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ECON304: Economic Development

Unit 1: What Is Economic Development?   The meaning of the term economic development is not as clear as you might expect. As we learned in earlier economics courses, economies are complex. Many internal and external factors impact whether an economy is able to grow, provide employment to its working-age population, and reduce poverty. Furthermore, different people may hold different views as to what constitutes development. Some may believe that development means higher incomes. Others might believe that development is a change in the structure of society or institutions. Still others might consider development an improvement in the health and education outcomes of a given population. Economics tells us that all of these factors are important in defining economic development population; thus, before considering the major theories of economic development, it is important to understand the key terms and concepts used in the literature of economic development and to determine what is meant by these concepts.

Development is not simply growth; it is economic growth plus sustainable changes in people’s quality of life. Economists usually measure economic growth in terms of the rate at which GDP changes over time. There is little argument about this measure of growth. A high real GDP growth relative to population growth is necessary to provide schools, hospitals, housing, and adequate nutrition. However, a high per capita GDP growth is not sufficient; it must be accompanied by structural changes that improve welfare. Therein lies the difference between economic growth and economic development. It is important to understand the factors that promote this growth, but it is just as important to understand the factors that change people’s quality of life, allowing people to make choices and to participate in the economy.

Unit 1 Time Advisory
Completing this unit should take you approximately 12 hours.

☐    Subunit 1.1: 3.5 hours

☐    Subunit 1.2: 1.25 hours

☐    Subunit 1.3: 3.25 hours

☐    Subunit 1.4: 1.5 hours

☐    Subunit 1.5: 0.5 hours

☐    Discussion: 2 hours

Unit1 Learning Outcomes
Upon successful completion of this unit, you should be able to: - define economic development; - distinguish between economic growth and economic development; - identify some of the stylized facts of developing countries; - discuss the link between population growth and economic development; and - explain the link between income, poverty, and income distribution. 

1.1 Origin of the Concept of Economic Development   The idea and process of economic development involves the deliberate manipulation of forces within the control of humans to alter economic outcomes instead of accepting what nature provides by way of sustenance as inevitable. Some argue that one major reason for underdevelopment is the fatalistic attitude of people who live in poor countries and their unwillingness to alter what has been. A recent paper by Easterly and Levine suggests that a great amount of economic development today is the result of European settlement outside Europe. The argument goes that these settlements “shaped institutional, educational, technological, cultural, and economic outcomes.” (2012) As with many theories, or rather hypotheses, in economic development, this one is not easy to accept. For many in the developing world, this smacks of Eurocentricism. Nonetheless, casual and empirical observations suggest that education introduced by European settlers had a lot to do with changing the fatalistic attitude of many traditional societies, ushering in human capital development in ways that had not been the case before. As you read through the various texts, you will come across many ideas that may sound self-serving to one group or the other. Your ability to discern what may be correct, based on empirical evidence is as much a part of your education as your knowledge of the various theories.

1.1.1 Defining Development   By the time you finish reading this section, you should feel comfortable defining economic growth and economic development as well as distinguishing between the two. The piece titled “Approach to Development” is a good opener, and the exercise should help you appreciate the fact that development is a process, a continuum of changes which eventually brings a country to a point at which it is classified as developed. As a continuum, one can always argue about the precise point at which developing has ended and developed has begun. The US is obviously a developed country, yet some parts of it are no different from a typical developing country. Azerbaijan, Brazil, China, India, and South Africa are all developing countries but some parts of these countries can hardly be called developing.

  • Activity: Connexions: Siyavula Uploaders’ “Approach to Development” Link: Connexions: Siyavula Uploaders’ “Approach to Development” (PDF)

    Instructions: Read the brief introductory information for a definition of developing countries and developed countries. Complete the activities, which will help you practice identifying which countries are developed and which are not. Once you’ve completed Activities 1–3, you may check your response against the answer key in the “Memorandum” section.

    Completing this activity should take approximately 2 hours.

    Terms of Use: This article is released under a Creative Commons Attribution 3.0 License. It is attributed to Siyavula Uploaders, and the original version can be found here.

