Chapter - 1 - Introduction 22 23 Semi

: Economic development: Origin, Approaches and Measurement
Advanced Development Economics I:

(Course code: ECON 675)
Mengesha Yayo ( Ph.D. )
Addis Ababa University, Department of Economics

2022/23 Academic year: Semester I
November, 2022
Mengesha Y. Advanced Development Economics I

Contents
1. Economic development: Origin, Approaches and

Measurement
History of Development Paradigms
Conceptualization of Economic Growth and Development
Traditional Definition and Measures of Development
Modern Definition and Measures of Development: HDI
Amartya Sen’s Capability Approach to Define Development
The Millennium Development Goals (MDGs and Sustainable
Development Goals, SDGs)
Green Economy

Economic Development in Historical Perspective
Adam Smith, David Ricardo, Thomas Malthus, John Stuart Mill and Karl
Marx all dealt at some length with the causes and consequences of
economic advances.
Beyond the classical school, economic development theory traces its
antecedents to the physiocrats who have generally been considered as the
first scientific school of economics.
From the 16th to the 18th century, European economic thought and
practice had been dominated by the Mercantilists (Focused on
manufacturing and trade)
Physiocratic theory was a reaction against the ideas of the Mercantilists (
agriculture was the source of all wealth).
As the conventional economic theories could not explain the development
problems of these countries, economists required recently a separate
subject that deals with this issue.

Although one could claim that Adam Smith was the first “development
economist” (wealth nation, 1776), the systematic study of the problems
and processes of economic development in Africa, Asia, and Latin
America has emerged only over the past five decades or so.
The relevance of industrial-country macroeconomic analysis to
developing nations has been the subject of debate for some time.
short-run macroeconomic issues in the developing world emerged
largely in the context of the monetarist (orthodox)-structuralist
debate about the sources of inflation in Latin America during the
late 1950s and 1960s.
A growing analytical literature has developed since the early 1970s
to address a succession of macroeconomic woes that have afflicted
developing countries.

Change in attitude and upsurge of interests in the economics of

development and the economies of poor nations:
Academic interest in development
The awareness of developing countries about their backwardness
and their demand for a new international economic order
The awareness of the world in general and developed countries in
particular about the mutual interdependence of the world economy

The Evolution of a Development Paradigm








The dominant conventional measures of growth and development are the

Gross National Product (GNP) or Gross Domestic Product (GDP) and
their corresponding per capital values.
GNP is calculated as the total domestic and foreign value added
claimed by a country’s residents without making deductions for
depreciation of the domestic capital stock.

Growth: Almost all economists would accept the increase in the output of
goods and services or income per capita of a country as its definition.
Output is measured by the gross national product (GNP) or gross
domestic product (GDP).
GNI
GNIpercapita = Population
GNI current year

GNI at constant price = GNI price deflator
GNI current year −GNI base year

Real Economic Growth = GNI base year

Development has been defined in different ways.

The process of improving the quality of all human lives and
capabilities by raising people’s levels of living, self-esteem, and
freedom.
It is development of the people, for the people, by the people.
‘Of the people’ ⇒adequate income generation through jobs,
‘for the people’ ’ ⇒ social services for those who need help,
and ‘by the people” ⇒ participation and democracy(Abraham
Lincoln)⇒
It could also be interpreted as the economic, social and
political dimensions of development(Abraham Lincoln)

Developmen is an elusive term.

In the 1950s and 1960s, for example, development was considered
as synonymous to economic growth.
Development is “conceived as a multi dimensional process involving major
changes in social structures, popular attitudes, sectoral share change, and
national institutions, as well as the acceleration of economic growth, the
reduction of inequality (and unemployment), and the eradication of
absolute poverty”. ( M.Todaro )

Development is the enlargement of the range of people’s choices (West

Indian economist and Nobel Prize winner Arthur Lewis)
Amartya Sen’s analysis has been in term of ‘capabilities’ and
‘functionings’, and not satisfactions, or happiness, or commodities.
The same amount of food has a different significance: It depends
on sex, age, size, work, health condition, stomach.

