Understanding

Economic development
IB- XI
Economic Growth
• All economies produce some output, which includes goods and services
produced for consumers, as well as capital goods (physical capital).
• Over time, the quantity of output produced changes. When it increases, there is
economic growth; if it decreases, there is economic contraction or negative
economic growth.
• Economic growth, or growing output, is important as a basis for economic
development, because it means that more goods and services are being
produced, and therefore the standards of living of people could be potentially
increased.
• Economic Growth :increases in total real output produced by an economy (real
GDP) over time; may also refer to increases in real output (real GDP) per capita
(or per person).
• Famous development economist, Charles P. Kindleberger, wrote in 1965,
‘Growth and development are often used synonymously in economic
discussion, and this is entirely appropriate’.
• It was believed that economic growth over long periods would
automatically provide economic and social benefits for the entire population
• But by 1970’s economists began to understand that since economic growth,
where it did occur, did not always work to eliminate widespread poverty and
improve standards of living,
• what was needed was an approach that would directly deal with the
problems of developing countries, and specifically the problem of persisting
poverty
Economic development
• Economic development is broad-based rises in the standard of living
and well-being of a population, particularly in economically less
developed countries.
• It involves increasing income levels and reducing poverty, reducing
income inequalities and unemployment, and increasing provision of
and
• access to basic goods and services such as food and shelter,
sanitation, education and health care services.
Human development
Human development
• The human development approach, developed by the economist Mahbub Ul Haq, is
anchored in Amartya Sen’s work on human capabilities, often framed in terms of
whether people are able to “be” and “do” desirable things in life iii. Examples include
• Beings: well fed, sheltered, healthy
• Doings: work, education, voting, participating in community life.
• Freedom of choice is central: someone choosing to be hungry (during a religious fast
say) is quite different to someone who is hungry because they cannot afford to buy
food.
• As the international community seeks to define a new development agenda post-
2015, the human development approach remains useful to articulating the
objectives of development and improving people’s well-being by ensuring an
equitable, sustainable and stable planet.
HDI
• The HDI was created to emphasize that people and their capabilities
should be the ultimate criteria for assessing the development of a
country, not economic growth alone.
• The HDI can also be used to question national policy choices, asking
how two countries with the same level of GNI per capita can end up
with different human development outcomes. These contrasts can
stimulate debate about government policy priorities.
HDI
• The Human Development Index (HDI) is a summary measure of
average achievement in key dimensions of human development:
• a long and healthy life,
• being knowledgeable and
• have a decent standard of living.
• The HDI is the geometric mean of normalized indices for each of the
three dimensions.
GNI per Capita - Purchasing Power Parity (PPP)
• GNI per Capita - Purchasing Power Parity (PPP)
• This is a method of currency valuation based on the idea that two
identical goods in different countries should eventually cost the same
• This is illustrated by the Big Mac index, which takes a Big Mac
hamburger and compares its prices in different countries in order to
establish the relative value of their currencies
• If PPP holds true, then you can buy the same goods and services with
£100 in London as you can in Glasgow, New York and Cape Town.
There are many reasons why this will not be the case.
Limitations of the Human
Development Index
• The HDI notably fails to take account of qualitative factors, such as cultural
identity and political freedoms (human security, gender opportunities and
human rights for example)
• Many argue that the HDI should become more human-centred and expanded
to include more dimensions, ranging from gender equity to environmental
biodiversity
• The GNP per capita figure – and consequently the HDI figure – takes no account
of income distribution. If income is unevenly distributed, then GNP per capita
will be an inaccurate measure of the monetary well-being of the people.
Inequitable development is not human development
• There are likely to be significant variations in human development outcomes
within as well as between countries.
• PPP values change very quickly and are likely to be inaccurate or misleading
Additional reading
• Max Roser's World in Data project has some excellent long run
historical data on progress in human development
• Click here http://ourworldindata.org/data/economic-developmen...
Sources of economic growth in economically
less developed countries
• Increases in the quantity of physical capital

• Increases in the quantity of human capital

• Development and use of new appropriate technologies

• Institutional changes
• The World Bank defines institutions as ‘the rules, organizations and
social norms that facilitate co- ordination of human action’.
• There are many economic, legal and social institutions that influence
economic growth.
Relating economic growth to economic development
Distinguishing between economically more
developed and less developed countries
• Low-income economies: GNI per Capita $1025per year or less
• Lower- Middle income economies: GNI Percapita $1026-$3995
• Upper Middle income Economies: GNI Per Capita $3996 - $12375
• High income Economies: GNI per capita $12376 or more
• As per July 2019, WB statistics
Common characteristics of developing countries

