LESSON 1

ECONOMIC DEVELOPMENT

In this lesson we will be able to:

 Describe the concepts of economic growth and development

 Discuss the relationship between economic growth, development and public policy;
 Explain the determinants of productivity, a key factor for economic growth and development
 Discuss the economic development of the Philippines
 Explain the targets of the world for economic growth and development

RECAP OF BASIC ECONOMICS

Economics - social science that deals with efficient management of limited or scarce resources.

- Depends on the concepts of human nature, strongly on the assumptions of behaviours, motives, meanings
of individuals and interactions with other people, groups and diverse institutions.

Economics - It highlighted the basic economic questions of:

1. What products are to be produced and their quantities?

2. How are they going to be produced?
3. For whom are the products?

2 MAIN BRANCHES OF ECONOMICS

1. MICROECONOMICS - also known as the economics of individual activities and entities, discuss the various
laws in supply, demand, equilibrium and diminishing marginal utility, and the factors affecting the products'
supply and demand.

 In "demand", there are substitution and income effects, thus applying the concepts of substitute goods and
complementary products, in addition, the marginal propensity to consume and the marginal propensity to
save.
 In "supply", some of the concepts include elasticity and equilibrium, shortage, surplus, imposition of price
ceiling and floor, and government interventions in market equilibrium, like subsidies and taxes.

2. MACROECONOMICS -economics of the entire nation, there are three basic questions:

(1) What determines the standard of living?

 (2) What determines the cost of living? and
(3) Why does our economy fluctuate (Business Cycle)?

ECONOMIC GROWTH

 Is defined as the process whereby the country's real and national and per capita income increases over
a long period of time.
 Refers to the percentage change in a nation's per capita GDP - the money value of all goods and
services produced over a long period of time.
 We often associate economic growth with the standard of living in a country for a relevant time
horizon. Many economists would suggest that economic growth is the key indicator of a country's
power and accomplishment.

FEATURES OF ECONOMIC GROWTH

 Economic Growth implies a process of increase in National Income and Per-Capita Income. The
increase in Per Capita income is the better measure of Economic Growth since it reflects increase in the
improvement of living standards of masses.
 Economic Growth is measured by increase in real National Income and not just the increase in
money income or the nominal national income. In other words the increase should be in terms of
increase of output of goods and services, and not to a mere increase in the market prices of existing goods.
 Increase in Real Incomes should be Over a Long Period: The increase of real national income and per-
capita income should be sustained over a long period of time. The short-run seasonal or temporary increase
in income should not be confused with economic growth.
 Increase in income should be based on Increase in Productive Capacity: Increase in Income can be
sustained only when this increase results from some durable increase in productive capacity of the
economy like modernization or use of new technology in production, strengthening of infrastructure like
transport network, improved electricity generation etc.

ECONOMIC GROWTH

Governments around the world are faced with issues concerning productivity and living standards. In 2013, the
World Bank Group adopted the twin goals to guide its works: ending extreme poverty and boosting shared
prosperity.
ECONOMIC DEVELOPMENT

Defined as a sustained improvement in material well-being of society. It is a wider concept than economic growth.
Apart from growth of national income, it includes changes - social, cultural, political as well as economic which
contribute to material progress. It contains changes in resource supplies, in the rate of capital formation, in size
and composition of population, in technology, skills and efficiency, in institutional and organizational set-up.

Its' objectives consist of ensuring more equitable income distribution, greater employment, and poverty
alleviation.

COMPARISON CHART: ECONOMIC GROWTH VS. ECONOMIC DEVELOPMENT

Economic Growth Economic Development

Meaning Economic Growth refers to an Economic development implies
increase in the real output of goods changes in income, savings, and
and services in the country investment along with progressive
change in changes in social economic
structure of country (institutional and
technological change)
Factors Growth relates to a gradual increase Development relates to growth of
in one of the components of gross human capital, decrease in inequality
domestic product: consumption, figures and structural changes that
government spending, investment, improve the quality of life of the
net exports. population.
Measurement Economic Growth is measured by The quantitative measures such as
quantitative factors such as increase HDI (Human Development Index),
in real GDP or per capita income. gender-related index, human poverty
index (HPI), infant mortality, literacy
rate, etc. are used to measure
economic development.
Effect Economic Growth brings Economic development leads to
quantitative changes in the economy. qualitative as well as quantitative
changes in the economy.
 Relevance Economic Growth reflects the Economic development reflects
growth of national or per capita progress in the quality of life in a
income. country.

