Transcript Chapter 22 - Introduction to Economic Development

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.
2.
3.
4.
5.
6.
7.
Introduction: Procedural and Administrative Matters
Economics and the Study of “Development” ?
The Development Imperative
The Institutional Range of Economic Activities
The “System of National Accounts” and the concept of
GDP, and “Development as Growth of GDP”
Broader Concepts of “Development”
- Standard Definitions
- UNDP, Amartya Sen and the Human Development
Index
Other Measures of Human Well-Being
1 Economics and the Study of “Development”
The Nature of Development Economics
v
Greater scope than traditional neoclassical economics
and political economy.
– The Role of Values in Development Economics
v Ethical content: Value judgments re what
ought to be done
v 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 noneconomic factors
v
– 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:
GDP 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
Region
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
“Formal
Sector” or
Economy
Legal products of
all varieies
Legality
of
Product
Yes
Legality of
Production
Process
Yes
Yes
Reasons for Exclusion
n.a.
Tax Evasion
Underground
provision for
some
activities
“Informal
Sector” or
Economy
Inclusion in “GDP”
Many types of
services, usually
small scale
Yes
Yes
No for some
activities
Often No
Excessive costs of
gathering information
Some tax evasion
Home-Based
Economic
Activities
Criminal
Activities
Child-care;
Home
maintenance and
repair,
Food preparation,
Personal Services
Drugs,
Prostitution,
Gambling of some
sorts;
Extortion rackets
Yes
Yes
No
Value impossible to
determine accurately
Tax collection unrealistic
No
Yes;
Maybe yes
Maybe no;
No
Activities are illegal;
No
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 System
Measurement 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 wellbeing.
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
1,713
6,757
China
Conclusion?
Source: UNDP, Human Development Report, 2007-2008 pp.376-380
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 wellbeing 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-Being
GDP 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 =
Explain
Growth
+ Equity
+ Sustainability
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,
better health,
equality of opportunity
greater freedom
education;
less poverty
better environment
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)
v
The Central Role of Women
– To make the biggest impact on development, societies
must empower and invest in women
v
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
u
Millennium Development goals (MDGs)
– Eight goals adopted by the United Nations
in 2000
v
v
v
v
v
v
v
v
u
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/
u
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%)
u
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
source
4. Underweight children under age five.
u
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 Data
Todaro/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=200
6
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/2
010/results
6. Wikipedia’s Directory of Rankings
http://en.wikipedia.org/wiki/International_rankings_of_Chile