(GLOBAL) Development Economics - How to measure?

A process where increases in real per capita output and incomes are accompanied by improvements in standards of living of the population such as:

• reductions in poverty

• increased access to goods and services that satisfy basic needs including food,  shelter, health care, education, sanitation etc,

• increasing employment opportunities and reduction of unemployment,

• reductions of serious inequalities in incomes and wealth.

• It was believed that economic growth over long periods would automatically provide economic and social benefits for the entire population.

• Larger quantities of goods and services, including health care and education, and employment opportunities and social change would eventually be spread out over most people in an economy.

• Life sustenance: Refers to access to basic services (merit goods) such as education and health care services, as well as satisfaction of basic needs like food, clothing and shelter.

• Self-esteem: Involves the feeling of self-respect; development is desirable because it provides individuals with dignity, honour and independence. Self-esteem is related to the absence of exploitation and dominance associated with poverty and dependence.

• Freedom: Involves freedom from want, ignorance and squalor; it is freedom to make choices that are not available to people who are subjected to conditions of poverty.

development that meets the needs of the present, without compromising the ability of future generations to meet their own needs.

• High birth rates/large dependency ratios.

• Low per capita GDP.

• High agricultural dependence.

• Large informal sector.

• Poverty cycle

• The dependency ratio is the combined number of people not in the labour force compared those who are in the productive population (labour force).

• High birth rates tend to lead high dependency ratios, another common characteristic of LDCs.

• Countries with high birth rates and large populations of younger people fall easily into this category. At the same time, richer countries with aging populations are also seeing their dependency ratios climb.

• Countries with high dependency ratios are likely to struggle to meet the needs of their relatively large dependent population.

• There is a high positive correlation between levels of development and attainment of GDP per capita.

• Thus, the countries which rank at the bottom of the Human Development Index tend to have low average levels of income.

• Perhaps not surprisingly, these same countries tend to have high rates of extreme and moderate poverty.

• Note that there is a correlation of low average income and extreme poverty.

• Economically less developed economies have large agricultural sectors and large primary sectors generally.

• Relatively low income elasticities of demand for agricultural products play a role in reducing the relative size of the agriculture sector as countries grow and develop, while agriculture increasingly becomes replaced by industry and services.

• The developed countries of today were in the same situation decades ago. The lower the level of per capita GNI, the larger the contribution of the agricultural sector.

"A formal sector refers to the part of an economy that is registered and legally regulated; an informal sector by definition lies outside the formal economy and refers to economic activities that are unregistered and legally unregulated."

• The term 'informal sector' has a far broader and different meaning in developing countries compared with developed ones.

• In developing countries, informal sector makes all the difference between physical survival and starvation for individuals.

• The informal sector is responsible for a large and rising share of urban employment.

• The informal sector poses many problems:

  • no worker protection

  • workers are vulnerable to exploitation

  • environmental dangers and health hazards

  • In slums with no basic services like water sanitation and sewerage

  • no access to credit for workers

  • limited possibilities for education and training.

"Economic growth is a percentage change in real GDP over the previous year. "

• Growth, because it usually means more money and activity and employment, generally suggests that something is going right with the economy. A recession, a lack of growth or a decrease in the economy's size, triggers attention and policy changes.

• Development, in contrast, emphasizes specific changes in aspects of people's lives in many different dimensions.

• A primary focus of development economics is the reduction of poverty, the raising of incomes among the world's poorest. Furthermore, development economics seeks the improvement of general living standards.

• Typically, living standards are measured by long life, general health, education achievement and opportunities, as well as measures of income.

"Real Gross Domestic Product (real GDP) is the inflation adjusted value of all the goods and services produced in the country in the past year within a country’s borders.

Real GNI is the inflation-adjusted value of all production from factors of production owned by a country across borders."

GNI = GDP + net income flows earned abroad

• For richer countries, GNI may be higher than GDP because firms in those countries have spread overseas and now generate significant profits that are sent back to their corporate homes.

