Development Economics Prof Dr Hans H Bass Jacobs

Development Economics Prof. Dr. Hans H. Bass Jacobs University, Spring 2010 Feb. 04, 2010

Development Economics Agenda Feb. 04 0. Introductory remarks, grading, topics for presentation, and overview 1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development 2. 1 Meaning 2. 2 Measurement Feb. 04, 2010 2

Development Economics Overview Voices of the Poor. . . and some questions for our course: “Why does affluence coexist with dire poverty not only on different continents but also within the same country? Can traditional low-productivity, subsistence societies be transformed into modern, high-productivity, high-income nations? To what extent are the development aspirations of poor nations helped or hindered by the economic activities of rich nations? . . . ” (Todaro/Smith 2009, p. 7) Feb. 04, 2010 3

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development The economic problem Material wants exceed productive capacity scarcity! Utility maximization under conditions of scarcity Economics is about making choices What is the most efficient way to allocate scarce resources and allow optimal growth of these resources? Feb. 04, 2010 4

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development From Adam Smith to modern times. . . Adam Smith, 1776 (founder of classical economics) („An Inquiry into the Nature and Cause of the Wealth of Nations“) modern mainstream economics (neo-classical and beyond) Feb. 04, 2010 5

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development § § § Main neo-classical assumptions homo economicus (fully informed, completely rational, utility maximizing behavior) decisions made on the basis of marginal, private-profit, and utility calculations consumer sovereignty, producer sovereignty perfect markets (perfect market information + no participant with market power to set prices + no barrier to entry or exit + equal access to production technology = perfect competition) prices equate supply and demand, immediate price adjustments equilibrium outcomes in all product and factor markets Feb. 04, 2010 6

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development The new economic problem What is the most efficient way to allocate scarce resources and allow optimal growth of these resources? and: What are the economic, social, and political mechanisms necessary to bring about rapid and large -scale improvements for the world’s poor(est), i. e. 150+ economies? Feb. 04, 2010 7

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development Economics assumes. . . § imperfect markets are the rule rather than the exemption; § consumers and producers have limited information; § prices often do not equate supply and demand § § disequilibrium situations prevail; economic calculations can be dominated by political or social priorities (building new nations, replacing foreign advisors with local decision makers, resolving ethnic conflicts …); non-economic (extended family, tribal …) considerations may take precedence over private, self-interested utility or profitmaximizing calculations. Feb. 04, 2010 8

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development Economics assumes. . . strategic economic variables (savings, investment, product and factor prices, forex rates. . . ) and non economic factors (attitudes to life, work, authority; bureaucratic structures, kinship, religion, values. . . ) can be equally important to increase national production, raise standards of living, promote employment opportunities Feb. 04, 2010 9

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development Economics assumes. . . Economics is not a formal science (as mainstream economists, “formalists” tend to believe), but a social science (“substantivist approach”): § It is about societies organizing their production, distribution, and consumption (rather than only about “making choices”) § It implies value judgments in the identification of its subjects (“poverty is worth being investigated”) and its research goals (“poverty should be eradicated”). § The heterogeneity of the Developing World and its complexity need eclectic and multi-disciplinary approaches. § Its research must be policy-oriented. Feb. 04, 2010 10

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development What they say about each other (1) Development Economics is an amalgamation and basically an unaltered application of traditional fields (micro, macro, monetary economics, public finance. . . ) with a specific focus on industrializing economies in Asia, Africa, and Latin America. (2) Neo-classical mainstream economics is “monoeconomics” (A. O. Hirschman): A book about horses cannot be called “Animals” (D. Seers)! Feb. 04, 2010 11

1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development From Adam Smith to modern times. . . Adam Smith, 1776 John Maynard Keynes, 1936 Paul N. Rosenstein-Rodan, 1943 Gunnar Myrdal, Nobel Prize 1974 (not for D. E. ) A. William Lewis & Theodore Schultz, Nobel Prize 1979 Amartya K. Sen, Nobel Prize 1998 Joseph Stiglitz, Nobel Prize 2001 Muhammad Yunus, Nobel Peace Price 2006 Feb. 04, 2010 12

