Development Economics: Aspect of Development

Doctoral Thesis / Dissertation, 2013

106 Pages, Grade: 4.0


Table of contents.

Chapter One.-
1.0 Introduction
1.1. Definition
1.2. Differences between economic growth and development

Chapter Two
2.0. Introduction
2.1. Physical Quantity of Life Index
2.2. Human Development Index

Chapter Three
3.0. Introduction
3.1. Optimists View
3.2. Fer and Ranis (1964) and Denis (1954)

Chapter Four
4.1. Harrod- Domar Model
4.2. Growth Accounting model

5.0. Introduction
5.1. The classical growth theory
5.2. Adam Smith
5.3. Malthus
5.4. Ricardo
5.5. Robert Torrens
5.6. Carl Max
5.7. Neo- Classical Model

6.1. Schumpeter Model of entrepreneurship
6.2. Lewis Model of economic development with unlimited supply of labour

7.1. Rostow’s stages of economic growth
7.2. The concept of the leading sector

8.1. North South unequal exchange

9.0. Case study; Uganda
9.1. State of education and health in Uganda
9.2. The linkage between education and development
9.3. The impact of AIDS on economic development of Uganda
9.4. The Uganda’s strategies and policies underlying human development initiative

Chapter Ten



Chapter One.

1.0. Introduction.

Development economics entail all the aspects of the development process especially meant for the developing countries to overcome the challenges that impede development. This can be through education, education and man power development, restructuring market incentives, incorporating favorable social and political approaches and practices among other factors.

Human beings however need streamlined social and economic systems that are able to achieve development through major changes in social structures, national institutions, cultures and attitudes as well as eradication of poverty, reduction of income inequality and acceleration of economic growth. The developing world needs a multi disciplinary approach and ideas so as to come out of the economic backward situation. Micheal, P. (2003: 9) describes that because of heterogeneity of the developing world, and the complexity of the development process, development economics must be eclectic, attempting to combine relevant concepts and theories from traditional economics analysis along with new models and broader multi disciplinary approaches from historical and co temporally development experience of Africa, Asia, and Latin America. Debraj Ray (2007) puts it that development economics studies economics of the developing world and has made excellent use of economic theory, econometrics, anthropology, sociology, political science, biology and demography. It needs a lot more dimensional approach to understand it. Other scholars have tried to bring about the key issues that are in development economics such as Dasgupa (1998), Hoff, Braverman and stiglitz (1993), Ray (1998), Bardhan and Udry (1999), Mookerjee and Ray (2001), and Sen(1999).

1.1. Definition .

Economic growth refers to a rise in national income or per capita income. If the production of goods in a nation rises by whatever means one can speak of that rise as economic growth. Maunder (1996 : 462) asserts that potential growth is largely determined by the factors of production a nation has and also how these factors are effectively combined and developed.

On the other hand economic development includes not merely economic growth but steady progress towards absolute poverty elimination. A sustained increase in employment and a reduction of inequality contribute to economic development.

Some economists take development as purely an economic phenomenon in which rapid gains from overall growth of GNP and income per capita would automatically bring benefits “trickle down” to the masses in form of jobs and other economic opportunities. Time has also shown that without adequate economic growth, economic development cannot be sustained in the long run. But economic growth and development need not be the same.

1.2.Differences between growth and development.

1. Using quality of life regarded as an important index of development is contended that such quality is not adequately reflected in the index of a country X may have a lower per capita real income than the other income but the quality of life enjoyed by citizens of X may be better than of Y. several factors are used in measurement of such quality such as education and literacy rates, life expectancy, the level of nutrition, consumption of energy per head, consumption of consumer durables per head.
2. Another source of difference between growth and development place is the question of externality and non marketability. The GNP captures only those means of wellbeing that happen to be transacted in the market and leaves out benefits and costs that do not have a price tag attached to them. The importance of what is left out has become increasingly recognized as awareness of the contribution of the environment and natural resources to our well being has grown. Economies have externalities for example in physical and human capital as noted by Romer (1986), Lucas (1988), Azariadis and Drazen (1990). There is thus low average income to society, high inequality and high poverty rates.
3. Economic growth is usually only concerned with GNP per head and does not take into account the distribution of that GNP among the population. It is of course possible for a country to have an expansion of GNP per head while its distribution becomes more unequal possibly even with the poorest groups going down absolutely in terms of their real incomes. For instance in Uganda (1945- 1960) a period of rising incomes brought about largely by favorable prices of primary products as benefits were both more immediate and more widespread because they accrued to most of the cultivators of small farms in central part of the country. But areas further away from the railway still did not pay to grow crops for export and consequently inequality in Uganda came to take the form of growing regional disparity of income.

