Lucia Piscitello, 23rd February 2021

Titolo presentazione
lucia.piscitello@polimi.it
sottotitolo
Milano, XX mese 20XX
 Introducing the course
Development Economics
Classes: Tuesday 8.30-11.00 (room L02) - Friday 14.00-16.30 (room LM3)

Aim
The purpose is to introduce students to the wide-ranging policy issues and theories in
development economics.

Learning outcomes

1. Demonstrate familiarity with some central themes and issues of economic development.
2. Demonstrate the understanding of the difference between growth and development, major
growth theories, the measurement of inequality, significance of poverty, international
trade, and role of foreign investments.
3. Discuss competing theories of economic development;
4. Analyse empirical evidence on the patterns of economic development and evaluate the
impact of development policies and measures.
5. Read critically the journal literature and draw independent conclusions as they confront
development problems, their sometimes ambiguous evidence, and real-life development
policy choice.

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 Introducing the course
Development Economics

Textbooks:

• Todaro & Smith (2015), Economic Development, 12th edition,

Pearson.

• De Janvry A., Saudolet E. (2016). Development Economics: Theory

and Practice. Routledge, ch. 1&4.

• Readings (academic papers, reports, etc)

• Syllabus: see BeeP

• Calendar: see BeeP
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 Development Economics

Assessment
Type 1:
The exam is constituted by three parts:
– Intermediate (written) Test, 20 or 23 April 2021 - (this part is 30%) - date to be
confirmed
– Group assignment and presentation (end of May 2021-first week of June 2021)
(40%) - dates to be confirmed
– Final Test, 4th June 2021 (30%) – date to be confirmed
Type 2:
(Written) Exam in the regular sessions (14th June 2021, 12nd July 2021, 1st September
2021).

Honor Program Students (5 ECTS)

The exam could be undertaken with the two different modalities (Section 8 and Section 9,
as well as Group assignment and presentation are excluded).

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 Introducing the course
Development Economics

As people throughout the world awake each morning

to face a new day, they do so under very different
circumstances
Typical family: North America vs. Bangladesh

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Rio de Janeiro, Brazil
Rio de Janeiro, Brazil
 GDP per capita

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 Material poverty and hunger

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 Average Life Expectancy (Years)

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 Some Critical Questions

• Why are some countries poor while others are

rich?
• What are the causes of extreme poverty?
• What is the real meaning of development?
• What can be learned from the historical progress
of the now developed countries?
• ...

• Something could be done, but there are no magic

recipes

• The history of development has much to teach us, but

historical achievements are rarely directly transferable
In order to answer these questions…

Learning how to think development

History, current diagnostics, economic theory, causal empirical

analyses of past experiences, current experiences

Indentifying effective instruments for development

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 ECONOMIC DEVELOPMENT
A huge challenge: No less than 85% of the world’s
population

A multidimensional concept

1. Low level of national per capita income, and insufficient

income growth to allow convergence
2. Extensive material poverty, food insecurity and hunger
3. Inequality in the distribution of income and inequity in
chances to succeed
4. Vulnerability to shocks and risk of falling into poverty
5. Lack of satisfaction of basic needs in human development
(especially, health and education)
6. Rising natural resources scarcity and environmental stress
7. Unsatisfactory quality of life in a number of dimensions
(individual freedom, human rights, capabilities)

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 ECONOMIC DEVELOPMENT
A huge challenge

Trade-offs and national priorities: the need to choose

Because development (the achievement of individual and

collective wellbeing) is so multidimensional, and countries are so
heterogeneous, trade-offs inevitably exist.

Which aspects of development matter most for a particular society?

• Income growth (‘50s and ‘60s)

• Poverty reduction (i.e. reducing child mortality, promoting
education) (‘70s)
• Inclusive development and social harmony
• …

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 The primacy of growth

Without growth, the other objectives (poverty reduction, reduced

disparities, satisfaction of basic needs, and achieving a satisfactory
quality of life) are difficult if not impossible to achieve

Tremendous importance given to understanding what makes growth

happen.. One of the most fundamental and yet paradoxically least
understood subjects in development economics!

The role of geography and resource endowments

The role of institutions
The role of good policy
The role of culture

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 Adverse Geography (Sachs, 2001)

Source: Data from Atlas of Global Development, 4th ed., pp. 16-17: World Bank and Collins. 2013. ATLAS OF GLOBAL DEVELOPMENT: A VISUAL GUIDE TO THE WORLD’S GREATEST CHALLENGES, FOURTH
EDITION. Washington, DC and Glasgow: World Bank and Collins. doi: 10.1596/978-0-8213-9757-2. License: Creative Commons Attribution CC BY 3.0
Source: Sachs et al. (2000)
Colonial Legacy and External Dependence

– Institutions (extracting rather than creating wealth)

 Positive analysis of development

200 countries, 200 years, 4 minutes

https://www.youtube.com/watch?v=jbkSRLYSojo
• Key differences between conditions in today’s developing countries and those
in now developed countries at an early stage of their development

Heterogeneity in time and space means that development diagnostics, and the
causal determinants of development outcomes have to be constantly established
and re-established (as the context is always changing)

There are NO permanent regularities that can characterise development!!