• Low levels of GDP/GNI per capita

• High levels of poverty
• Relatively large agricultural sector
• Large urban informal sector
• High birth rates and population growth
• The challenges of population growth
• Low levels of health and education
• Low levels of productivity
• Dual economies
• The poverty cycle (trap)
Single indicators

• GDP is an indicator of the value of output produced within a country,

and GNI is an indicator of the income (or value of output) received by
the residents of a country, usually within a year (see page 221). Per
capita means that these values are calculated on a per person basis.
• GNI per capita is a better indicator of the standards of living of a
country, because it represents income per person received by the
residents. GDP per capita is a better indicator of the level of output
per person produced in a country.
Comparing and contrasting
health indicators
• Three commonly used health indicators are life expectancy at birth,
infant mortality and maternal mortality.
• Life expectancy at birth refers to the number of years one can expect
to live, calculated as the average number of years of life in a
population.
• It is one of the most commonly used indicators of development.
Infant mortality refers to the number of infant deaths from the time
of birth until the age of one, per 1000 live births
• GNI per capita (or any other income or output measure) is an
insufficient indicator of health outcomes.
• Limited resources, due to low GNI per capita, are not always the most
important cause of poor health outcomes. Most (if not all) countries,
both more and less developed, can do more with their available
resources to meet economic development goals
Comparing and contrasting education indicators

• Education indicator is the adult literacy rate, which measures the percentage
of people aged 15 or more in the population who can read and write.
• The second indicator, primary school enrolment, measures the percentage of
school-age children who are enrolled in primary school (elementary school)
• The third indicator, secondary school enrolment, measures the percentage of
children enrolled in secondary school
• Countries can achieve universal literacy and universal primary education
even if they have relatively low per capita incomes, provided their
governments allocate enough resources to education services, and ensure
that all children have access to these
World Development Indicators
(the World Bank)

• The World Bank compiles a set of indicators known

as the ‘World Development Indicators’ (WDI). As of 2011, there were
over 900 indicators for 210 countries
• Some (but not all) of these indicators can be accessed free of charge
at the World Bank’s website http://data. worldbank.org/indicator
• Mahbub ul Haq, a highly influential Pakistani development economist,
and Amartya Sen, an Indian economist who won the Nobel Prize
for his work in economic development – to develop composite
indicators, which are summary measures of more than one
dimension of development.
• By including more than one dimension, composite indicators are
more accurate measures of development
• HDI
• Inequality-adjusted Human Development Index
The Inequality-adjusted Human Development
Index (IHDI) measures human development in
the same three dimensions as the HDI adjusted for inequality in each
dimension. The IHDI attempts to measure losses in human development
that arise from inequality.
• Gender Inequality Index
• The Gender Inequality Index (GII) measures inequalities between the
genders in three dimensions: reproductive health, empowerment and in
the labour market. It measures the loss in human development of
women due to inequalities in these areas
Multidimensional Poverty Index

• The Multidimensional Poverty Index (MPI) measures multiple

deprivations in the areas of health, education and standard of living.
• It is a measure of human poverty, to be contrasted with income
poverty, occurring when income falls below a nationally or
internationally determined level
The World Bank’s development
diamond
• The World Bank has developed an alternative method, the
‘development diamond’, to make cross country comparisons involving
more than one development indicator.
• A development diamond is a polygon illustrating development in
four dimensions, each represented by an indicator measured in one of
the four corners of the polygon (i.e. on one of the four axes shown).
• The shaded polygon is a ‘reference diamond’, representing the
average value of indicators for a country’s specific income group (low,
lower middle, upper middle, high income
• The black lines (solid and broken) show a particular country’s
indicators in relation to the reference diamond.
• A point outside the reference diamond shows that a country is
performing better than the group’s average, while a point inside the
reference diamond shows below-average performance.
• By plotting indicators for more than one country, it is possible to
compare the performance of two countries with each other.
Development diamonds for India and Tajikistan

-----India
____Tajkistan
Shaded polygon is the average for lower middle income countries