Even when the markets do exist, the valuation of commodities in GNP will reflect the biases that markets may have. There are important problems in dealing with different prices in different parts of the world. Even for a given economy, the relative importance that is attached to one commodity compared to with other may be distorted visa- vis what might be achieved under perfectly competitive conditions if the market operations happens to be institutionally imperfect or if equilibrium outcomes do not prevail. Keneth J. Arrow (2011: 493), emphasizes on the traditional explanations of unemployment focus on market rigidities which ignores the characteristics in the product market. What takes place in the product market influences unemployment and economic growth.

4. The real incomes enjoyed by a person in a given year reflects at best the extent of the wellbeing enjoyed by that person at that particular period of time. However in assessing what kind of life the person has experienced in life we have to take a more integral view of that person’s life. The issues to be considered include interdependence over time as well as the elementary question of life. GNP information does not adequately capture the details of what goes on period by period within the society welfare therefore GNP remains fundamentally inadequate for the concept of development.
5. It must be noted that GNP is a measure of the amount of a means of a wellbeing that people have and it does not tell us how the people are involved in succeeding to getting out of these means given their ends.

It is possible that while per capita income is increasing, per capita consumption may also be falling.

If the on the whole an increase in output is devoted to building up of a country’s military strength or putting monumental buildings, with which to impress the population and foreign visitors it may not impact on development. The assessment of economic development therefore has to go beyond GNP information.

Another aspect of GNP is where there may be increasing incomes accompanied by a widening income inequality. Income inequality is believed to have an impact on economic growth. Barro (2000) inequality is negatively associated with growth in poor countries, and positively in rich countries. It negatively affects demand, human capital development and investment.

Chapter Two.

2.0. Introduction.

The most common way to assess and determine development is by reference to a country’s GNP. GNP is a measure of its total output valued at the prices at which it is sold. International comparisons of GNP per head provide rough guidelines of relative welfare between countries or in the countries over time. The first difficulty is that national products of different countries are expressed in different currencies having different purchasing power both in international trade and at home.

Since they are expressed in a common currency, this has usually involved a conversion and official rate of exchange but at best these exchange rates reflect only the price relations of goods entering into international trade. In practice they frequently diverge substantially even from this since currencies are often overvalued or undervalued. A further problem arises in that foreign exchange rates cannot be used to measure the relative prices of goods and services that do not enter international trade (non trade goods). With that regard such goods and services, a currency may have a totally different purchasing power from that it may have over foreign goods.

Finally it is also arguable that the national products especially of very similar countries are made up of totally different goods and services and satisfy equally different needs determined by different climatic conditions and institutional factors such as the income of a Ugandan sustains him in Uganda but converted in dollars it may not provide him with enough food, shelter and clothes in America. On the other hand, the suggestion that Ugandans have less need for heating and therefore do not need so large an income to meet some of the harsh conditions of nature can be misinterpreted to having a better life in these areas. With the dissatisfaction of GNP as an economic development measure, certain economists try to measure it in terms of social indicators and these include health, food and nutrition, education including literacy and skills, employment, conditions of work, consumption of basic necessities, transportation, and housing including household facilities, clothing, recreation and entertainment, social security among other parameters.

2.1. Physical Quantity of Life Index (PQLI).

A policy is used only in three items i.e infant mortality, life expectancy and illiteracy rate in constructing PQLI relating to the 23 developed and developing countries of the World on the comparative study.

PQLI = f (im, e, L )

= (imI, ei, Li)/3

= 0.33imI + 0.33ei + 0.33Li

Where, e is life expectancy,

I is illiteracy,

Im is infant mortality.

Limitations of PQLI

1- There is a problem of assigning weights to various items which may depend upon the social economic and political set up of a country. This involves subjectivity. Scholars assign equal weight to the three indicators which undermines the value of the index in and comparison would be as inaccurate as GNP figures.
2- The majority of the indicators are inputs and not outputs such as education, health etc.

2.2. Human Development Index.

This is the most recent attempt to provide an aggregate measure of development and is now annually published by UNDP since 1990. It is an index of measuring national social economic development based on measure of life expectancy at birth, educational attainments and adjusted real per capita income.

Like PQLI, the HDI attempts to rank all countries at a scale of 0 (the lowest human index). Based on three goals or end products of development.

1- Longevity; Is measured by life expectancy at birth.
2- Knowledge; Is measured by a weighted average of adult illiteracy (2/3) and many years of schooling (1/3 weight).
3- Incomes as measured by adjusted real per capita income (adjusted for the differing purchasing power and for the assumption of rapidly diminishing marginal utility of income.