Positive analysis, consisting of quantitative and qualitative diagnostics, and

the identification of causal relationships is needed

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 Normative analysis (and the importance
of causality)
The purpose of positive analysis is to support normative prescriptions, namely the
design of project alternatives and of policy recommendations to improve on
development outcomes

We need the rigorous identification of causal relations

Y = f(X1, X2)

X1 = uncontrolled variables (such as weather, the world economic context, past

events, and current initial conditions)

X2 = policy instruments (taxes and tariffs, public investments, technology, and

transfers)

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 Toward a «new development economics»

• Development economics as a field of economics is not new.

• It started as «political economy» (catching up in per capita

income with the more advanced industrialized economies)
with the thinkers behind the Western experience (from France
in 1820 to Japan in 1880) and the Asian miracles (the «gang
of four» in the ‘50s and ‘60s.. Taiwan, South Korea, Hong
Kong, Singapore)

• As an academic discipline, it started with the «pioneers of

development» in the ‘40s and ‘50s… influenced by
reconstruction after WWII under the Marshall Plan
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 Toward a «new development economics»
(ctd)
• Until recently, however, the field of development economics
was seen by mainstream economists as an eccentric
exercise, with a lack of theoretical rigor (due in part to the
vastness of the subject) and weak empiricism (due to the lack
of databases)

• In recent years, advances in economic theory relevant to

development issues and availability of extensive databases
(e.g. the Living Standards Measurement Surveys, the
Development and Health Surveys for demographic variables,
access to administrative data from major public programs, ..)

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 Development as problem solving

• Because there are no magic bullets to solve

underdevelopment problems, and each country has its own
idiosyncratic priorities, opportunities, and constraints,
development economics is all about problem solving.

• How to design a policy or program to address a particular

development issue?
• How to design the impact evaluation to identify causality
between intervention and outcomes?

• Design and implementation are two fundamental skills

that development economists must acquire

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 What is development?

Indicators and issues

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 Multi dimensions of development

The paradox: We agree on the desiderability of development, but we

have difficulty agreeing on defining exactly what it is.

The dimensions of development and their relative importance are in

the end a social and a personal choice, i.e. and ideological and moral
statement.

A good starting point: MDGs and SDGs!

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 The Millennium Development Goals - United Nations,
2000-2015

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 The Millennium Development Goals - United Nations,
2000-2015

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 The Sustainable Development Goals
2030 Agenda for Sustainable Development

“I am pleased to share some good news for people

and planet,” UN Secretary-General Ban Ki-moon
said to a packed room of press delegates. The
good news? After three years of negotiations and
debate, 193 countries had agreed to a set of
development goals more bold and ambitious
than anything that has come before them.

https://www.weforum.org/agenda/2015/09/what-are-
the-sustainable-development-goals/

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 The Sustainable Development Goals

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 Measuring progress
towards the Sustainable Development Goals

https://sdg-tracker.org/

SDG Tracker presents data across all available indicators from

the Our World in Data database, using official statistics from the UN
and other international organizations. It is a free, open-access
publication that tracks global progress towards the SDGs and allows
people around the world to hold their governments accountable to
achieving the agreed goals.

The 17 Sustainable Development Goals are defined in a list of 169

SDG Targets. Progress towards these Targets is agreed to be
tracked by 232 unique Indicators. Here is the full list of definitions.

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Traditional measures of economic
development
 INCOME AND INCOME GROWTH

The most common way to define the developing world is by per capita
income → World Bank Classification
(https://datacatalog.worldbank.org/dataset/gdp-ranking)
https://datahelpdesk.worldbank.org/knowledgebase/articles/378834-
how-does-the-world-bank-classify-countries

For the current 2017 fiscal year, low-income economies are defined as those
with a GNI per capita, calculated using the World Bank Atlas method, of
$1,025 or less in 2015; lower middle-income economies are those with a
GNI per capita between $1,026 and $4,035; upper middle-income
economies are those with a GNI per capita between $4,036 and $12,475;
high-income economies are those with a GNI per capita of $12,476 or more.

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 INCOME AND INCOME GROWTH

Income is what gives a household the monetary capacity to

consume, invest, or save

Without growth, raising the wellbeing of selected segments of the

population, e.g. the poor, would have to be done through taxation,
or redistribution, i.e. at the cost of the others.

