econ 3508: introduction to economic development; autumn 2015

ECON 3508: Introduction to Economic Development; Autumn 2015

ECON 3508: Introduction to Economic Development

Economic and Human Development:

Concepts and Measurement

[See Textbook, Chapter 1 and 2, pp. 40-55]

September 2 and 9, 2015

Note: concepts of income distribution will be examined later]

Agenda

1. Introduction: Procedural and Administrative Matters

2. Economics and the Study of “Development” ?

3. The Development Imperative

4. The Institutional Range of Economic Activities

5. The “System of National Accounts” and the concept of GDP, and “Development as Growth of GDP”

6. Broader Concepts of “Development”- Standard Definitions- UNDP, Amartya Sen and the Human Development

Index

7. Other Measures of Human Well-Being

1 Economics and the Study of “Development”

The Nature of Development Economics Greater scope than traditional neoclassical economics

and political economy.

– The Role of Values in Development Economics Ethical content: Value judgments re what

ought to be done Centrality of concepts of

– poverty elimination– equity and “fairness”– raising living standards– participation, democratic decision-making– human rights

Economies as Social Systems: The Need to Go Beyond Pure Economics– Social Systems

(organizational and institutional structures of a society, including values, traditions, cultures, attitudes and social and power structures)

Interdependent relationships between economic and non-economic factors

– Success or failure of development policy depends on knowledge of broader social systems.

Importance of taking account of institutional and structural variables along with more traditional economic variables

2. The Development Imperative

Why Study Development Economics?

Humanity’s “Great Tasks”

Central Issues

The Development Challenge:

RegionGDP pc

(PPP)$US 2012

Life Expectancy

2012

Child Mortality. Per 1000

2012

Sub-Saharan Africa 2,010 54.9 76

East Asia & Pacific 6,874 72.9 20

Low-Income Europe and Central Asia

12,243 71.5 17

Latin America & Caribbean

10,300 74.7 18

Middle East & N. Africa

8,317 71 36

Canada 35,369 81.1 5

Source: UNDP, Human Development Report 2013, Tables 1 and 7

Figure 2.4 Shares of Global Income, 2008

World Income Distribution

City Night-Lights as seen from from Space

4. The Institutional Range of Economic Activities

1 A. Home-Based Economic Activities– personal services for ourselves;– goods and services (G&S) for family members

B. Services for Friends and Neighbors– voluntary services;– cooperation with others

2. Informal Activities (Underground or Shadow Economy)

– small-scale goods and services production;– legal G&S, “extra-legal” production,

– “extra-legal”: outside state regulatory framework and taxation system

3. Formal Economy– legal Goods and Services, produced ithin regulatory framework

and taxation regime of government

4. Criminal Economy– illegal G&S, illegal production

The Range of Economic Activities and their Place in GDP Measures

Product Legality of

Product

Legality of Production Process

Inclusion in “GDP” Reasons for Exclusion

“Formal Sector” or Economy

Legal products of all varieies

Yes

Yes

Underground provision for

some activities

Yes

No for some activities

n.a.

Tax Evasion

“Informal Sector” or Economy

Many types of services, usually small scale

Yes

Yes

Often No

Excessive costs of gathering information Some tax evasion

Home-Based Economic Activities

Child-care; Home maintenance and repair, Food preparation, Personal Services

Yes

Yes

No

Value impossible to determine accurately Tax collection unrealistic

Criminal Activities

Drugs, Prostitution, Gambling of some sorts; Extortion rackets

No

Yes;

Maybe yes Maybe no;

No

No

Activities are illegal;

Relevant Information

impossible to determine

5. The “System of National Accounts” and concept of GDP

Relevant mainly for the “formal economy”Originated after World War II in most countries

- designed to measure key economic variables - objective: permit effective economic management

UN Standardizes the SystemMeasurement of Economic Aggregates is - costly;

- conceptually fuzzy and problematic;- usually inaccurate, ambiguous, and moreso in low income countries- vital for effective macroeconomic management

[and thence for human development and environmental protection]

Defining Economic Development in relation to Economic Growth

Economic Growth in per capita terms: focuses on volume of economic output or production;

- A weak and imprecise measure of real production and material well-being;

- An even weaker measure of general human well-being.