The three parameters mentioned are part of the core values of development outlined by Brinley Thomas (1954), i.e sustenance, self esteem, and freedom that represent common goals cherished by all individuals and societies.

In the HDI, proposed by UNDP,

HDI= g ( Y, L, e)

Where, Y is adjusted real / per capita income,

e, is life expectancy,

L is literacy rate.

The index varies between 0 and 1. The index nearer to 1 the higher the level of human development. The human development has two components.

a) The actual achievement.
b) Shortfalls from a target or measure of deprivation.

An index which emphasizes the magnitude has tasks that lie ahead. The construction of the index of deprivation indicator is as follows;

DIYi = (Max Y – Yi)/ (Max Y- Min Y).

It is important to note that many studies such as Strauss and Thomas (1995) show that human capital investment is correlated with family income. Carvalho (2000) put it that an increase in pension income resulted into a decrease in child labor and increase in school enrolment. The level of incomes greatly affects the other parameters such as life expectancy and human capital investment.

Limitations of HDI.

1- One must always remember that the index is one of relative rather than absolute development so that all countries improve at the same weighted rate. The poorest countries will not get credit for their progress.
2- The national HDI may have unfortunate effect of shifting the focus away from the substantial inequality within countries.
3- The three indicators used are good but not ideal. For example the UN team wanted to use nutritional status of children under 5 years as the ideal health indicator but the data was not available.

Some good work has been done to determine the relationship and dynamic interplay between growth and social institutions such as (Cole, Mailath and Postelwaithe (1992), (1998), (2001).). Well built up social institutions have a big bearing on the good well being of the people. In situations where poor institutions appear there is lack of proper governance, transparency and poor service delivery. Many studies stress that there is a strong association between aggregate investment and measures of bad institutions or corruption ( e.g. Knack and Koefer (1995), Mauro (1995), and Svensson (1998) ). Strong institutions are required for an increased investment, a pre-requisite to economic growth.

4- Its creation in part motivated by a political strategy designed to focus attention on health and education aspects of development.

Chapter Three.

3.0. Introduction.

No agreed position has been reached on the effects of rapid population growth of developing countries on their economic growth. The assumption is that rapid population growth was detrimental as prevailed in 1950’s and 1960’s when the emphasis in the general development literature was on lack of capital coupled with surplus labor in agriculture as a major constraint in economic development. By late 1970’s with attention shifting to efficiency with which capital and other factors of production were utilized and to the roles of policy in creating or distorting positive incentives of efficiency. Challenges arose to the conventional view that the apparent abundance of labor in poor countries compared to labor and land was hindering economic growth.

The following discussion is according to the points of view of analysis of macroeconomic consequences of rapid population growth. i.e the pessimists and optimists.

Malthus as a successor pessimist gave a simple model where he incorporates the classical ways theory that the supply of labor was completely elastic at subsistence level. In good times i.e when Average Product rose above the subsistence level, marriage occurred more often and earlier and couples had more children thus higher income per capita led to an increase in population and the supply of labor.

A population increase however eventually brought about falling wages and rising food prices as an increasing supply of labor run up against the fixity of land and given the diminishing returns, labor productivity fell with falling consumption, marriage, and fertility rates fell and mortality rates rose completing the cycle.

As a description of trends of several centuries preceding this 1801 essay, Malthus was likely to collect. Data put together by demographers and economic historians on wages, rents, food prices and fertility and mortality in England from the 14th century portions in the Malthus model.

As a predictor of the future, Malthus seemed to be wrong both about diminishing returns and about human productive behavior but by 19th century couples were practicing cautious control fertility within marriages leading to a smaller family size.

Malthus and the classical economists were writing at a time when in England population growth were accelerating with a new burst of population growth in developing countries after 2nd World war economists returned to Malthus tradition.

The analytical models Leibenstein (1954) and Nelson (1956) they introduced population as an endogenous variable influenced by income. In these models small increases in income at the subsistence level lead to increases in labor supply that swarm small houses in capital or other small displacement or stimuli to the economy. The result is a low level equilibrium trap.

Only massive capital formation or major stimulus can overcome the trap.

Early one sector neo classical model by Solow (1956) were similarly Malthusian in that the fast the rate of population growth and thus the more activity the increase in labor supply compared with capital formation, the lower the level of per capita income consumption. With the constant returns to scale and constant rate of saving the faster than the growth rate of labor force reduces the capital- labor ratio and the productivity of labor. More resources must be used to increase capital per head preventing immediate higher consumption in future period. Thus rapid population is harmful even in absence of diminishing returns. Population in these neoclassical state models, labor was treated as exogenous with no effort to incorporate the determination of population growth via the effects of economic change on mortality and fertility.

