IB Economics SL16 - Economic Development Intro

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IB ECONOMICS UNDERSTANDING ECONOMIC DEVELOPMENT

16.1 ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT Economic growth and development • Economic growth - increases in output and incomes over time. Usually measured per capita. • Economic development - process that leads to improved standards of living for a population. • Economic growth can result in economic development, but it is not guaranteed. • Economic development changed over years: • In 1950-60s, economists thought that growth was the same as development • Trickle-down theory - benefits of growth would “trickle down” to everyone • Current view of economic development: process where increases in real per capita output and incomes are accompanied by improvements in standards of living and increased access to goods and services that satisfy basic needs. • Human development defined with three core values: life sustenance (access to basic services and needs), self-esteem (feeling of self-respect; absence of exploitation), and freedom (freedom to make choices that are not available to people in poverty). • Income poverty is when income falls below a poverty line. Human poverty is the lack of opportunity to “lead a long, healthy, creative life and to enjoy a decent standard of living, freedom, dignity, self-esteem, and the respect of others.” Sources of economic growth in economically less developed countries • Sources of economic growth same everywhere. In less-developed places certain sources are more important. • Increases in physical capital - physical capital quantity makes possible increases in labor productivity. • Increases in human capital - increases labor productivity. in developing countries, more labor can improve productivity. • Development/use of new technologies - technology contributes to growth, but they need to be appropriate and fitting for the location. • Institutional changes - there is a need to develop institutions for property rights, a legal system, a tax system, because a market system cannot function well without them. • Commodity-type natural resources - there is a trend (curse of natural resources) where resource-poor developing countries are growing faster than resource-rich countries. This is because resource-poor countries diversify earlier because they cannot rely on the production of the commodities. Resource-rich countries depend on their volatile exports. Economic growth and economic development, again • Economic growth can occur without development. Development is possible if policies to provide social services are followed. Showed on PPC with merit and industrial goods. • A → B: no economic growth, some development • B → C: economic growth, no development • B → D: economic growth with development Distinguishing between more and less developed countries • The World Bank divides countries based on their GNI per capita. • Economically less developed countries: • Low income (GNI per capita < $975

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• Lower middle income (GNI per capita $976-$3855) • Upper middle income (GNI per capita $3856-$11905) Economically more developed countries • High income (GNI per capita >$11906) The less developed countries include countries in Africa, Asia, Latin America, and some former Soviet countries. More developed countries include North America, western Europe, Japan, New Zealand, and some oil producing Middle Eastern countries. Classifying countries by GNI does not represent level of development! Classifying countries by GNI also hides the lack of uniformity - some countries still have poverty in some places.

Common characteristics of developing countries • Low levels of GDP/GNI per capita • By definition, economically less developed countries have GNI per capita levels below a certain level. • High levels of poverty • Almost all extreme poverty and most moderate poverty are concentrated in less developed countries. • Relatively large agricultural sector • Due to YED for agricultural products • Large urban informal sector • Informal sector refers to unregistered/unregulated economic activities. A lot of them exist in developing countries. Examples: carpenters, pedicab drivers, vendors, etc. • In developing countries, these activities are undertaken for survival. In developed countries, these activities are undertaken to avoid taxes, labor, or legislation. • 1/2 to 3/4 of non-agricultural employment in the informal sector. • Size and growth due to policy failures that focused on industrialization and population growth. • Informal sector has many problems: no protection, exploitation, hazards, slums, etc. • Seen as opportunity for increased employment opportunities. • High birth rates and population growth • Developing countries have higher birth rates and population growth. • Dependency ratio - people who must be supported by the working population • Developing countries have a higher dependency ratio because of the large proportion of children. Families need to spread their income among more people. • Increases in population will burden the developing world - need to absorb more employment opportunities, pressures on environment, quality of health, education, etc. • Rapid population growth requires more rapid output and income growth. • High population growth results in high dependency; less income per person. • Negative consequences for mothers whose health is affected by childbirth. • Environmental degradation. • Low levels of health and education • Low levels of productivity • Low levels of health and education and scarcity of capital goods result in low productivity. • Dual economy • Dual economy - when there are two different/opposing circumstances that exist together. • Wealthy and poor, formal and informal, high-productivity and low-productivity, commercial sector and agricultural sector. • Economic development tries to eliminate aspect of dualism to make uniform social structures.

