Lecture 1: Economics, Institutions and Development

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Introduction

• Lecture 1 Economics, Institutions and Development

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Economics, Institutions and Development

• Overview
• Global Differences in Standard of Living
• Purpose of Development Studies Values and
  Objectives
• The Meaning of Development

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Economics, Institutions and Development

• Global Differences in Living Standards
• The majority of the 6.4 billion people in the
  world live in relative poverty.
• Differences in
• Household Size, Income and Property
• Educational Attainment and Opportunities
• Health and Nutrition
• Access to basic necessities (e.g. clean water)
• Life Expectancy

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Economics, Institutions and Development

• Global Differences (Contd)
• Employment Opportunities
• Inequality within Countries/Cities
• Interdependence Economic and Environmental
  interdependence in an ever-shrinking world

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Development Measures by Country
Source UNDP Human Development Report, 2005
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The Purpose of Development Studies

• Although development economics often draws on the
  principles and concepts of other branches of
  economics, it differs from traditional economics
  and political economy.
• Traditional economics (neoclassical economics) is
  concerned with the efficient allocation of scarce
  productive resources and sustained optimal growth
  of production possibilities over time. This is
  appropriate for studying advanced capitalist
  economies
• Perfect and Complete Markets
• Purely Capitalist Incentives in Decision-making
• Economic Rationality

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The Purpose of Development Studies (contd)

• Political economy analyzes how politics and
  economics are related. It studies the social and
  institutional mechanisms through which decisions
  about the allocation of scarce productive
  resources are made.
• Development economics has a broader scope.
• The focus is not just on efficient allocation of
  scarce resources and sustained growth but also
  analyzing the role of economic, social, political
  and institutional mechanisms that exist in
  promoting/hindering the well being of the people
  in less developed countries.

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The Purpose of Development Studies (contd)

• It is the economics of the contemporary poor,
  underdeveloped nations with varying ideological
  orientations, diverse cultural backgrounds, and
  very complex yet similar economic problems.
• These problems demand a different approach than
  those of advanced capitalist and centrally
  planned economies.

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The Purpose of Development Studies (contd)

• Additional Challenges
• Market Imperfections
• Informational Asymmetries
• Structural Transitions
• Multiple Equilibria and Disequilibrium
• Political and Social Considerations
• Attitudes toward life, work and authority,
  cultural traditions, integrity of government
  agencies, levels of political participation,
  bureaucratic, legal and administrative
  structures, level of political participation,
  systems of land tenure, flexibility/rigidity of
  economic and social classes.
• Requires larger government role, wide scale
  planning and coordinated efforts

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Questions asked in Development Studies

• Can traditional, low-productivity, subsistence
  societies be transformed into modern,
  high-productivity, high-income nations?
• To what extent are the development goals of
  developing countries thwarted by the economic
  activities of developed nations?
• How is it that extreme inequality can exist not
  only across continents but within cities and
  countries?

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More Questions

• What lessons can developing countries learn from
  the historical record of economic progress of
  developed countries?
• What are the primary causes of extreme poverty?
• What strategies have been most successful in
  eradicating poverty?

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Even more questions

• What roles do population growth and migration
  play in the development process?
• Do the educations systems in developing countries
  promote development and reduce inequality or do
  they help to sustain wealth and class structures?
• Are deregulation and privatization the answer?

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Values in Development Economics

• The goals of this discipline are derived from
  subjective value judgments about what is good and
  desirable.
• Economic and Social Equality
• Elimination of Poverty
• Universal Education
• Higher Living Standards

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Values (contd)

• Political and Economic Freedom and Participation
• Self-reliance
• National Independence
• Institutional Modernization
• Personal Fulfillment

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Core Values of Development

• Common goals sought by all individuals and
  societies
• Sustenance ability to meet basic needs food,
  shelter, health and protection. Absolute
  underdevelopment describes the absence of these
  basic needs.
• Self-Esteem to achieve a sense of worth and
  self-respect (i.e. dignity)
• Freedom from Servitude emancipation from
  alienating material conditions of life, from
  social servitude to nature, ignorance, other
  people, misery, institutions, and dogmatic
  beliefs.

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United Nations Millennium Development Goals

• Eradicate Extreme Hunger and Poverty
• 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 Stability
• Develop a Global Partnership for Development

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Core Objectives of Development

• The improvement in the access and distribution of
  basic necessities
• The improvement of living standards
• The expansion economic and social opportunities

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The Meaning of Development

• Traditional Measures
• The capacity of a once relatively stagnant
  national economy to generate and sustain
  significant economic growth
• Annual increases of 5 or higher in gross
  national product. Alternative measures include
  income per capita and real income per capita
  (real accounting for inflation).
• Changes in the structure of production shifts
  from agriculture towards manufacturing and
  services (i.e. industrialization)
• Little attention paid to eradicating poverty,
  unemployment, inequality and discrimination.

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Economics, Institutions and Development

• Contemporary Measures
• Broader definition of development to include the
  reduction of poverty, unemployment and inequality
  within the context of a growing economy.
• The goal can no longer be just higher incomes.
  The objectives of development must also include
  better education, health and nutrition, equal
  opportunities, individual rights and freedoms,
  clean environment etc.

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Sens Capability Approach

• Economic growth cannot be sensibly treated as an
  end in itself. Development has to be more
  concerned with enhancing the lives we lead and
  the freedoms we enjoy.
• -Amartya Sen, Development as Freedom
• 1998 Nobel Laureate in Economics

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Sens Functionings and Capabilities

• Functionings what an individual does (or can do)
  with the commodities of given characteristics
  that are in his/her possession or control. This
  reflects the various things an individual may
  value doing or being.
• Capabilities the freedom an individual possesses
  with respect to choice of functionings, given
  his/her personal traits and his control over
  commodities.

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Limitations of Traditional Measures

• Sen points to the limitations of traditional
  measures of real income in defining well being.
  These measures fail to include
• Personal heterogeneities
• Environmental diversities
• Variations in social climate
• Differences in relational perspectives
• Distribution within households
• Sen argues that changes in functions and
  capabilities are better measures of development

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• Next topic
• Differences and Commonalities among Developing
  Countries