Population growth is also treated as exogenous and stimulates a negative effect in 2 sector growth models.

3.1. Optmists view.

The pessimists’ models have not gone unchallenged. Optimists view of population growth have tended to emphasize the critical contributors to economic growth. Such factors such as innovation, efficiency in the use of factors, human as opposed to physical capital and technological change in contrast to the neoclassical emphasis on the critical role of physical capital formation.

Optimists argue that a growing population is a net contributor of economic growth for 2 principle reasons.

a) Because of a large population brings economies of large scale of population and consumption.
b) Because population pressure and the scale economies. Population growth are likely to encourage technological innovations and organizational and institutional change particularly in agriculture.

In addition optimists argue that a growing population can stimulate demand and thus reduce investment risk and permits constant improvement of the labor force with better trained workers.

In a classical period Adam Smith involved scale and resultant induced innovation not only to explain economic growth itself but also as arguments for a positive effect of population growth on economic growth. He noted that growing population by widening the market and fostering creativity and innovation facilities and division of labor leading to higher productivity.

Later Marshal also emphasized economies of scale and innovation; noting that while the part which nature plays in production shows a tendency to diminishing returns, a part which man plays shows a tendency to increasing returns. Economies arise out of increased knowledge, greater specialization, better communication and organization changes all associated with increasing scale of production which might result from population growth.

In a modern era Kuznets and Hirschman and others have also emphasized the potential contribution of a growing population, scale economies and to innovation. But there has been limited effort to test the expected effects empirically and that effort has focused solely on the scale effect.

Glover and Simon report that a strongly positive elasticity of roads per unit area with respect to population density in a cross national analysis.

The most effective argument that population may encourage innovation has been made by Boserup (1981) for the agricultural sector. She suggests that increasing population densities induces a shift to a more labor intensive farming system. A shift from a long fallow to a more frequent cropping confronts farmers with a new innovation possibilities. A shift initially requires greater labor input which results in diminishing returns to labor. It will not occur unless rising population pressure necessitates it. Once such shifts occur the use of new tools and techniques permits large increases in productivity. On the other hand there are only historical but also co temporally examples that appear to refute Boserup argument. There are cases in the 19th century like China, Bangladesh and parts of Africa in the last 2 decades in which population growth has probably contributed to declining returns. Outside agriculture it is difficult to show that population pressure rather than other factors has been a major impediment to innovation.

The arguments of the optimists with the possible exception of the advantages of greater population density in rural areas though appealing are as poorly supported empirically and are difficult to support as arguments of the pessimists. The arguments rest largely on theory. The effects of population vary with time, place and circumstances must be studied empirically.

3.2. Fer and Ranis (1964) and Denis (1954).

In these 2 models surplus labor in agricultural sector is absorbed in the manufacturing economy. Savings and thus capital grow faster than population and technological change in dynamic manufacturing sector offsets the combining effects of research and development in agriculture and population growth.

All other things the same, the transfer of labor in main sector occurs more rapidly and the share of labor in manufacturing thus grow more rapidly the slower the growth of the population. Slower population growth thus speeds up the elimination of dualism that is a hindrance to economic growth.

These early growth models treated population growth and labor force growth as equivalent and ignored age structure. In these overlapping generation model Samuelson (1968) introduced a crude approximation of the age structure. He pointed out 2 age groups. A younger working population and older retired population. Younger generation transfers consumption (loans) to the older generation. The loans to be repaid by the subsequent generation of young workers. A sustained increase in population growth raises the population of the young group causing higher consumption transfers to the old. If a higher population growth rate persists, each generation benefits; thus Samuelson came to the opposite conclusion from that reached in neo classical growth a sustained higher population rate leads to higher life time economic welfare.

Samuelson ignored dependent children in effect assuming they cause no cost to the parents nor to the economy external to the household. In fact higher population growth that results from higher fertility will increase the proportion of children in a population and not increase labor supply for about 15 years. To the extent children consume more than they produce. Their existence must reduce the consumption or saving of workers or retirees.

In the tradition wholly different from the above analytic and deductive models Coale and Hoover (1958) developed a model highlighting the fact that children are costly and that higher fertility increases the proportion of children in the population. They built into their stimulation model of the economics of India the assumption that savings/ capital and thus investment /capital fall in proportion of non working dependants as the economy rises.

Using the model they made the protection of the per capita of India under low, high and fertility assumptions and concluded that over 30 year period per capita income could be as much as 40% high compared with low fertility assumption.


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Development Economics: Aspect of Development
( Atlantic International University )  (BUSINESS STUDIES AND ECONOMICS)
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