Economic Growth and Economic Development
Denis Goulet distinguishes three basic components or core values in this

wider meaning of development,
Life-sustenance: life-sustenance is concerned with the provision of
basic needs.
Self-Esteem: self-esteem is concerned with the feeling of self-respect
and independence.
Freedom from servitude:
Freedom is ability of people to determine their destiny.
It involves an expanded range of choices for societies and their
members together with a minimization of external constraints
in the pursuit of devolvement.

Measurement of Economic Growth and Economic Development
Income and Happiness: Comparing Countries

Development Economics
The study of how economies transformed from stagnation to growth and
from low income to high-income status, and overcome problems of
absolute poverty.
Concerned with the efficient allocation of existing scarce (or idle)
productive resources and with their sustained growth over time,
It must also deal with the economic, social, political, and institutional
mechanisms, both public and private, necessary to bring about rapid (at
least by historical standards) and large-scale improvements in levels of
living for the peoples of Africa, Asia, Latin America, and the formerly
socialist transition economies.
Deals with the economic, cultural, and political requirements for effecting
rapid structural and institutional transformations of entire societies in a
manner that will most efficiently bring the fruits of economic progress to
the broadest segments of their populations.
Development is actually more general – removal of poverty, malnutrition,
access to clean water, raising life expectancy, reduction in infant mortality,
increased access to schooling (all these for most people, not an elite!)

The Nature of Traditional Development Economics
Traditional economics is concerned primarily with the efficient,

least-cost allocation of scarce productive resources and with the
optimal growth of these resources over time
Decisions made on the basis of marginal, private-profit, and
utility calculations; and equilibrium outcomes in all product
and resource markets.
Traditional economics : An approach to economics that emphasizes
utility, profit maximization, market efficiency, and determination of
equilibrium.
Political economy goes beyond traditional economics ⇒ the social and

institutional processes through which certain groups of economic and
political elites influence the allocation of scarce productive resources now
and in the future, either for their own benefit exclusively or for that of the
larger population as well.

Measurement of development depends on the appraoch we use to define

because the term development may mean different things to different
people.
Traditional Economic Measures
Achieving sustained rates of growth of income per capita ⇒
“real” per capita gross national income (GNI) ⇒measure the
overall economic well-being of a population⇒how much of
real goods and services is available to the average citizen for
consumption and investment.

The New Economic View of Development

The experience of the 1950s and 1960s, when many developing
nations did reach their economic growth targets but the levels of
living of the masses of people remained for the most part
unchanged, signaled that something was very wrong with this
narrow definition of development.
During the 1970s, economic development came to be redefined in
terms of the reduction or elimination of poverty, inequality, and
unemployment within the context of a growing economy.
“Redistribution from growth” became a common slogan.
Development must therefore be conceived of as a multidimensional
process involving major changes in social structures, popular
attitudes, and national institutions, as well as the acceleration of
economic growth, the reduction of inequality, and the eradication of
poverty.

Modern Definition and Measures of Development
Among the developed alternative indicators in modern days, the major are
the physical quality of life index (PQLI) developed by Morris (1979), the
Human Development Index (HDI) developed by UNDP, and the Human
Poverty Index.
The physical Quality of Life Index (PQLI) : Infant mortality, life
expectancy, and literacy.
The PQLI of each country is given by the following formula.
Life expect .index + infant mort. index + literacy index
PQLI =
3
The PQLI indirectly reflects the effects on human development of
investment in health service, water and sewage systems, quality of
food and nutrition, education, housing, and changes in income
distribution.

The Human Development Index (HDI)

UNDP is offering the HDI as an alternative to the GNP for
measuring the relative socio-economic progress of nations.
HDI has also attempted to take account of some of the limitations
of the PQLI.
HDI is based on three variables:
Longevity:- as measured by life expectancy at birth
Educational attainment:- as measured by a condition of adult
literacy (two third weight) and a combined primary, secondary,
and tertiary school enrollment ratios (one third weight)
Standard of living measured by real per capita income at PPP.