  • Reading: The World Bank’s Beyond Economic Growth: “What Is Development?” Link: The World Bank’s Beyond Economic Growth: “What Is Development?” (PDF)
     
    Instructions: Read this chapter for an overview on development. For further clarification on issues raised in this chapter, please refer to the accompanying glossary. This article introduces the concept of development, providing both what might be considered the traditional and more modern definitions of development.
     
    Reading this chapter should take approximately 30 minutes.
     
    Terms of Use: This material has been reposted by the kind permission of the World Bank, and the original version can be found here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

1.1.2 Historical Foundations of Theories of Economic Development   The perennial effort to live from one day to the next without the fear of hunger or danger has always preoccupied humankind. Societies have always sought ways to overcome these obstacles. They did so by organizing in ways they felt would give them the best chance of survival. Some were more successful than others. The successful ones gave economists the impetus to study them and apply lessons to others. Our economic systems are ways of organizing production activities. Sometimes it is not easy to differentiate the way we govern ourselves from the way we organize productive activities. From feudalism to capitalism to communism and in between, the social system has been as much about government as about allocating the scarce resources. The piece below traces the historical origins of economic development.

  • Reading: University of Iowa, Center for International Finance and Development: E-Book on International Finance & Development: Ricardo Contreras’ “How the Concept of Development Got Started” Link: University of Iowa, Center for International Finance and Development: E-Book on International Finance & Development: Ricardo Contreras’ “How the Concept of Development Got Started” (HTML or PDF)

    Instructions: Read this chapter, which traces the historical foundations of the current debate on economic development from the 13th to the 20th centuries. Pay particular attention to the forces behind the emergence of the classical/neo-classical tradition and the historical materialism school. You can access the PDF by choosing the “Download PDF” link next to the Adobe Icon at the top of the article.

    Reading this chapter should take approximately 1 hour.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

1.2 Comparing Levels of Development between Regions of the World   Although the term developing countries refers to a group of countries, no two countries are alike. The stylized facts of developing countries fit them in aggregate, but on just about any measure of development, you will find that some of the facts do not apply to some of the countries. Some developing countries experience frequent extreme poverty and hunger, whereas others rarely do. Some developing countries have low literacy rates, whereas others have high literacy rates. Some have low doctors per thousand of population, whereas others do not. The contrast between development and the absence of development will be between the poor developing countries and rich developed countries. The UK is a developed country compared to Ethiopia, but how does Ethiopia compare to say Haiti? They are both developing countries, and in regard to some measures, Ethiopia will do better and on others Haiti may do better than Ethiopia.

  • Reading: The World Bank’s Beyond Economic Growth: “Comparing Levels of Development” Link: The World Bank’s Beyond Economic Growth: “Comparing Levels of Development” (PDF)
     
    Instructions: Read this chapter, which explains how different regions throughout the world compare on common measures of levels of development.
     
    Reading this chapter should take approximately 30 minutes.
     
    Terms of Use: This material has been reposted by the kind permission of the World Bank, and the original version can be found here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

  • Guest Lecture: YouTube: TED Talks’ “Hans Rosling Shows the Best Stats You’ve Ever Seen” Link: YouTube: TED Talks’ “Hans Rosling Shows the Best Stats You’ve Ever Seen” (YouTube)

    Instructions: Listen to this guest lecture for a brief comparison of how individual nations compare to each other in terms of development. Keep in mind that this is just an overview; try to identify other aspects that would make for good comparison points between nations.

    Watching this lecture and pausing to take notes should take approximately 45 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. It is attributed to TED, and the original version can be found here.

1.3 Population Growth in the Developing World   Population growth is both a boon and a bane for economic development. First, it is from the population that society derives the labor force. Thus, without population growth, this essential factor of production will dwindle. Second, it is from the population that society derives entrepreneurs with the qualities to take risks and to organize production. On the other hand, if the population grows too quickly, it poses problems. The population must be cared for, be educated over a long period, be made ready for participation in economic activity, and be prepared to take care of the aging. Is there an ideal population growth rate? Are the poor countries poor because the populations are growing too fast? These are important issues of interest to the development economist. 