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The poverty cycle • Poverty can cause poverty. • Poor people spend their incomes on survival essentials. The have little capital and natural capital gets destroyed. To come out of poverty, they need more capital, which can only be made by saving. They cannot save because they need their essentials. This creates a poverty trap. • Poverty is transmitted across generations: • Low income earners have low productivity, cannot send children to school, cannot provide enough food for the family, and have large families. • Children grow into adulthood without skills. Poor people need intervention • to break out of the poverty cycle, such as government investing in capital. • They also need the government to allow poor people to participate in private sector activities. • If a country is trapped in the cycle, foreign aid is needed. Diversity among less developed countries • Resource endowments • Countries have natural resource endowments that can be marketable. • Less developed countries have more labor resources, and more developed countries have more capital. This affects their pricing. • Resource endowments play a role by determining the type of specialization. Climate • • Climate determines economic activities - heat reduces productivity, tropical climates reduce soil quality. • Most developed countries have temperate climates. • History • most developing countries are former European colonies. These colonies were set up to extract resources. These colonies have not reformed even post-independence. Political system • • Countries have different political systems, like monarchies, democracies, etc. • Political stability • Stable government necessary for gov’t decision making and making policies. • Instability creates uncertainty, outflow of capital, and increased vulnerability to hunger and famine. • Low levels of income per capita related to political instability. International development goals • Millennium Development goals are targets that want to be achieved within 15 years that come with indicators used to monitor progress.

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GOALS

TARGETS

Eradicate extreme poverty and hunger

1.Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day. 2.Halve, between 1990 and 2015, the proportion of people who suffer from hunger.

Achieve universal primary education.

3.Ensure that by 2015 children everywhere will be able to complete primary schooling.

Promote gender equality and empower women.

4.Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015.

Reduce child mortality.

5.Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.

Improve maternal health.

6.Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.

Combat HIV/AIDS, malaria, and other diseases.

7.Have halted by 2015 and begun to reverse the spread of HIV/AIDS. 8.Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases.

Ensure environmental sustainability.

9.Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. 10.Halve, by 2015, the proportion of people without sustainable access to safe drinking water and sanitation. 11.By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers.

Develop a global partnership for development.

12.Develop further an open, rule-based, predictable, non-discriminatory trading and financial system. 13.Address the special needs of the least developed countries. 14.Address the special needs of landlocked developing countries and small island developing states. 15.Deal comprehensively with the debt problems of developing countries through national and int’l measures in order to make debt sustainable in the long term. 16.In cooperation w/ developing countries, develop and implement strategies for decent and productive work for youth. 17.In cooperation w/ pharmaceutical companies, provide access to affordable essential drugs on a sustainable basis. 18.In cooperation w/ the private sector, make available the benefits of new technologies, especially information and communications.

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GOALS

INDICATORS

Eradicate extreme poverty and hunger

•Proportion of population below $1 (1993 PPP) per day. •Poverty gap ratio (poverty gap is amount of income required to raise everyone’s income to at least $1 ad ay). •Share of poorest quintile in total income. •Prevalence of underweight children under five years of age. •Proportion of population below minimum level of dietary energy consumption.

Achieve universal primary education.

•Net enrollment ratio in primary education. •Proportion of pupils starting grade 1 who reach grade 5. •Literacy rate, 15-24 years old.

Promote gender equality and empower women.

•Ratio of girls to boys in primary, secondary, and tertiary education. •Ratio of literate women to men, 15-24 years old. •Share of women in wage employment in the non-agricultural sector. •Proportion of seats held by women in national parliament.

Reduce child mortality.

•Mortality rate of children under five. •Infant mortality rate. •Proportion of one-year-old children immunized against measles.

Improve maternal health.

•Maternal mortality ratio. •Proportion of birth attended by skilled health personnel.

Combat HIV/AIDS, malaria, and other diseases.