Definition: Gross Domestic Product:

The total market value of all final goods and services produced legal activities only during a given period of time within a geographical area (country, region, or

province) regardless of the ownership of the income generated.

usually covers the formal economy and often some estimates of the informal or underground economies

GDP, with “Purchasing Power Parity”

Explain

Comparison of – GDP pc at Official Exchange Rates and Prices

and

– GDP pc according to Purchasing Power Parity

GDP pc (PPP)

GDP per capita, 2005; Normal and Purchasing Power Parity

Country GDPpc GDPpc (PPP)Sub-Saharan Africa 845 1.998

Ghana 485 2,480

Kenya 547 1,240

Tanzania 316 744

Zimbabwe 259 2,038

OECD, High Income 35,616 33,831

Canada 34,484 33,375

Norway 63,918 41,420

China 1,713 6,757

Source: UNDP, Human Development Report, 2007-2008 pp.376-380

Conclusion?

World Map of GDP per capita PPP 2008-2013

GDP and Economic Well-Being

GDP Per Person (PPP) a measure of income and expenditure of the average person in the economy.– It is an “OK” measure of the material well-

being of the economy as a whole.– More Real GDP usually means we have a

higher material standard of living by being able to consume more goods and services.

– It is NOT intended to be a measure of happiness or quality of life.

GDP and Human Well-Being

GDP and GDP pc (PPP) are weak measures of human well-being.

WHY ??

GDP and Human Well-BeingGDP and GDP pc (PPP) are weak measures of human well-being.

1. Measurement difficulties to begin with.2. They ignore:

- Distributional issues- Factors that lead to a quality environment.- Ignores activities that takes place outside

markets, e.g. - child-rearing- volunteer work

- most home-based economic activities- “informal sector” activities are often missed;- underground activities are missed;

- Leisure and the amount of work is ignored; - The duress, or pleasantness of work is ignored- “Climate-Adjustment” ?

5. Broader Concepts of “Development”

Some Background on the concept of “Development”

Development = Growth

+ Equity

+ Sustainability

Explain

Standard Definitions/Concepts of “Development”

“Development” =

Growth +

Improved Quality of Life +

Economic and Social Structural Transformation

“Growth” of the Economy: rising GDP pc (PPP)

Improved Quality of Life: includes

higher incomes, education;

better health, less poverty

equality of opportunity better environment greater freedom

Broader Concepts: Amartya Sen and UNDP

The Newer Views of “Development”– Leads to improvement in wellbeing, more broadly

understood

Amartya Sen’s “Capability” Approach– Functionings as what a person is able to do with

available “G&S”– Capabilities as freedoms enjoyed in terms of

functionings, or control over G&S– Development and happiness– Well being in terms of being well and having

freedoms of choice – “Beings and Doings”:

Some Key “Capabilities”

Some Important “Beings” and “Doings” in Capability to Function:– Being able to live long– Being well-nourished– Being healthy– Being literate and knowledgable – Being adequately clothed– Being mobile– Being able to participate in the life of the community– Having ample freedom of choice re G@S– Being free and with inalienable rights (and

responsibilities) – Being happy – as a state of being - may be valued

as a functioning

Question:

Does “higher GDP generate happiness?

Does “Development” generate happiness?

Measures of Perceptions of Well-Being and Happiness

Income and Happiness: Comparing Countries

What Do We Mean by Development? (cont’d)

Todaro/Smith:

Three Core Values of Development – Sustenance: The Ability to Meet Basic Needs – Self-Esteem: To Be a Person– Freedom from Servitude: To Be Able to Choose

What Do We Mean by Development? (cont’d)

The Central Role of Women– To make the biggest impact on development, societies

must empower and invest in women

The Three Objectives of Development– Increase availability of life-sustaining goods– Raise levels of living– Expand range of economic and social choices

The Millennium Development Goals: Reflecting the UNDP / A. Sen Approach

Millennium Development goals (MDGs)– Eight goals adopted by the United Nations

in 2000 Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria, and other diseases Ensure environmental sustainability Develop a global partnership for development

(More on this later)