Components of human development can be grouped under five

headings:
Economic growth
Human resource development
Human rights and participation
Peace and security
Sustainability.
The role of culture falls under the heading of human rights and
participation.
Issues of equity, and in particular of gender equity, run through
all five tributaries.

To construct the index, fixed minimum and maximum values are taken for
each of the variables.
For life expectancy at birth, the range is 25-85 years.
For adult literacy, the range is 0 – 100 percent.
For real per capita income, the range is $100 – 40,000.

How to compute Human Development Index :

For any component of the HDI, the individual indices can be
computed according to the general formula of:
Actual value −Minimum value
Index = Maximum value−Minimum value
LE −25
Life Index = 85−25
2 1
Education Index = 3
∗ ALI + 3
∗ GEI
ALR−0
Adult Literacy Index = 100−0
CGER−0
Gross Enrollment index (GEI) = 100−0
log (GDPpc) − log (100)

GDP Index =
log (40000) − log (100)
Where: LE: Life expectancy, ALR: Adult literacy rate, CGER: Combined gross
enrolment ratio, GDPpc: GDP per capita at PPP in USD
How to compute Human Development Index :

The logarithm of GDP per head, calculated at the real purchasing
power, not at exchange rates, up to the international poverty line;
Literacy rates (and, since the 1991 Report, mean years of
schooling); and
Life expectancy at birth.

The index thus ranges from 0 to 1. If the actual value is equal to

maximum the index is one.
The HDI ranks countries into three groups:
Low human development (0.0 to 0.49),
Medium human development (0.50 to 0.79) and
High human development (0.80 to 1.00).

A better Measure of economic Development ? Human development

index measurement
Why human indicators are less misleading than income per head.
The distribution of literacy and life expectancy is much less skewed
than that of income.
The average of the human indicators tells us something about the
distribution.
Any upward move in a human indicator can be regarded as an
improvement.
International income gaps, whether relative or absolute, may
inevitably be widening, but to aim at reducing international gaps in
human indicators is both sensible and feasible.
Human indicators show the troubles of overdevelopment or, better,
mal-development, as well as of underdevelopment.
Indicators that measure impact rather than inputs distinguish
between goods and anti-bads (regrettable necessities) which bring
us back to zero

Critics/Drawbacks of HDI:
Partha Dasgupta (2001) has pointed out that the index
misrepresents concerns about the future, since it does not deduct
capital depreciation
It reflects only current well-being, and that it is an index only of
human capital, leaving out natural capital.
Average income per head is that it is an average that can conceal
great inequalities ⇒the components of the Human Development
Index (HDI), namely life expectancy and literacy, are also averages.
They can conceal vast discrepancies between men and women,
boys and girls, rich and poor, urban and rural residents,
different ethnic or religious groups.

Modern Definition and Measures of Development: Human Poverty

Index
Human Poverty Index (HPI)

The HPI for developing countries is based on three main indices:
The percentage of the population not expected to survive to
the age of 40 (P1)
The adult illiteracy rate (P2)
A deprivation index based on an average of three
variables(P3):
The percentage of the population without access to safe
water;
The percentage of population without access to health service;
and
The percentage of the under weight children under five years
old .
1/3
The HPI formula is given by: HPI = 1/3 P13 + P23 + P33

Measurement of Economics Development: Amartya Sen’s Approach
Amartya Sen argued that the national income is a quite inadequate measure of
human development for several reasons.
It counts only goods and services that are exchanged for money, leaving
out of account the large amount of work done inside the family, mainly by
women, and work done voluntarily for children or older people or in
communities.
Amartya Sen’s analysis has been in term of ‘capabilities’ and ‘functionings
Capabilities :The freedoms that people have, given their personal features
and their command over commodities.
Three Core Values of Development: sustenance/nutrition, self-esteem,
and freedom—represent common goals sought by all individuals and
societies.