•HIV prevalence among pregnant women. •Condom used rate or the contraceptive prevalence rate. •Ratio of school attendance of orphans to school attendance of non-orphans aged 10-14 years. •Prevalence and death rates associated with malaria. •Proportion of population in malaria-risk areas using effective malaria prevention and treatment measures. •Prevalence and death rates associated with tuberculosis. •Proportion of TB cases detected and cured under internationally recommended TB control strategy.

Ensure environmental sustainability.

•Proportion of land area covered by forest. •Ratio of area protected to maintain biological diversity to surface area. •Energy use per $1000 GDP (PPP) •CO2 emissions per capita and consumption of ozone-depleting CFCs. •Proportion of population using solid fuels. •Proportion of population with sustainable access to an improved water source, urban and rural. •Proportion of population w/ access to improved sanitation, urban and rural. •Proportion of households w/ access to secure tenure.

Develop a global partnership for development.

•Targets 12-15: measures of development assistance, developed country imports from developing countries, tariffs imposed by developed countries on developing country agricultural exports, debt relief, debt service, and others. •Unemployment rate of young people aged 15-24 years, male and female and total. •Proportion of population w/ access to affordable essential drugs on a sustainable basis. •Telephone lines and cellular subscribers per 100 population. •PCs in use per 100 population and Internet users per 100 population.

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16.2 MEASURING ECONOMIC DEVELOPMENT Complexities of measuring economic development • No single measure itself can measure economic development. Indicators, or measurable variables that indicates the state of something measured, are used. GDP per capita is an indicator of output level. • Indicators can 1) help monitor how a country changes over time, 2) help make comparisons between countries, 3) help assess how well a country is performing, and 4) help devise appropriate policy measures to deal with problems. • There are also composite indicators, which are summary measures of several goals of development. Single indicators • GDP indicates the value of output produced within a country. GNI indicates the income received by the residents. (Usually measured in per capita.) • When a country has many workers from other countries and send profits back home, the country’s GNI is lower than its GDP because wages of foreigners are not included. • GNI per capita better indicator of standards of living. • In high-income countries, GNI and GDP differ only about 10%. In middle/low income countries, the differences are can also quite small. They can also be large, due to large amount of worker remittances. • GNI/GDP can give misleading results because money has a greater purchasing power in a highprice country. • Purchasing power parity - the amount of a country’s currency needed to buy the same quantity of local goods and services that can be bought with US$1 in the US. • For poorer countries, GDP based on PPPs are higher than those based on exchange rates. For wealthier countries, GDP figures based on PPPs are lower. • Price of g/s lower in countries with low per capita GDPs. • Health indicators measure characteristics of populations related to health, such as life expectancy, infant mortality, and maternal mortality. • Life expectancy at birth - number of years one can expect to live. • Infant mortality - number of infant deaths from birth to age of one, per 1000 live births • Maternal mortality - number of women who die due to pregnancy and related causes, per 100000 live births. • Higher GDPs per capita have higher life expectancies and lower mortalities, but there are patterns that show that income is not the only factor. • Life expectancy is higher, and mortality is lower when there are: • adequate public health services and prevention of communicable diseases • adequate health care services with broad access • a healthy environment and low pollution • ad adequate diet and avoidance of malnutrition • high level of education • absence of serious income inequalities and poverty • Outcomes depend on how countries achieve objectives • Some countries have inequality in income and education to cause poverty. • Education indicators measure levels of educational attainment, such as literacy rate, enrollment in primary school, and enrollment in secondary school.

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• Usually high-income countries have higher indicators, although some low-income countries also have such rates, especially former Soviet countries because communist countries have a high priority on education. • Secondary education is less of a priority for some countries, because they must use resources to first provide primary education. • The World Bank compiles a set of indicators. Composite indicators • Composite indicators are summary measures of more than one dimension, and measure aspects of human development. • Human Development Index - summary measure of human development with three dimensions: 1) long and healthy life (life expectancy at birth), 2) access to knowledge (mean years/expected years of schooling), and 3) a decent standard of living (measured by GNI per capita US$ PPP) • Each dimension between 0 (low) and 1 (high), and the composite index is the average of the three dimensions. • HDI also has shortcomings, because economic and human development have more dimensions not shown in the HDI. • Some countries have similar HDIs, but ones with a lower GNI show that they can achieve a similar level of human development with a lower GNI.

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