Capacity Building For Knowledge Production

At The University Of Mandalay
 
Module 1:Theories and Concepts in Social Sciences And Development
 
Workshop 4 : Introduction to Economics
 
June 11 -13, 2018
 Convened by:

Professor Franque Grimard

  

Workshop 4 : Introduction to Economics

1. Introduction to Microeconomics
2. Introduction to Macroeconomics
3. Introduction to Development Economics
 
June 11 -13, 2018
 Convened by:

Professor Franque Grimard

Introduction to
Development
Economics
PROF. FRANQUE GRIMARD, MCGILL UNIVERSITY (MONTRÉAL,
CANADA)
Plan of the presentation

 What is economic development?

 The problems of poverty and inequalities

 Data collection through household surveys

 Women’s empowerment as an important poverty alleviator

 International organizations and foreign aid

 The case of Myanmar

What is Economic Development?

 Development economics is “the study of how economies transformed from

stagnation to growth and from low-income to high-income status.” (M. P. Todaro
and S. C. Smith, 2006)
 The development process is composed of many factors and is a very complex
problem, from economic indicators to values, attitudes, and institutions.
 Since 2000, the international community has clear objectives of development
called the Millennium Development Goals (MDGs). Because of the mitigated
success of the MDGs, a new and extended set of goals (17 goals) was agreed in
2015, the Sustainable Development Goals (SDGs).
 The problem of poverty
   2013, 10.7% of the world’s population (767 million
In
people) lived on less than $1.90 US ( K 2,500) a day,
which is defined as extreme poverty.
 There has been some notable progress in extreme poverty
alleviation in recent decades. 1.1 billion people moved out
of extreme poverty since 1990.
 However, the progress has been highly uneven: mostly in
East- and South-Asia (especially in China and in India). It
roughly stagnated in Sub-Saharan Africa.
 In 2015, 6.5% of Myanmar’s population (3.4 million) was
living under extreme poverty.

Source : The World Bank

 Poverty in the world

Source : The World Bank

What is poverty?

 In purely economic terms, poverty is the inability to meet basic standards of

living.
 Poverty is also multidimensional because human needs are more complex than
simply having enough food to survive.
 There is also the question of capabilities and social inclusion. Lacking capability
to function in the society is also a form of impoverishment.
 However, when one takes into account many factors, poverty becomes harder to
measure.
The poverty line
 Basic measures of poverty are computed relatively to a reference point called the
poverty line.

Poverty line

Poor Non-Poor
1.90 (extreme poverty) $US/day
How to measure poverty?
  
Each country has its national poverty line because being poor in Canada is not the
same thing as being poor in Myanmar. In Myanmar, 19.4% of the population
stood below the national poverty line in 2017.
 The poverty headcount ratio (PHR) is the proportion of the population below the
poverty line.

 The average poverty gap (APG) is a measure of the degree of poverty. It links the
PHR to the distance of individuals to the poverty line.
Poverty in selected countries (2005)

Source: G. Roland (2014)

International comparisons
 When one wants to make international comparisons, especially in the case of
poverty, taking into account the differences in purchasing power across countries
is important.
 First, one needs to adjust the economic variables by taking into account the
exchange rates. In general, all currencies are converted in US dollars because it is
an easy reference currency.
 Second, even once prices are adjusted for currency differences, prices (in US
dollars) differ from a country to another. The purchasing power parity (PPP)
exchange rates take into account these differences such that the same basket of
goods in two different countries have the same dollar value.
 A simple example of the PPP is the Big Mac index. It is an index that compares
the price of an identical good across countries, which is the Big Mac (McDonald’s
famous hamburger).
Broader measures of poverty
  
Development economists agree that there are four important criteria that are
desirable for a measure of poverty.
 Anonymity: It should not depend on who is poor. No individual is more important than
the others.
 Population independence: It should not depend on the size of the pop.
 Monotonicity: Giving money to someone below the poverty line should decrease the
poverty level.
 Transferring money from a poor individual to a richer person should make the overall
economy poorer.
 The Foster-Greek-Thorbecke index is a measure of poverty that also takes into
account the distribution within the poor. It satisfies the four desirable criteria.
Broader measures of poverty (cont’d)

  
Another useful measure of poverty that takes into account the multidimensionality
of poverty is the Human Poverty Index (HPI).
 The HPI is based on the Human Development Index (HDI), a measure of living
standards that takes into account two other important aspects of quality of life:
education and health.

 The HPI is an analogous measure of poverty. Having a higher HPI is reflective of

a higher level of economic deprivation.
 The problem of inequality

China
USA Japan

India

Country sizes as proportional to their GDP (source: World Mapper, 2018)

Within-country inequalities
 Inequalities in Myanmar
Distribution of income by quintile in Myanmar in 2015 (%)

Poorest 20%

Second Quintile

Third Quintile

Fourth Quintile

Richest 20%

0 5 10 15 20 25 30 35 40 45 50

Source : The World Bank

What are inequalities?

