Economic Growth and Development

1
Economic Growth and Development

• Lecture 14
• ECON 1113
• Luisa Blanco Raynal

2
Some terms

• Absolute real economic growth increase in real
  GDP from one period to the next
• Per capita real economic growth an increase from
  one period to the next in per capita real GDP
  which is real GDP divided by the population
• Two types of economic growth
• From an inefficient level of production (inside
  PPF)
• From an efficient level of production (from the
  PPF)
• Causes of economic growth (according to Arnold)
  natural resources, labor, capital, technological
  advances, free trade, property rights structure,
  economic freedom
• Policies that promote economic growth
• - Tax policy
• - Regulatory policy
• - Industrial policy

3
Why are we so rich and they so poor? David
Landes, 1989

• Some facts about economic growth
• There is an enormous variation in per capita
  incomes across countries. The poorest countries
  have per capita incomes that are less than 5 of
  per capita incomes in richest countries
• Rates of economic growth vary across countries
• Growth rates are not generally constant over time

4
What is the difference between Economic growth
and Economic development?

• Economic growth process that provides an
  increase in the standards of living in developed
  countries
• Economic development process that provides an
  increase in the standards of living in developing
  countries
• Evolution of name for Less Developed Countries
  (LDC)
• Underdeveloped ? developing ? LDC
• Any country with a GDP per capita below 6000 is
  considered LDC

5
Economic development definition according to
Amartya Sen

• In his book Development as Freedom, Sen
  mentions that development should be seen as the
  process of expanding human freedoms. He believes
  that growth of GDP per capita is a good indicator
  of the freedoms. However, He argues that freedom
  depends on other determinants such as social and
  economic arrangements.
• Sen states that development requires the removal
  of the sources of unfreedoms such as poverty,
  poor opportunities, social deprivation,
  repressive states, etc

6
Why do we care about LDCs?

• 4/5 of the population live in those countries
• The majority of natural resources are
  concentrated there
• Increase in interdependence
• Self interest from developed countries

7
How do we measure economic development?

• GDP
• Income distribution
• Inflation rates
• Quality of Human capital
• Degree of Political stability
• Size of the middle class
• Presence of traditional values

8
Pioneers in Economic development

• Rostow stages for development development
  takes long time
• Rodan balanced growth
• Hirchman unbalanced growth
• Lewis Importance of savings rate (there is a
  surplus of labor)
• Prebich Center and periphery - pessimism
• Krueger Against foreign trade controls

9
Difference between old and new theory on
growth/development

• Old theory ?Neoclassical growth theory O
  F(L,K,T) where T technology, T is exogenous
  (Technology fell out of the sky)
• New theory ? Romer ?T is endogenous emphasis in
  the process of discovering and formulating new
  ideas
• According to Romer Economic growth occurs
  whenever people take resources and rearrange them
  in ways that are more valuable ? Ideas are
  important to economic growth. How to increase
  the number of ideas?

10
Why are institutions important for development?

• Democracy Vs Dictatorship
• Rent seeking activities
• Corruption
• Property rights
• Proper macro fundamentals (low inflation and low
  fiscal budget deficit)
• Tax system
• Stability

11
What is economic development about?

• Robert Klitgaard in his book Tropical Gangsters
  talks about his experience in Equatorial Guinea
  as an economic advisor for the world bank
• Easterly does a good overview on development on
  The Elusive Quest for Growth
• Sachs also provides an insight on development in
  The End of Poverty

12
Extra credit activity.

• Look at the World bank page at this address for a
  list of developing (LDC) countries in different
  regions (copy-paste)
• http//www.worldbank.org/data/aboutdata/errata04/C
  lass.htm
• Do an essay about an specific LDC in which you
  talk about the country and some of their main
  problems. Also talk about what do you think can
  be done to help out that LDC.
• Essay must be typed double space (2 pages min 3
  pages max, font size not bigger than 12). Try to
  get information about the country from reliable
  sources.