1. ECON 3508: Introduction to Economic Development; Autumn 2015

2. ECON 3508: Introduction to Economic Development
Economic and Human Development:
Concepts and Measurement
[See Textbook, Chapter 1 and 2, pp ]
September 2 and 9, 2015
Note: concepts of income distribution will be examined later]

3. Agenda 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

4. 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

5. Economies as Social Systems: The Need to Go Beyond Pure Economics
(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

6. 2. The Development Imperative Why Study Development Economics
2. The Development Imperative Why Study Development Economics? Humanity’s “Great Tasks” Central Issues

8. The Development Challenge:
Region
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
Source: UNDP, Human Development Report 2013, Tables 1 and 7

9. Figure 2.4 Shares of Global Income, 2008

10. World Income Distribution

11. City Night-Lights as seen from from Space

12. 1 A. Home-Based Economic Activities
4. The Institutional Range of Economic Activities
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

14. 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]

15. 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.

16. 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 10

17. GDP pc (PPP) 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)

18. 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
Conclusion?
Source: UNDP, Human Development Report, pp

19. World Map of GDP per capita PPP 2008-2013

20. 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. 30

21. GDP and Human Well-Being
GDP and GDP pc (PPP) are weak measures of human well-being.
WHY ?? 31

22. 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” ? 31

23. 5. Broader Concepts of “Development”
Some Background on the concept of “Development” Development = Growth + Equity + Sustainability Explain

24. Standard Definitions/Concepts of “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

25. 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”:

26. 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
Being free and with inalienable rights (and responsibilities)
Being happy – as a state of being - may be valued as a functioning

27. Question:
Does “higher GDP generate happiness?
Does “Development” generate happiness?

28. Measures of Perceptions of Well-Being and Happiness

29. Income and Happiness: Comparing Countries

30. 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

31. 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

32. Millennium Development goals (MDGs)
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)

33. MDGs 2015: Goals and Targets

34. 6. Other Measures of Human Well-Being
A. The Original UNDP Human Development Index or HDI (See HDI Web Site)
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

35. Short-comings and Advantages of HDI (and NDHI)
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

36. 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.

37. The New Human Development Index
Introduced by UNDP HDR 2010, November 2010

39. 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

40. 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

41. 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)

42. 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

43. The 2010 New Human Development Index (NHDI), 2008 Data Todaro/Smith
See hyperlink: UNDP, International Human Development Indicators.

44. All Countries
Source: UNDP, HDR 2010.

45. Sub-Saharan Africa

46. East Asia andPacific

47. South Asia

48. Arab States

49. Latin America and the Caribbean

50. OECD

51. 2. “Genuine Progress Indicator” or GPI
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.

52. 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.

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

54. Other Indices of Human Well-Being:
Some Examples:
1. UNDP Gender Adjusted HDI:
2. Political:
e.g. Freedom House, Human Freedom Index

55. e.g. Yale Environmental Sustainability Index
4. . UNDP Technology Achievement Index
5. . Transparency International:
Corruption Perceptions Index
6. Wikipedia’s Directory of Rankings