 Income inequality is an indicator of the differences in income and wealth between

the poor and the rich.
 Such as poverty, it can be measured within a country or through international
comparisons.
 The most common measure of inequality is the Gini index. It takes a value
between 0 and 1. In a perfectly equal society, the index is equal to zero while it is
equal to 1 if only one person has all the income (perfectly unequal society).
 It is easily measured with the help of another concept called the Lorenz curve,
which is the distribution of the cumulative income share of different quintiles.
 The Gini coefficient in Myanmar
% Cumulative income share by quintile in Myanmar (2015)
100

90

80
Gini index = A/(A+B)
0 < A/(A+B) < 1
Percent of income

70
= 0.381
60

50
A Lorenz curve
40

30
B
20

10

0 %
0 20 40 60 80 100

Percent of the population

The link between income inequality and
growth
 Many studies have confirmed that there is a clear relationship between income
inequality and economic growth. There is still a debate about the shape of the
relation, but economic theory states that there is a negative link between the two.
 There are three main explanations for this negative relationship.
 Credit markets: The higher the inequality in a society, the smaller the fraction of the
population that has access to a collateral to offer as a guarantee on loans. Access to
credit is a key factor that contributes to growth because it allows people to start
businesses and invest.
 Political economy: In unequal societies, rich people have more political power because
they put more pressure on governments by lobbying. Resources allocated to rent-
seeking could be more useful elsewhere.
 Social stability: High levels of inequality are seen as unfair and this could lead to
increases in violence and conflicts that are harmful to growth.
Data collection issues

 In developing countries, accurate economic data is often difficult to collect. This

is especially true for microeconomic data such as household expenditures and
individual income.
 Therefore, scientists must rely on household surveys and, when they are available,
on national censuses. There are many practical issues with household surveys.
 Informal sector: When the size of the informal sector is big, such as in Myanmar,
national data underestimate the real size of the economy. People working in illegal jobs
often do not report their income.
 Potential misreporting: Individuals could make mistakes when they answer the survey.
But more importantly, they could have an incentive to lie about their income level or
their expenditures.
Women’s empowerment
 Almost everywhere in the world, there exists a gender gap between males and
females. In developing countries, this gap is even more pronounced in key areas
of development such as education, health, and income.
 The gender gap is particularly problematic because there is evidence that women
devote a higher share of their income to their children than men. In poor
households, getting out of poverty needs spending on children’s education and
health.
 This is why many attempts to empower women have been made in the last
decades, such as microcredit. Women’s empowerment is recognized as an
important poverty alleviator.
 Foreign aid
 In 2016, the Development Assistance Committee (DAC) members spent $24.6 US
billion in Official Development Assistance (ODA).
 ODA takes several forms, but, since 2018, loans are no longer considered as
ODA. It has to be in the form of grants only.
 The main argument for foreign aid has been made by Jeffrey Sachs, an American
economist. He states that if the richest countries give a Big Push to poor countries,
the latter could go out of poverty.
 However, foreign aid has not shown the expected results in terms of growth in the
past decades. For instance, Africa received $568 billion in foreign aid between
1965 and 2000 and experienced virtually no growth in that period.
 Also, donors give because it is in their self-interest: they have political and
economic motivations.

Source : OECD
Reshaping the foreign aid model
 Most economists consider that most of foreign aid money has been wasted.
 In order to make foreign aid more efficient, the international community designed
principles to guide foreign aid in the future. The Paris Declaration on Aid
Effectiveness (2005) and the Accra Agenda for Action (2008) represent the shift
in the vision of foreign aid.
 Ownership: Partner countries exercise leadership over their development policies.
 Alignment: Donors base their support on partners’ strategies.
 Harmonization: Donors’ actions are transparent and effective.
 Managing for results: Results need to be measured.
 Mutual accountability: Donors and partners are both accountable.
Conclusion

 Economic development is a complex phenomenon that depends on a wide range

of factors.
 Poverty and inequality are the main problems that keep developing countries
away from prosperity.
 Women’s empowerment is a major source of poverty alleviation, and more efforts
must be made in that direction by policymakers.
 There is still a heavy debate around foreign aid. The international community is
taking a new orientation that is compatible with the Sustainable Development
Goals, but proof of foreign aid’s usefulness is still to be made.
List of suggested references
 Rodrik, Dani and Mark R. Rosenzweig. (2010). Handbook of Development
Economics, Volume 5, Elsevier Science Pub. Co.
 Roland, Gérard. (2014). Development Economics, Pearson.
 Smith, Stephen C. (any edition) Case studies in Economic Development, Addison
Wesley Longman.
 Todaro, Michael P. and Stephen C. Smith. (any version). Economic Development,
Pearson.
 United Nations. (2015). Transforming our World: The 2030 Agenda for
Sustainable Development, found at
https://sustainabledevelopment.un.org/post2015/transformingourworld/publicatio
n.