In Luxembourg, famous as banking centre, it appears that the an economic activity in the country exceeds the income accrued to its firms and citizens.

• Developing countries may also have a discrepancy between GDP and GNI numbers.

• The income generated by production within China slightly outpaces the income generated by Chinese-owned factors.

• For relatively less developed countries, the differences between GDP and GNI may be for different reasons.

China, with increasing amounts of foreign direct investment, may see a significant amount of corporate profits sent out of country.

• In the case of poor countries with higher GNI numbers, it is possible that many have citizens living abroad as guest workers who repatriate salaries home.

• Comparisons in national income accounting between Norwegian kroner and Thai baht would seem meaningless without being translated into a single currency, usually the US dollar.

• While this translation makes comparisons more useful, the spending power of money in Norway may be very different from that in Thailand.

• Resources, goods and services may be more expensive in Norway than in Thailand, which means that more income is needed in Norway to enjoy the same standard of living as in Thailand.

• To more accurately reflect the buying power of any amount of income, and so to better assess the standard of living in a country, economists use a comparison called purchasing power parity (PPP).

• Purchasing power parity is based on the law of one price, which states that an identical good in one country should cost the same in another country, and that the exchange rate should reflect that price.

• One of the highest rates of return in both economic growth and development issues is undoubtedly to be found in education.

• Every country in what we now call the developed world experienced the brunt of growth and development once primary education had been established.

• In fact, one of the world's most famous development economists, Nobel laureate Amartya Sen, points out that Japan as early as 1870 had higher literacy rates than Europe - allowing rapid transition to an industrialised power 50 years later. Sen points out that the 'miracle economies of East Asia had similar levels of literacy.

• The benefits of education are both private and social. The element of merit good in education is very high, which to a large extent ends the discussion on private or public provision in developing countries.

• The societal return in education investment is so high that a majority of developing countries strive to spend as large a portion of government funds as possible on the education sector.

• Economic growth is partly a benefit of education, as the benefits of education extend to society in the form of increased labour productivity and greater output.

• Education contributes to improvements in the quality of physical capital, because knowledge can be applied to research and development, and especially to the development of technologies appropriate to local economic, ecological and climate conditions.

• Education results in lower unemployment, lower absenteeism from work and increased international competitiveness; and it attracts foreign direct investment.

• Education leads to increased political stability, an important condition for economic growth and development.

• Education provides further social benefits, such as a lower crime rate and a better quality of life.

• Highly educated individuals cannot find employment in their field of specialisation, and instead are forced to find employment in areas that are unrelated and require lower skill levels.

• Doctors and medical personnel educated in government funded institutions do not work in public medical institutions intended to provide free services to lower income groups, but instead work in the private sector which serves wealthy patients

• Highly educated individuals apply their skills and abilities to research and technology development in areas that are more relevant to the needs of developed countries because these are more prestigious activities, while ignoring local technological needs and problems such as building low-cost schools, hospitals and housing, etc.

• Health leads to greater worker productivity, greater output and economic growth.

• Healthy people do not transmit diseases, thus lowering the risk of spreading diseases to the community.

• Immunization benefits not only the immunized person but also the community by lowering the risk of contracting a disease.

• Healthier people provide more benefits to the community through more active and productive participation.

• Spillover to Education:

  • Increased levels of health and good nutrition improve school attendance and performance in school, and lead to longer periods of time spent in school.

  • Healthier individuals make better use of the knowledge and skills they possess.

  • Better health means a longer lifespan, and so a longer time during which the benefits of education can affect the economy and society.

"Labour-intensive technologies use more labour in relation to capital. They result in increases in local employment and the use of local skills and materials, increases in incomes and poverty alleviation, and save on the use of scarce foreign exchange.

