve: A graphical representation of
income or wealth distribution. Arranges the
population from lowest to highest income share.
 ■​ The Line of Equality (45-degree line) ○​ Assets: Not just quantity but also quality matters.
represents perfectly equal distribution Includes individual assets (houses, cars,
(e.g., 40% of population receive 40% of consumer goods) and country assets (access to
income). raw materials, natural resources, infrastructure,
■​ The Lorenz Curve shows the actual capital assets, human assets).
cumulative income distribution. ○​ Gender: Evidence suggests women are still paid
■​ The further the Lorenz curve lies below less than men for the same job. Some countries
the line of equality, the greater the discriminate against women. Men dominate
inequality. positions of power. The 'glass ceiling' limits
■​ If a Lorenz curve moves closer to the line women's ascent to the top.
of equality, it indicates a reduction in ○​ Wealth: Different from income (wealth is a stock,
inequality. income is a flow). Includes houses, land, physical
○​ Gini Coefficient: Calculated from the Lorenz assets like artwork. Inherited wealth is a source of
Curve (Area A / Area A+B, where A is the area inequality. Example: In 2001, the wealthiest 1% in
between the line of equality and the Lorenz curve, the UK owned 23% of national wealth; the
and B is the area below the Lorenz curve). wealthiest 50% owned 95%.
Enables more precise comparison of Lorenz
Curves. Development Typologies & Inequality:
■​ Varies from 0 (perfect equality) to 1
(perfect inequality). ●​ These typologies relate economic growth to changes in
■​ Countries with highly unequal income distribution:
distributions typically have Gini ○​ Traditional Sector Enrichment Growth: Growth
coefficients between 0.50-0.70. happens in the traditional sector. Leads to higher
■​ Relatively highly equitable distributions income for farming households and a more equal
typically have Gini coefficients between relative distribution of income. Reduces poverty.
0.20-0.30. Causes the Lorenz curve to shift uniformly
■​ A lower Gini coefficient means the Lorenz upward, closer to the line of equality. Examples:
curve is closer to the line of equality. A Sri Lanka, Kerala (India). Often characterized by
rise in Gini shows a rise in inequality. low growth but significant poverty reduction.
■​ Example Calculation: Gini = 0.5 * ○​ Modern Sector Enrichment Growth: Growth
(average difference in income / average happens in urban/modern areas. Leads to higher
income). For perfect equality (everyone incomes for urban households but a less equal
has the same income), Gini = 0. For relative distribution between urban and rural
perfect inequality (one person has all sectors. Produces no change in poverty. Causes
income), Gini = 1. the Lorenz curve to shift downward and farther
○​ Gini Coefficient Principles: from the line of equality. Examples: Latin America,
■​ Anonymity: Measure shouldn't depend Africa.
on who has the higher income. ○​ Modern Sector Enlargement Growth:
■​ Scale Independence: Measure shouldn't Development where absolute incomes rise and
depend on the economy's size or absolute poverty is reduced. The poor get richer
currency. as they move into modern sector jobs, increasing
■​ Population Independence: Measure the share of the middle class. Those remaining in
shouldn't be based on the number of the traditional sector get a smaller share of
income recipients. income. Lorenz curves will cross, meaning you
■​ Transfer (Pigou-Dalton): Transferring can't make an unambiguous statement about
income from a richer to a poorer person changes in relative inequality. Inequality is likely to
(holding others constant) results in a worsen in early stages then improve. Examples:
more equal distribution. OECD, East Asia.

Understanding Inequality: Why is Extreme Inequality Bad?

●​ Types of Income Inequality: 1.​ Economic Inefficiency:

○​ Vertical Inequality: Difference between the rich ○​ Reduces access to loans for low-income
and the poor. individuals (lack of collateral), hindering education
○​ Horizontal Inequality: Differences in incomes and business opportunities.
among people of similar background, status, ○​ Leads to lower overall saving rates (middle class
qualifications, etc. saves more than the wealthy, who might spend on
●​ Factors Influencing Income Inequality: luxury or engage in capital flight).
○​ Labour Market: Differences in education, ○​ Causes inefficient asset allocation (e.g., focus on
qualifications, skills, abilities, and experience affect higher education over quality primary education).
labor supply relative to demand. ○​ Unequal land ownership results in inefficiencies,
○​ Tax System: Impact of regressive taxes and the ○​ lowering average incomes and growth.
ability of some to exploit the system to pay less 2.​ Undermines Social Stability and Solidarity:
tax. ○​ Strengthens the political and economic bargaining
○​ Education: Level of education and access power of the rich.
influence earnings. ○​ Makes it difficult to improve poor institutions
●​ Factors Influencing Inequality (Broader): because the wealthy might view themselves as
○​ Opportunity: Influenced by access to education, worse off from reforms.
work, housing, markets (for countries), and ○​ May lead the poor to support self-defeating
discrimination based on race, ethnicity, gender, populist policies.
etc.. 3.​ Generally Viewed as Unfair:Philosopher John Rawls' "veil
○​ Physical Environment: Includes natural of ignorance" thought experiment suggests most people
resources, raw materials, and climate. Not just would choose less inequality than currently exists if they
availability but also accessibility and ease of didn't know their future social position, as much inequality
exploitation are key. Requires sufficient capital comes from luck or arbitrary factors.
equipment to exploit resources. Equitable climates
are often found in economically developed Measuring Poverty:
countries. Natural climate factors and climate
change tend to affect countries least able to help ●​ A. Headcount Index (H/N):
themselves. ○​ Measures the percentage of a population living
below the absolute poverty line (Yp).
 ○​ H is the number of poor, N is the total population.
○​ Easy to understand.
○​ Insensitive to the degree of poverty (treating
someone just below the line the same as someone
far below) and the distribution of income among
the poor.
●​ B. Poverty Gap Index:
○​ A measure of how much individuals fall below the
poverty line, expressed as a percentage of the
poverty line.
○​ Calculated by multiplying the share of the
population in poverty by the average shortfall from
the poverty line.
○​ A smaller index indicates greater potential to
allocate a budget to identifying poor
characteristics. Gives a better sense of the depth
of poverty.
●​ C. Squared Poverty Gap Index (Poverty Severity Index):
○​ Averages the squares of the poverty gaps relative
to the poverty line.
○​ Measures the severity of poverty. A larger value
indicates more uneven and extreme poverty
among those affected.

Relationship Between Growth and Poverty:

●​ Traditionally, some believed rapid growth bypassed the

poor.
●​ There were concerns that public spending for poverty
reduction would slow growth.
●​ However, when growth is inclusive, it reduces poverty.
●​ Lower extreme poverty may also lead to higher growth.
●​ The question is whether poverty reduction and growth
acceleration conflict or are complementary.

Takeaways about the Poor:

●​ Poverty involves more than just lack of money; the poor are
often malnourished, illiterate, prone to sickness,
unemployment, alcoholism, and depression.
●​ They are often excluded from markets and social groups.
●​ They are vulnerable to disasters and predation.
●​ Poverty limits awareness of rights and access to legal
institutions.
●​ The poor are often trapped in this situation for most of their
lives.
●​ Poverty is linked to significant social and political problems
like crime, violence, broken families, health crises,
corruption, and poor governance.
●​ Privilege involves not just money and social access but also
the intergenerational transfer of knowledge and the "hidden
rules" of economic class. Individuals bring these hidden
rules with them from their upbringing.

Reminders: Midterm exam, online quiz, reporting, discussion,

grades TBA.