Development Economics Agenda Feb. 04 1. Economics 1. 1 Approaches in mainstream economics 1. 2 Approaches in Development Economics 2. Development 2. 1 Meaning 2. 2 Measurement Feb. 04, 2010 13

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Three phases § Turning the vicious circle of poverty into a virtuous circle of growth – resulting in a diversified industrial economy and higher per capita incomes (1950 s) § Looking beyond averages: Reducing poverty, unemployment, and inequality (1970 s) § Replacing the domination of circumstances and chance over individuals by the domination of individuals over chance and circumstances (1990 s) Feb. 04, 2010 14

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Phase I: Vicious to virtuous circles “Low productivity is the problem. The economic remedy for the problem is capital creation, . . . though I readily agreed that noneconomic remedies may be more important. ” “Economic progress is not a spontaneous or automatic affair. ” “Big push” (Ragnar Nurkse 1953) Feb. 04, 2010 15

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Development Paradigms Goals Policies Theories Data Feb. 04, 2010 16

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Goal: Economic Growth (GNI, GNI p. c. ) Theories big push, critical minimum effort, no full employment natural state intervention Feb. 04, 2010 Paradigm 1950 s/1960 s Policies capital accumulation, planning, industrialization, diversification, infrastructure investment Data national accounts 17

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Phase II: Social Dimensions of Growth “What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? . . . If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result ‘development’ even if per capita income has soared. ” There is no trickle-down effect! (D. Seers 1969) Feb. 04, 2010 18

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Phase II: Social Dimensions of Growth Phase II Feb. 04, 2010 19

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Goals emplyoment, harmonizaton of income distribution, basic needs Theories informality, migration (Harris. Todaro model), appropriate technology Feb. 04, 2010 Paradigm 1970 s / early 1980 s Policies integrated rural development, employment creation, asset redistribution Data employment censuses, household / rural / IS surveys 20

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Phase III: Development as Freedom / Capabilities „The process of economic development has to be concerned with what people can or cannot do, e. g. whether they can live long, escape avoidable morbidity, be well nourished, be able to read and write and communicate, take part in literary and scientific pursuits. . . “ Sustenance, self-esteem, freedom (A. K. Sen 1983) Feb. 04, 2010 21

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring Phase III: Development as Freedom / Capabilities Phase III Feb. 04, 2010 22

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring “Millenium Development Goals“ (multidimensional) Theories new institutional economics, economics of corruption Feb. 04, 2010 Paradigm late 1990 s / present Policies promotion of good governance and accountability, change in social and political institutions Data large-scale income / household surveys, subjective poverty assessments, health surveys 23

Emphasis on Production Emphasis on Distribution Government as Main Protagonist Feb. 04, 2010 Market Forces as Main Protagonists 24

Government as Main Protagonist Policies Goals Policies Theories Data 1950 s / 60 s Emphasis on Distribution Emphasis on Production Goals 1970 s late 1990 s - present Goals Policies Theories Data Feb. 04, 2010 Market Forces as Main Protagonists 25

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring 1. 2. 3. 4. 5. 6. 7. 8. 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 Sustainability Develop a Global Partnership for Development Feb. 04, 2010 26

1. Economics 2. Development 2. 1 Meaning 2. 2 Measuring 1. MDG Targets Eradicate Extreme Hunger and Poverty Target 1. Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day Target 2. Halve, between 1990 and 2015, the proportion of people who suffer from hunger 4. Reduce Child Mortality Target Reduce by two-thirds the mortality rate among children under 5. Feb. 04, 2010 27

Quiz 1 Todaro/Smith, Economic Development, 9 th ed. , 2005 http: //wps. aw. com/aw_todarosmit_econdevelp_9/35/9052/231 7470. cw/index. html Chapter 1 Feb. 04, 2010 28

Questions for Discussion 1. (Why) is economics central to an understanding of the problems of development? 2. (Why) is a strictly economic definition of development inadequate? 3. Are there dimensions of development not mentioned so far? Which ones? Feb. 04, 2010 29

Download Link http: //www. hsbremen. de/internet/de/hsb/struktur/mitarbeiter/bass/lehrver anstaltungen/schwerpunkt_internationale_wirtschaft/Develo pment_Economics/ Feb. 04, 2010 30