Capital-intensive technologies use more capital in relation to labour. In developing countries with large supplies of labour they displace workers and increase unemployment, reduce incomes and throw people into poverty, and require skill levels that may be costly and difficult to acquire, as well as the use of foreign exchange for imports."

• Most technological advances tend to be of the capital using type, because most research and technological developments occur in developed countries that focus on their own priorities and needs.

• This poses serious problems for developing countries that mostly require labour-using technologies and have limited resources for developing technologies well suited to their own economic and physical environments.

• Many developing countries have at times tried to copy or imitate the production techniques of the developed world, resulting in the use of inappropriate technologies, such as tractor technologies in agriculture, and capital-intensive technologies in industry.

• Among the failures of growth and development policies, a major one was the push for industrialisation using modern, capital-using technologies in the formal sector, and the use of inappropriate technologies in agriculture, contributing to unemployment and underemployment and growth of urban informal sectors around the world.

• Although some economically less developed countries have significantly stepped up their R&D, most technological innovation occurs in developed countries. Many developing countries have very few resources to devote to R&D and new technology development.

• A further problem is that the private sector in developing countries faces few incentives to engage in R&D. In developed countries the private sector is responsible for over 50-60% of R&D expenditures; however, in low-income countries the private sector contribution is very low.

• Many developed country firms produce and innovate for large markets, and the expectation of large profits creates powerful incentives to innovate in order to compete, capture market shares and take advantage of new opportunities.

• Firms in developing countries, especially in the lower income ones, have neither the resources nor the markets to support R&D activities.

• They provide an incentive for people to save, because they offer a return on savings. The greater the savings in an economy, the greater are the funds available to be invested. They provide businesses and farmers with credit to open, run and expand their businesses and farms.

• Increased borrowing permits greater investment, resulting in increased output and therefore growth.

• They provide consumers with credit that can be used for investments in human capital, increasing the productivity of labour and contributing to growth and development.

• Access to credit is very important for poverty alleviation because poor people are least able to save any part of their income, since they are forced to spend most of it on essentials.

• Making credit available to very low income earners can therefore allow them to make necessary investments in physical, human and natural capital.

• It can also contribute to improving the distribution of income as the investments that credit makes possible increase the incomes of the poor and allow them to participate in economic growth.

• Commercial banks in developing countries often cater to larger, wealthier borrowers, bypassing the medium-sized and especially smaller borrowers.

• Many commercial banks are overseas branches of large multinational banks that are more interested in providing loans to multinational corporations or large domestic firms.

• Even domestic banks, often under government direction, prefer borrowers in manufacturing who are considered to be more creditworthy and who are believed to be the driving force of industrialisation.

• Sometimes, bank lending is influenced by political interests and the power of local elites with large control over the business and financial sectors.

• Commercial banks are interested in large loans that are safe. Poor and small-scale producers, farmers and traders need very small loans, and very often lack collateral to secure their loans.

• As efficient domestic banking systems have been noticeably lacking in many LDCs, funding for small and medium domestic enterprises has also been unavailable.

• Much of the funding came from foreign banks and went to large enterprises which could put up sufficient collateral (= security for loans).

• In answer to this gap in liquidity, a number of development banks have arisen in developing countries to supply longterm loans.

• Much of the money has in turn been supplied by loans and aid monies from international development organisations and domestic governments.

• Micro-credit refers to credit (loans) in small amounts to people who do not ordinarily have access to credit.

• Small amounts of the loans, the very small size of businesses or activities, micro-enterprises, that are financed by the loans and the short repayment periods involved.

• Micro-credit is delivered to poor people through Microfinance institutions (MFIs), which include a wide variety of organisations such as:

  • credit unions

  • financial non-governmental organisations (NGOs)

  • informal savings and loan groups

  • and even some commercial banks with special programmes for the poor.

• MFIs lend to a wide variety of borrowers:

• Micro-enterprises:

  • Street vendors

  • Carpenters

  • Seamstresses

  • Landless rural workers

  • Small farmers,

  • Female heads of households

  • Pensioners etc.