Amartya Sen’s “Capability” Approach
– Functionings as an achievement
Capabilities as freedoms enjoyed in terms of functionings
Development and happiness
Well being in terms of being well and having freedoms of choice
“Beings and Doings”:

Measurement of Economics Development: Amartya Sen’s

Approach-Some Key “Capabilities”
Some Important “Beings” and “Doings” in Capability to Function: –
Being able to live long

Being well-nourished
Being healthy
Being literate
Being well-clothed
Being mobile
Being able to take part in the life of the community
Being happy – as a state of being - may be valued as a functioning

Three Core Values of Development
Sustenance: The Ability to Meet Basic Needs

Self-Esteem:To Be a Person
Freedom from Servitude: To Be Able to Choose

What Do We Mean by Development?
The Central Role of Women
To make the biggest impact on development, societies must empower and invest
in women
The Three Objectives of Development
Increase availability of life-sustaining goods

Raise levels of living
Expand range of economic and social choices

The Millennium Development Goals
Millennium Development goals (MDGs) – Eight goals adopted by the United Nations
in 2000
Eradicate extreme poverty and hunger
Achieve universal primary education
Promote gender equality and empower women
Reduce child mortality
Improve maternal health
Combat HIV/AIDS, malaria, and other diseases
Ensure environmental sustainability
Develop a global partnership for development

Millennium Development Goals and Targets for 2015

Millennium Development Goals and Targets for 2015

Green Economy: Path way to Sustainable Development(SD)
First SD thinking: 1972 UN Conference on the Human

Environment
1987 Brundtland Report: Our Common Future
SD-common future: development that meets the needs of current

generation without compromising the ability of future generation to
meets their own needs

The 1992 UN Conference on Environment and Development

(UNCED), also known as the Rio Earth Summit frames sustainable
development as a principal goal of the international community
The conference called upon governments to develop national

strategies for sustainable development, incorporating policy
measures outlined in the Rio Declaration and Agenda 21.
The Rio Declaration on Environment and Development is a
document that defines principles for the relationship of states to
each other and the relationship between states and their citizens in
the field of environment and development.
Agenda 21 is a comprehensive plan of action to be taken globally,
nationally and locally by organizations of the United Nations
System, governments, and major groups in every area in which
human impacts on the environment.

In 2015, the United Nations set forth 17 Sustainable Development

Goals (SDGs), recommencing the needed attention for global effort
to address sustainability challenges.
Sustainability is commonly described along the lines of three

dimensions (also called pillars): environmental, economic and
social.



Agenda 21 explicitly talks about economic, social and

environmental dimensions as follows:
“Countries could develop systems for monitoring and evaluation of

progress towards achieving sustainable development by adopting
indicators that measure changes across economic, social and
environmental dimensions”.
Agenda 2030 also conceived the 17 Sustainable Development Goals

(SDGs) with their 169 targets as “integrated, indivisible and
balance the three dimensions of sustainable development, the
economic, social and environmental”.

Green Economy: Alarming trends
Population Growth: by 2050, world population will be 9 billion (

mostly from Africa (108%) and Asia (18%)
Persistent Poverty and Inequality: by 2021, 9% of world population
is living in etreme poverty ( earning <$1.90 per day
71 percent of the world’s population live in countries where

inequality has grown
Depletion of Natural Resources: by 2050, water ( 57% live in area

where water is scare per month atleast), coal (137 years last only )
, Oil and Natural Gas (50 -60 years only)
Biodiversity Decline: decling by much
Loss and Degradation of Ecosystem services

Green Economy: Alarming trends
Climate Change - major global climate change projections include
Increasing temperature ,
Declining snowpack ,
More frequent, severe and prolonged extreme events,
Sea level rise

What is a Green Economy?
The concepts of sustainability and sustainable development has

been criticized for lacking unanimous definition making them open
for reinterpretation and contention
Similarly, there is no internationally agreed definition of green
economy
However, the definition provided by the UNEP is widely adopted
and most cited in literature.
“A green economy is one that results in improved human well-being
and social equity, while significantly reducing environmental risks
and ecological scarcities.” (UNEP, 2011)



In addition to lack of an internationally agreed definition or

universal principles on the concept of green economy, a number of
interrelated but different terminologies and concepts are also
developed.
This include circular economy, bioeconomy, green growth, low

carbon development, sustainable economy and so on.