  • Reading: The World Bank’s Beyond Economic Growth: “World Population Growth” Link: The World Bank’s Beyond Economic Growth“World Population Growth” (PDF)

    Instructions: Read this chapter, which explains the importance of population growth in the dynamics of development and underdevelopment. This article also shows how recent trends in population growth differ between regions in the world.

    Reading this chapter should take approximately 30 minutes.

    Terms of Use: This material has been reposted by the kind permission of the World Bank, and the original version can be found here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

  • Guest Lecture: YouTube: TED Talks’ “Hans Rosling: Asia’s Rise – How and When” Link: YouTube: TED Talks’ “Hans Rosling: Asia’s Rise – How and When” (YouTube)

    Instructions: Watch this lecture. The idea that poorer countries’ income per capita will grow faster than richer countries’ income per capita is known as convergence. Does that mean that eventually all countries will converge to the same level of income? The rate at which China, India, and Brazil have been growing has led several people to conclude that eventually China will have a higher (per capita) income than the US. In this invigorating guest lecture, the speaker compares the growth of US to the growth of emerging nations such as China and India and makes some predictions about when these economies are likely to catch up to the US economy. He also points out existing roadblocks in these economies. As you listen, think about the factors that promote and inhibit growth. 

    Watching this lecture and pausing to take notes should take approximately 45 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. It is attributed to TED, and the original version can be found here.

  • Guest Lecture: YouTube: TED Talks’ “Martin Jacques: Understanding the Rise of China” Link: YouTube: TED Talks’ “Martin Jacques: Understanding the Rise of China” (YouTube)

    Instructions: Watch this lecture. You previously listened to Hans Rosling’s talk on the rise of Asia. In this lecture, Martin Jacques talks about China’s road to success. Jacques explains the factors that render the country distinct from its western counterparts, the reasons that have led to its success, and the factors that will determine its future.
     
    Watching this lecture and pausing to take notes should take approximately 45 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. It is attributed to TED, and the original version can be found here.

  • Reading: The World Bank’s Beyond Economic Growth: “Economic Growth Rates” Link: The World Bank’s Beyond Economic Growth: “Economic Growth Rates” (PDF)
     
    Instructions: Read this chapter, which tracks trends in economic growth according to a number of classifications including geography, natural resource endowment, and income level. When reviewing this reading, start to consider the origin of the differences in economic growth rates for these different countries.

    Reading this chapter should take approximately 30 minutes.
     
    Terms of Use: This material has been reposted by the kind permission of the World Bank, and the original version can be found here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

  • Guest Lecture: YouTube: TED Talks’ “Nandan Nilekani’s Ideas for India’s Future” Link: YouTube: TED Talks’ “Nandan Nilekani’s Ideas for India’s Future” (YouTube)

    Instructions: Watch this lecture. This lecture introduces another case study in the context of a developing country’s recent growth. In this guest lecture, the speaker presents four categories of ideas that help shape the development of a nation. He explains these ideas in the context of India’s progress and emphasizes those that are important for its continued progress.

    Watching this lecture and pausing to take notes should take approximately 45 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. It is attributed to TED, and the original version can be found here.

