Great Land College

MA in Development Management

Course Title: Development Economics

Course Code: ECON 631

Lecturer: Firdisa Birru (Assistant Professor)

Email: helphelpless2015@yahoo.com

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Unit One

LECTURE 1
Fundamentals of Development
Economics

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 Introduction
The World is divided into two: the haves and the have-nots.
 The former are those who are rich with bright future and
the latter are those who are poor.
 Majority of the earth’s nearly 7 billion people, are much
less fortunate.
 They may have inadequate food and shelter, especially if
they are among the poorest third.
 Their health is often poor, they may not know how to read
or write, they may be unemployed, and their prospects for
a better life are uncertain at best.
 Over 40% of the world’s population lives on less than $2
per day, part of a condition of absolute poverty.

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 Introduction cont’d…
Development Economics is the study of how
economies are transformed from stagnation to growth
and from low income to high-income status, and
overcome problems of absolute poverty.
It started to emerge in the late 1940s, with the book of
Harrod (British economist).
The significance of development economics is that it is
an applied economics, where we attempt to apply the
theories of economics to development.
Thus, one can call it an applied branch in economics

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 Ideal Economy
An ideal economy is one in which there is:
– Stable, Steady , sustainable, equitable, Inclusive, balanced
development
– Rapid growth of output per worker
– Low unemployment, no poverty and Low inflation
– Less debt and deficits
– Less inequality
– Balanced regional development
Note: Debt is an amount of money borrowed by one party from
another, often for making large purchases that they could not
afford under normal circumstances

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 SCOPE OF DEVELOPMENT ECONOMICS
 Studies the pattern of economic growth
 the distribution of pattern of income
 the characteristics of Underdeveloped countries and
obstacles of development
 the Theories of Economic Development
 the Relevance of growth models
 the Domestic Measures of Economic dev’t( Rural dev’t,
Agriculture, Industry, Capital Formation, Urbanization,
Poverty, Migration, Human Capital, GDP, Gender,
Technology, Entrepreneurship, Role of State,
 the international Measures of Economic development(
FDI,WTO, etc)
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 Basic Concepts

Income per capita Total gross national income

of a country divided by total population
 Absolute poverty: A situation of being unable to
meet the minimum levels of income, food, clothing,
healthcare, shelter, and other essentials
 Subsistence economy: An economy in which
production is mainly for personal consumption and
the standard of living yields little more than basic
necessities of life—food, shelter, and clothing.

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 Economic Growth and Development
Quite often economic growth and development are used
interchangeably
But, truly there is a big difference between the two concepts
The later is very wider and also engulfs the first one
Growth rate is the percentage change in real
output from one period to another.
Economic growth is a necessary condition but not
a sufficient condition for development.
Economic Growth is Measured by GDP,GDPPC

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 GROWTH AND DEVELOPMENT
ECONOMIC DEVELOPMENT ECONOMIC GROWTH
(1) Multi dimensional (1) Uni-dimensional/narrow
(2) Qualitative +quantitative Change (2) Quantitative Changes.
(3) Gradual & steady change (3) Planned change
(4) Continuous change. (4) Discontinuous change
(5) Growth with development. (5) Growth without dev’t.
(6) Econ & non economic factors (6) Economic factors

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 Cont’d…

Development is about realizing very fundamental

human values. These human values include:
The opportunity for meaningful employment and the
possibility to provide for oneself and family
Sufficient food, shelter and other amenities for a decent
and meaningful life above the poverty line
The opportunity to pursue education
A reasonable level of healthcare
Social security for old age
Equal treatment under the law
Respect for individual dignity
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 Con’d---
 The three core values/Goals of development are:
life-sustenance, self esteem and freedom from
servitude.
Sustenance: the ability to meet basic needs such
as food, shelter, health and protection
Self-esteem: to be a person. It is a sense of worth
and self respect (dignity), of not being used as a tool
by others for their own ends. This is about dignity,
identity, respect, honor, recognition.
Freedom from servitude: to be able to choose.
Emancipation from alienating material conditions of
life and from social servitude to nature, other
people, misery, oppressive institutions and dogmatic
beliefs, especially that poverty is predestination.

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 Calculating Growth Rates
To calculate real growth rate in GDP, we use the formula:
R GDP inCurrent Year  RGDP in Pr eviousYear
Growth Rate of RGDP  X 100
RGDP in Pr eviousYear

For example: if real GDP in the current year is $8.4

trillion and real GDP in the previous year was $8.0
trillion, then the growth rate of real GDP is:

The standard of living depends on real GDP per person.