FACTORS CONSIDERED IN BUILDING AN ECONOMY

A. Saving and investment.

In order to produce more, we have to invest in capital asset to enable us to have the capacity to yield more
goods and services. However, it is to be noted that capital investment would mean sacrifice to consume more.
There is a need for a country to promote both domestic and foreign investments in order to reduce unemployment.
Ideally, a reduction in unemployment will reduce poverty levels, and hence, the government's social burden,
which will ultimately allow for increased public savings.

B. Diminishing Returns and Catch-Up Effect.

As the stock of capital increases, the extra output produced from an additional unit of capital decreases.
Productivity is considerably affected minimally when the workers with a large quantity of capital they use in the
production process are given extra units of capital. In the long run, a higher saving rate leads to a greater level of
productivity and income but not greater growth in these variables.

C. Investment from Abroad.

An investment that is sponsored with foreign money and operated domestically is called foreign portfolio
investment. It is expected that the use of the foreign money would mean more opportunities to produce where the
money is capitalized, but of course, a certain interest in that money is foreseen as well. The World Bank (WB)
and the International Monetary Fund (IMF) were established to ensure that there is economic prosperity around
the world by financing public goods and services with funds accumulated from more advance economies like the
United States of America (USA).

D. Education.

Human capital theory attributes differential investments in human capital to inequities in income, such as
those found to exist between women and men or minorities and whites. This theory emphasizes human capital as
a set of economic assets. Education benefits human capital that is as important as physical capital. In fact, the
largest chunk of the annual budget is dedicated to the education sector. More quality educated people produced
in a country would mean an opportunity to generate more and better ideas to produce goods and services.
E. Health and Nutrition.

A healthy population would also mean human capital, just like education, hence are capable to produce
more goods and services because they can maximize employment as compared to an unhealthy population. Other
things remain fixed, healthier individuals are more productive. Policies that lead to economic growth would
consider having healthy workers to promote greater productivity.

F. Property Rights and Political Stability.

Property rights ensure the exercise of rights over one's property and these guarantee more production of
goods and services. In addition, when there is less uncertainty in government decisions and policies, especially in
terms of market trading, there is an opportunity to improve production process and distribute products in the
country. A stable political environment is considered to have efficient executive, legislative and judiciary systems,
working together for the country's economic development.

G. Free Trade.

A competitive economy that reduces or eliminates trade and restrictions experiences economic growth
after benefiting from more products to be used as input to production. Outward-oriented policies give way to
developing countries' opportunity to interact with other countries and trade freely, thus creating more prospects
to improve production.

H. Research and Development

The products of R&D are new ideas, goods, and services that people consume. Government institutions
allocate a part of their yearly budget to research to continue improving the ways things are done, in any more
efficient or totally distinctive way. To protect the idea, a patent is awarded to an innovator for a certain number
of years to encourage more researchers to discover beneficial things. Essentially, R&D turning money into
knowledge and innovation is a process of creating a business out of this knowledge.

I. Population Growth.

A relatively large population means more human resources working and contributing to the production of
the country, but on the other hand, it also means more people to consume those goods and services.

There are countries with a few population and slow population growth rate but are considered developed
like Germany, having an annual growth rate of 0.2% and Singapore, -0.3% in the 2020 study of the World Bank.
PRODUCTIVITY

In production, we consider the factors such as quantity of labor (L), quantity of physical capital (K),
quantity of human capital (H), quantity of natural resources (N) and technological advances (T) and if we are to
summarize the output of production (Y), we say Y=Tf{L,H,N}. In the advent of technology, as it develops, so is
the production of goods and services. The production function shows that all other things remain constant; output
increases as physical capital, human capital, labor and natural resources increase.

Means the amount of goods and services produced from each unit of labor. It is obvious to see that the
key factor in defining the standard of living is the advances in productivity. Remember that the GDP may be seen
in two ways, the total cost of expenses that a country spends on goods and services and the economy's income as
its output.

4 DETERMINANTS OF PRODUCTIVITY

1. Physical Capital -> assets utilized to produce goods and services. The more capital we use, the more
production we have.
2. Human Capital -> intangible assets, comprises of knowledge, skills and abilities (KSA), is developed in
a person with education, training, years of experience, more knowledge, skilled and able, which produces
more than those who do not have.
3. Natural Resources -> the abundance of natural resources such as trees, water minerals, metals, fruits,
root crops, and oil makes an economy produce more goods and services. It varies from country to country.
Take for instance the USA which is endowed with wide arable lands for agriculture.
 4. Technology -> Refers to the output of innovation and never-ending thrust to discover new things and new
processes that would make production more efficient and faster using less input.