Green Growth
OECD (2011) defines green growth as:
“Fostering economic growth and development while ensuring that
natural assets continue to provide the resources and environmental
services on which our wellbeing relies. To do this it must catalyze
investment and innovation which will underpin sustained growth
and give rise to new economic opportunities”. (OECD, 2011:4)
Green growth has the potential to address economic and
environmental challenges and open up new sources of growth
through the following channels:

Green Growth
Productivity. Incentives for greater efficiency in the use of resources

and natural assets, including enhancing productivity, reducing waste
and energy consumption, and making resources available to their
highest value use.
Innovation. Opportunities for innovation, spurred by policies and
framework conditions that allow for new ways of creating value and
addressing environmental problems.
New markets. Creation of new markets by stimulating demand for
green technologies, goods, and services; creating new job
opportunities.
Confidence. Boosting investor confidence through greater
predictability and continuity around how governments deal with
major environmental issues.

The circular economy is a model of production and consumption,

which involves sharing, leasing, reusing, repairing, refurbishing and
recycling existing materials and products as long as possible. In
this way, the life cycle of products is extended. In practice, it
implies reducing waste to a minimum.
When a product reaches the end of its life, its materials are kept
within the economy wherever possible.
It can be productively used repeatedly, thereby creating further

value.
This is a departure from the traditional, linear economic model,

which is based on a take-make-consume-throw away pattern.


Bioeconomy
The bioeconomy comprises economic and social developments that

rely on renewable and sustainable sources where the basic building
blocks for materials, chemicals, and energy are derived from
renewable biological resources
The European Commission (EC) defined the bioeconomy as:
“The production of renewable biological resources and the
conversion of these resources and waste streams into value-added
products, such as food, feed, bio-based products and bioenergy”
(EC, 2017:5).



Conclusion
The importance of Development Economics
Inclusion of non-economic variables in designing development strategies
Achieving the Millennium Development Goals
“. . . One future-or none at all”
Sustainable Development
Green development : pathway to sustainable development

Scope of development economics
Development macroeconomic: development economics using

macroeconomics variables
Development microeconomic: development economics at

individual/household level.

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: Economic development: Origin, Approaches and Measurement

Advanced Development Economics I:

Mengesha Yayo ( Ph.D. )

Addis Ababa University, Department of Economics

Mengesha Y. Advanced Development Economics I

1. Economic development: Origin, Approaches and

Mengesha Y. Advanced Development Economics I

Economic Development in Historical Perspective

Mengesha Y. Advanced Development Economics I

Economic Development in Historical Perspective

Mengesha Y. Advanced Development Economics I

Economic Development in Historical Perspective

Change in attitude and upsurge of interests in the economics of

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

The Evolution of a Development Paradigm

Mengesha Y. Advanced Development Economics I

Conceptualization of Economic Growth and Development

The dominant conventional measures of growth and development are the

Mengesha Y. Advanced Development Economics I

Conceptualization of Economic Growth and Development

GNI current year

GNI current year −GNI base year

Mengesha Y. Advanced Development Economics I

Conceptualization of Economic Growth and Development

Development has been defined in different ways.

Mengesha Y. Advanced Development Economics I

Conceptualization of Economic Growth and Development

Developmen is an elusive term.

Mengesha Y. Advanced Development Economics I

Conceptualization of Economic Growth and Development

Development is the enlargement of the range of people’s choices (West

Mengesha Y. Advanced Development Economics I

Economic Growth and Economic Development

Denis Goulet distinguishes three basic components or core values in this

Mengesha Y. Advanced Development Economics I

Measurement of Economic Growth and Economic Development

Income and Happiness: Comparing Countries

Mengesha Y. Advanced Development Economics I

Conceptualization of Economic Growth and Development

Mengesha Y. Advanced Development Economics I

Traditional Definition and Measures of Development

The Nature of Traditional Development Economics

Traditional economics is concerned primarily with the efficient,

Political economy goes beyond traditional economics ⇒ the social and

Mengesha Y. Advanced Development Economics I

Traditional Definition and Measures of Development

Measurement of development depends on the appraoch we use to define

Mengesha Y. Advanced Development Economics I