MDGs 2015: Goals and Targets

6. Other Measures of Human Well-Being

A. The Original UNDP Human Development Index or HDI (See HDI Web Site) http://hdr.undp.org/en/reports/global/hdr2007-2008/

http://hdr.undp.org/en/statistics/ Includes Three Components:

1. Income, as a proxy for the ability of societies to meet the overall needs of their people (33.3%)2. Life Expectancy, as a proxy for the general health of a people (33.3%)3. Educational attainment as a proxy for the general empowerment of people through knowledge. (33.3%)

Short-comings and Advantages of HDI

Short-comings and Advantages of HDI (and NDHI)Advantages: Broader than GDP pc or GDP pc (PPP) Reasonable measure of Human Wellbeing

Disadvantages: De-emphasizes distributional issues Sustainability not included GDP measurement problems continue Weights and base measures are arbitrary

B. The UNDP “Human Poverty Index”

Attempts to measure poverty with a composite index including:

1. Probability of not surviving to age 40;2. Adult illiteracy rate;3. Population without access to improved water source4. Underweight children under age five.

The New Human Development Index

Introduced by UNDP HDR 2010, November 2010

What is new in the New HDI? 1. Calculating with a geometric mean

Probably most consequential: The index is now computed with a geometric mean, instead of an arithmetic mean

A geometric mean is also used to build up the overall education index from its two components

Traditional HDI added the three components and divided by 3

New HDI takes the cube root of the product of the three component indexes

The geometric mean, in mathematics, is a type of mean or average, which indicates the central tendency or typical value of a set of numbers. It is similar to the arithmetic mean,, except that the numbers are multiplied and then the nth root (where n is the count of numbers in the set) of the resulting product is taken.

For instance, the geometric mean of two numbers, say 2 and 8, is just the square root of their product; that is 2√2 × 8 = 4.

As another example, the geometric mean of the three numbers 4, 1, and 1/32 is the cube root of their product (1/8), which is 1/2; that is 3√4 × 1 × 1/32 = ½ .

Thanks, Wikipedia

What is new in the New HDI? Other changes:

Gross national income per capita replaces gross domestic product per capita

– (GDP measures what is earned in the country by foreigners as well as locals) while GNI reflects income earned from all sources, remittances as well as local earnings)

Revised education components: now using – the average actual educational attainment of the

whole population (in place of literacy), and– the expected attainment of today’s children (in

place of school attendance)

What is new in the New HDI? Other changes:

The maximum values in each dimension have been increased to the observed maximum rather than given a predefined cutoff

The lower goalpost for income has been reduced due to new evidence on lower possible income levels

The 2010 New Human

Development Index (NHDI),

2008 DataTodaro/Smith

See hyperlink: UNDP, International Human Development Indicators.

All Countries

Source: UNDP, HDR 2010.

Sub-Saharan Africa

East Asia andPacific

South Asia

Arab States

Latin America and the Caribbean

OECD

2. “Genuine Progress Indicator” or GPI

http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm

Major critique of “GDP” as a concept

Attempts to measure human progress in broad terms

Includes:

Personal consumption - Plus

Economic Benefits excluded from GDP:- the value of housework,- caring for children and the elderly,- volunteerism and community activities- the hours spent on free time or family

- all of which can be viewed as "good for the economy” and society,

despite no money changing hands.

- Economic Costs otherwise excluded:

- Commuting costs, - Social Costs:

- crime, divorce,

- The contribution of the natural world, such as

- clean air and water,

- fertile soil,

- Damage to the environment and resource depletion

- Loss of wetlands, farmlands, deforestation, fisheries, air pollution, ozone depletion etc.

U.S.A.: GDP vs. Genuine Progress, 1950 to 2002

Other Indices of Human Well-Being:

Some Examples:

1. UNDP Gender Adjusted HDI:

2. Political:

e.g. Freedom House, Human Freedom Index http://www.freedomhouse.org/template.cfm?page=15&year=2006

3. Environmental:

e.g. Yale Environmental Sustainability Index

http://epi.yale.edu/4. . UNDP Technology Achievement Index

5. . Transparency International:

Corruption Perceptions Index http://www.transparency.org/policy_research/surveys_indices/cpi

/2010/results

6. Wikipedia’s Directory of Rankingshttp://en.wikipedia.org/wiki/International_rankings_of_Chile