Real GDP per person=Real GDP/ population.
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Example, that in the current year, when real GDP is $8.4
trillion, the population is 202 million.
And suppose that in the previous year, when real GDP was
$8.0 trillion, the population was 200 million.
 The growth rate of real GDP per person can also be
calculated by using the formula:

 Growth of real GDP per person = Growth rate of real GDP -

Growth rate of population
 Growth of RGDP per person = 5% - 1% = 4%
 If the growth rate of the population exceeds the growth of
real GDP, real GDP per person falls.

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 Economic Development
Unlike the Economic Growth, Economic
Development comprises quality of life in terms of
life expectancy, educational status, nutritional
status, various institutions, etc.

Structural Change takes place in economic

development as the economy advances.

These structure are those existing in the different

sectors like agriculture (primary), manufacturing
(secondary) and service (tertiary), which undergoes
change.
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The tertiary sector contributes at fastest rate.
An example could be American economy, where
50% of the GDP comes from the service sector
In the US almost only 1.6% of the population
depends on agricultural sector

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 Economic Development con’d---
As the economy develops there are also other
structural changes that occurs in an economy

Such structure include structure of output, that is the

type of goods produced change from basic to capital

And in the industrial sector intermediate and

consumer goods are produced

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 Manufacturing Industries include
1) Basic industries: are all raw materials, food,
cements, oil, gas, petroleum, and steel are all
basic because they are to be used by other
industries
2) Capital industries: are industries that produce
machineries, tools, tractors, textiles machines, etc
3) Intermediate Industries: are industries that
produce semi finished commodities like chemicals
for textile, dye, yarns, etc
4) Consumers good industries: industries that
produces consumer goods such as pen, cloth,
beer, shoes, and all sorts of industrial good that
are ready to be consumed.
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 As the economy develops overtime industries move
from (1 & 2) to (3 & 4)

Basically, 1 & 2 are the characteristics of

underdeveloped economy

The 3rd and 4th begin to emerge as the economy

improves, this is because they are very much necessary
for the development of the economy

Capital is a crucial factor for development as it comes in

the form of machineries

The capital of poor economy is very low. Their capital

output ratio (k/Q) is small
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 Real Economic Development
Growth of per capita income (GDPPC) in excess
of inflation
Growth in GDPPC - π > 0
If π > Growth in GDPPC, then purchasing power
is falling even when income is increasing.
So “development” may not occur even if GDPPC
is growing when inflation growing even faster.

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 Happiness and Development
There is not a perfect correlation between
happiness and per capita income:
 people could be poor, but happy; rich, but unhappy.
Factors affecting happiness:-
Family relationships
Financial conditions
Work satisfactions
Community and friends
Health and health-care services
Personal freedom
Personal values

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 Defining the Developing World
Best known is World Bank’s System
 Categorizes countries by their per capita income levels:
1. Low-income countries (LICs) - $765 or less
2. Lower-middle-income countries (LMCs) - $766 to $3,035
3. Upper-middle-income countries (UMCs) - $3,036 to $9,385
4. High-income OECD countries - $9,386 or more
5. Other high income countries - $9,386 or more

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 HUMAN DEVELOPMENT INDEX (HDI) ---

Initiated in 1990 and undertaken by UNDP in its annual

series of HDRs.
The HDI attempts to rank all countries on scale of 0 to 1
based on three goals or end products of development/
three dimensions of human welfare:
Longevity- life expectancy
Knowledge –access to education, literacy rates.
 Knowledge is measured by weighted average of adult
literacy mean years of schooling
Standard of living – GDP per capita: PPP
 HDI = 1/3(Income index) + 1/3(life expectancy index) +
1/3(education index)
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 HDI Con’d---
 According to HDI Countries are ranked into three
groups:
1. Low human development (index of 0.0 – 0.499)
2. Medium human development (index of 0.5 – 0.799);
3. High human development (index of 0.80 – 1.0.)

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 Barriers to Development
Inequalities in the existing distribution of income and
wealth (including land ownership).
The level and efficiency of physical infrastructures
(roads, electricity, water, telecommunication, port,
etc).
The role and level of development of organized
banking and lending activities, financial markets and
intermediaries
An ineffective or underdeveloped educational system
including low level of general literacy and imbalances
in financing primary, secondary and higher education.
Prevailing ideological concepts and their impact on
thinking and behavior (religious thinking, the
accepted role of women, ethnic minorities, the
prevailing economic orthodoxy).
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 Barriers to Development con’d---
 The role of the state: the power and nature of the influence of
central government including the degree of political freedom
and the strength of democratic processes.
 The extent and importance of political corruption, patronage
and the impact of this on public policies and on economic
behavior of those governed.
 The existence of substantial ―market failures‖ such that the
market signals are not fully, completely, or accurately
transmitted to economic agents, thus distorting resource
allocation, production decisions and spending patterns.
 Geographic characteristics, for example, land-locked nations,
mountainous terrain, extensive deserts and small country size.

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 10Q!

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