1.4 Poverty and Income Inequality   Per capita GDP is not always a good measure of the level of poverty or of wealth. First, many development practitioners consider poverty to be multi-dimensional, meaning that is it not only defined by how much income a household has to spend. Second, GDP per capita does not consider the impact of inequality in the distribution of income, which may mask problems of poverty. A high per capita GDP may be distributed such that a small fraction of the population gets a large fraction of the income. This may result in a large percentage of the population being poor even though the country has a high per capita GDP. Economists have come up with an ingenuous way of measuring this concept by using the Lorenz curve. The Lorenz curve is a square graph with the cumulative percent of income on the vertical axis and the cumulative percent of the population receiving the cumulative percent of income on horizontal axis. For example, if the first 20 percent of the population receives 20 percent of income, then the coordinates will put that point on the line 45o from the origin (the line from the origin which bisects the 90 degree angle). If the first 20 percent of the population receives 5% of the income, then the coordinates will be below the 45o line. Zero percent of the population will receive zero percent of the income, and naturally 100 percent of the population will receive 100 percent of income; thus, if we plot the coordinates of the cumulative percentage of population against the percent of income it receives, then the line will start from the origin and end at the vertex of the parallel to the horizontal axis and the line parallel to the vertical axis. Now, if the bottom 20 percent of the population receives 5% of the cumulative income and the bottom 40% receives 25% of cumulative income, then these points will lie below the 45o line. If we continued till we have covered 100 percent of the population and 100 percent of income, we would have a new line which lies below the 45o line. The area between this line and the 45o line divided by the area formed by the triangle to the left of the 45o line is called the Gini Coefficient (named after Corrado Gini, a mathematician). This coefficient gives us a sense of the distribution of income. If the coefficient is zero, then there is equal distribution of income or perfect distribution of income. The bigger the coefficient, the more unequal income is distributed.

  • Reading: The World Bank’s Beyond Economic Growth: “Income Inequality” and “Poverty and Hunger” Link: The World Bank’s Beyond Economic Growth: “Income Inequality” (PDF) and “Poverty and Hunger” (PDF)

    Instructions: Read these articles. The first article describes a number of definitions of poverty and analyzes variations in poverty globally. The second article compares inequality differentials between countries and examines what impact inequality might have on economic growth.

    Reading these articles should take approximately 45 minutes.

    Terms of Use: The articles above have been reposted by the kind permission of World Bank and can be viewed in their original forms here and here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

  • Guest Lecture: YouTube: TED Talks’ “Paul Collier on the ‘Bottom Billion’” Link: YouTube: TED Talks’ “Paul Collier on the ‘Bottom Billion’” (YouTube)

    Instructions: Watch this lecture. In this guest lecture, the speaker, economist Paul Collier, contends that the fundamental challenge of development at present is to find a way to give hope to the billion people that have been stuck in stagnant economies. In this regard, he advances a bold, compassionate plan for closing the gap between the rich and the poor.

    Watching this lecture and pausing to take notes should take approximately 45 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License. It is attributed to TED, and the original version can be found here.

1.5 Industrialization in the Developing World   - Reading: The World Bank’s Beyond Economic Growth: “Industrialization and Postindustrialization” Link: The World Bank’s Beyond Economic Growth: “Industrialization and Postindustrialization” (PDF)

 Instructions: Read this chapter, which looks at how the structure
of countries’ economies tends to change over the course of the
development process. Following the decolonization of most of the
developing world after WWII, many former colonized poor countries
saw their path to development in terms of industrialization.
Therefore, these countries embarked on extensive industrialization.
Along with the issue of industrialization as a means to develop was
whether the process was to be government led or private sector led.
If it was to be government led, how was it to be financed? In Latin
America, some countries decided that it was to be government led and
its deficit financed. The result was a period of rapid inflation and
poor economic performance. This text is a primer on the subject.
While reading this text, consider how this evolution has differed
during various historical periods and how new technologies will
impact this change in the future.  

 Reading this chapter should take approximately 30 minutes.  

 Terms of Use: This material has been reposted by the kind
permission of the World Bank, and the original version can be found
[here](http://www.worldbank.org/depweb/english/beyond/global/chapter9.html). Please
note that this material is under copyright and cannot be reproduced
in any capacity without explicit permission from the copyright
holder.

Unit 1 Activity   - Activity: The Saylor Foundation’s “ECON304 Course Discussion Board” Link: The Saylor Foundation’s “ECON304 Course Discussion Board”

 Instructions: After reviewing the course materials for this unit,
please respond to the following questions by posting to the course
discussion board. Please feel free to start your own discussions as
well as review and respond to other students’ postings.  

 1.    Economic growth is more important than economic development.
Economic development is more important than economic growth. Which
do you think is more important, and why? Provide supporting evidence
for your reasons.  

 2.    People who live in developing countries are by definition
poor. Why might this be true or why might this be false? Explain
your reasons.  

 Completing this activity should take approximately 2 hours.