• They tend to target women because women have proved to be more likely than men to repay loans, and also because they are more likely to use the earnings from their investments to improve the family's well-being.

• The evidence on micro-credit schemes indicates that these have a positive impact on poverty reduction. They result in higher incomes, in more stable incomes, as well as improvements in health, nutrition and primary school attendance.

• Micro-credit schemes may become a substitute for urgently needed government anti-poverty policies.

• Micro-credit schemes contribute to the growth of the informal sector.

• Some extremely poor and highly unskilled people may be harmed by micro-credit because of lack of skills like same basic literacy and numeracy skills.

• Interest rates in micro-credit schemes are too high.

• The resources or crops LDCs are producing have a declining terms of trade value, such countries must produce more of their decreasing-price exports to buy the relatively more expensive import goods from around the world.

• This problem can easily degenerate into a vicious cycle: the pressure to produce more crops contributes to deforestation, soil depletion, and even water contamination.

• In broader terms, the pressure on resources in LDCs leads producers to seek ever-lower costs with regards to many types of production. The result is the daunting array of environmental damage discussed below:

  • Deforestation

  • Land Degradation

  • Water Pollution

  • Over-fishing

  • Air Pollution

  • Climate Change

• Economic development cannot be adequately measured by any single indicator. This problem led two famous economists to develop composite indicators, which are summary measures of more than one dimension of development.

• By including more than one dimension, composite indicators are more accurate measures of development.

• Their work was carried out at the United Nations Development Programme (UNDP), which since 1990 produces a Human Development Report every year with analyses of various development issues as well as statistical information, including information on the Millennium Development indicators and composite indicators.

• With this ideal in mind, the HDI evaluates the performance of a country in three areas:

  • long life — measured by life expectancy

  • education — measure by adult literacy and combined primary, secondary and tertiary enrollment ratio

  • standard of living — measured by GDP per capita (PPP-adjusted).

• Human Development Index (HDI) was created by the UN Development Programme (UNDP) in the late 1980s and put into use in 1990.

• It was created as a response to dissatisfaction with the emphasis on economic growth as the sole means to measure development.

• According to the UNDP:

  • Growing evidence that did not support the then prevailing belief in the trickle down power of market forces to spread economic benefits and end poverty

  • The human costs of Structural Adjustment Programmes became more apparent

  • Social ills (crime, weakening of social fabric, HIV/AIDS, pollution, etc.) were still spreading even in cases of strong and consistent economic growth

  • a wave of democratization in the early 90s raised hopes for people-centred models.

• UNDP, Human Development Reports website, Home page, accessed May 2011

Switzerland is first

• In 2010, the UNDP created the first Gender Inequality Index, a composite indicator of the disparity in well-being between women and men in three areas:

  • reproductive health

  • empowerment

  • the labour market.

• health dimension is measured by two indicators: maternal mortality ratio and the adolescent fertility rate.

• empowerment dimension is also measured by two indicators: the share of parliamentary seats held by each gender and their secondary and higher education attainment levels.

• labour dimension is measured by women's participation in the workforce.

• According to the UNDP, the Gender Inequality Index is designed to reveal the extent to which national human development achievements are eroded by gender inequality, and to provide empirical foundations for policy analysis and advocacy efforts.

IHDI is based on a distribution-sensitive class of composite indices proposed by Foster, Lopez-Calva and Szekely (2005), which draws on the Atkinson (1970) family of inequality measures.

It is computed as a geometric mean of inequality adjusted dimensional indices.

The IHDI accounts for inequalities in HDI dimensions by "discounting" each dimension's average value according to its level of inequality.

The IHDI value equals the HDI value when there is no inequality across people but falls below the HDI value as inequality rises. In this sense, the IHDI measures the level of human development when inequality is accounted for.

(Well being x life expectancy)/carbon footprint