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 Indicators for income and income growth
(national level)

Gross National Product (GNP) or Gross National Income (GNI) = total domestic and
foreign value added claimed by a country’s residents = GDP plus factor incomes earned
by foreign residents (under the form of repatriated profits), minus income earned in the
domestic economy by non residents (under the form of remittances sent by migrants).

Gross Domestic Product (GDP) = total final output of goods and services produced by
the country’s economy within the country’s territory by residents and non residents

GNP, GNI or GDP per capita is the most common measure of the overall level of
economic activity.

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 Indicators for income and income growth
(national level) - ctd

Growth in GDPpc is a good measure of progress over time in average income.

GDP = C+I+G+(X-M)

C= consumption, I = investment, G = government expenditures, X = exports,

M = imports

Growth rate between two dates: γT = γ0(1+g)T g= (γT /γ0 )1/T -1

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 Comparison over time: the need to adjust for inflation

To compare wellbeing over time, we need to deflate current (nominal) income by a

price index, tipically the consumer price index (CPI) for income, or GDP deflator

for GDP. With a CPI = 100 in the base year:

Real GDPpc measured in prices of the base year = 100*Nominal GDPpc/CPI

GDPpc is compared over time as measured in the base-year currency value (see the

example for Brazil over the 2000-2013 period).

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 Comparison over time: the need to adjust for inflation

Comparing GDPpc over time for Brazil, 2000-2013

Brazil Units 2000 2013 Average annual

growth %
Nominal GDP Million current Reales 1,179,482 48,844,820 11.5
Population Million 174.5 200.4 1.1
GDP deflator 2000=100 100 270.7 8.0
Nominal GDPpc Reales 6,759 24,180 10.3
Real GDPpc Reales of 2000 6,759 8,931 2.2
Source: World Bank, World Development Indicators

To measure GDPpc growth in real GDPpc, we can use also the approximate formula:

Real GDPpc growth = Nominal GDPpc growth – Rate of growth of CPI

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 Time to double at a given growth rate: the 70 years rule

Taking logarithms in the growth equation: γT = γ0(1+g)T :

lnγT = lnγ0+ T ln(1+g) = lnγ0+ T ln(1+g) = lnγ0+ T g

Solving for T (i.e. the time needed to go from γ0 to γT at a growth rate of g :

T = (lnγT - lnγ0)/g

Ex. 1: Time needed to double γ0? T = (ln2γ0 - lnγ0)/g = ln2/g

as ln2 = 0.7, if g=10%, then T = 7 years

The number of years to double is 70 years divided by the percent growth rate

(if g=10%, T=7 years; if g=1%, T=70 years)

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Ex. 2: Time needed to get out of poverty for a given initial γ0 , a given poverty line z (defined
as an income threshold to be out of poverty, and a given growth rate g in income?

T = (lnz- lnγ0)/g

If z= 100, γ0= 50 and g=2%, then T = 35 years

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 Comparison across countries: the need to bring income
figures into a single currency

Two options:

1. Use the official exchange rate that tells us how many local currency units
(LCU) are needed to acquire 1 US$

2. Use an exchange rate that reflects the purchasing power of the local currency
relative to the US $, taking into account price differences across countries,
called Purchasing Power Parity exchange rate

The first is easier to calculate, but the second gives a more accurate measure of
wellbeing if prices are significantly different across the countries compared.

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 Comparison across countries: the need to bring income
figures into a single currency - ctd

Comparison at the official exchange rate

Define the official exchange rate as e = number of LCU/US$ 1

GDPpc$ = 1/e (GDPpc)LCU

Problem:

movements in the exchange rate will create changes in GDPpc$ even if there has been

no change in (GDPpc)LCU

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 Comparison across countries: the need to bring income
figures into a single currency - ctd

Comparison at the PPP-adjusted exchange rate

We can define an exchange rate that adjusts for the purchasing power of a dollar in the

country:

PPPe = number of LCUs required to buy the same amount of goods and services

(of equal quality) as US$ 1 in the US.

Thus, GDPpc measured in US$ with the same purchasing parity power in the US is:

PPP adjusted GDPpc$ = 1/PPPe (GDPpc)LCU

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Comparison of Per Capita
GNI in Selected Developing
Countries, the United
Kingdom, and the United
States, Using Official
Exchange-Rate and
Purchasing Power Parity
Conversions, 2011
 Take-home messages

1. Development is about human wellbeing, and wellbeing is a

multidimensional concept with inevitable trade-offs. Hence, there is not
one single definition of development that everybody can agree upon.
Any development diagnostic (positive analysis) and development
program (normative analysis) must clearly specify the definition of
development that is being used.

2. Primacy of income growth… but agreement about the importance of

other dimensions (poverty reduction, meeting basic needs, and
environmental sustainability)

3. Considerable uneveness across countries and over time

4. Need of accurate measurements and indicators

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