FACTORS AFFECTING ECONOMIC GROWTH

Divided into two categories: Economic Factors and Non-Economic Factors:

Economic Factors:

1. Natural Resources:
The principal factor affecting the development of an economy. Include the land area and the quality
of the soil, forest wealth, good river system, minerals and oil resources, good climate etc.
2. Capital Formation:
It is the process by which a community's savings are channelized into investments in capital goods
such as plant, equipment and machinery that increases nation's productive capacity and worker's efficiency
thus ensuring a larger flow of goods and services in a country. It implies that a community does not
spend whole of its income on goods for current consumption, but saves a part of it and uses it to produce
or acquire capital goods that greatly add to productive capacity of the nation.
3. Technological Progress:
Mainly implies the research into the use of new and better methods of production or the
improvement of the old methods. In generally results in the increase in productivity. It increases the ability
to make a more effective and fruitful use of natural and other resources for increasing production. It
improves an ability to make a fuller use of the natural resources e.g. with the aid of power-driven farm
equipment a marked increased has been brought about in agricultural production.
Entrepreneurship implies an ability to find out new investment opportunities, willingness to take
risks and make investment in the new and growing business units. Most of the underdeveloped countries
in the world are poor not because there is shortage of capital, weak infrastructure, unskilled labor and
deficiency in natural resources but because of acute deficiency of entrepreneurship. It is therefore,
essential in the underdeveloped nations to create climate for promoting entrepreneurship by emphasizing
education, new researches, and scientific and technological developments.
4. Human Resources Development:
A good quality of population is very important in determining the level of economic growth. So
the investment in human capital in the form of educational and medical and such other social schemes is
very much desirable. Human resource development increases the knowledge, the skills and the capabilities
of the people that increase their productivity.
 5. Population Growth:
Labor supply comes from population growth and it provides expanding market for goods and
services. Thus more labor produces larger output which a wider market absorbs. In this process, output,
income and employment keep on rising and economic growth improves. Population growth is desirable
only in an under-populated country. It is however, unwarranted in an overpopulated country like India.
6. Social Overheads:
Another important determinant of economic growth is the provision of social overheads like
schools, colleges, technical institutions, medical colleges, hospitals and public health facilities. Such
facilities make the working population healthy, efficient and responsible. Such people can well take their
country economically forward.

Non-Economic Factors

1. Political Factors:

Political stability and strong administration are essential and helpful in modern economic growth. The
stable, strong and efficient government, honest administration, transparent policies and their efficient
implementation develop confidence of investors and attracts domestic as well as foreign capital that leads to faster
economic development.

2. Social and Psychological Factors:

Includes social attitudes, social values and social institutions which change with the expansion of
education and transformation of culture from one society to the other. The modern ideology, values, and attitudes
bring new discoveries and innovations and consequently to the rise of the new entrepreneurs. The outdated social
customs restricts occupational and geographical mobility and thus pose an obstacle to the economic development.

3. Education:

It is now fairly recognized that education is the main vehicle of development. Greater progress has been
achieved in those countries, where education is wide spread. Education plays an important role in human resource
development, improves labor efficiency and removes mental block to new ideas and knowledge thus contributes
to economic development.

4. Desire for Material Betterment:

The desire for material progress is a necessary precondition for economic development. The societies that
focus on self-satisfaction, self-denial, faith in fate, etc. limit risk and enterprise and thus keep the economy
backward.
THE NATURE OF DEVELOPMENT ECONOMICS

Adam Smith -> first “development economist” and that his Wealth of Nations, published in 1776, was the first
treatise on economic development, the systematic study of the problems and processes of economic development
in Africa, Asia, and Latin America.

Traditional Economics -> is concerned primarily with the efficient, least-cost allocation of scarce resources and
with the optimal growth of these resources over time so as to produce a very expanding range of goods and
services.

Political Economy -> study among other things, the social 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.

Development economics -> 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.

 Must also deal with the economic, social, political and institutional mechanisms, both public and private,
necessary to about rapid and large-scale improvements in levels of living for the peoples of Africa, Asia,
Latin America, and the formerly socialist transition economies.

More developed countries (MDC) -> the now economically advance capitalist countries of Western Europe,
North America, Australia, New Zealand, and Japan.

Less developed countries (LDC) -> developing countries.

 commodity and resource markets are typically highly imperfect, consumers and producers have limited
information, major structural changes are taking place in both the society and the economy, the potential
for multiple equilibria rather than a single equilibrium is more common and disequilibrium situations often
prevail (prices do not equate supply and demand).
 The ultimate goal of development economics is to help us understand developing economies in order to
help improve the material lives of the majority of the global population.

THE IMPORTANT ROLE OF VALUES IN DEVELOPMENT ECONOMICS

 Economics, as a social science, is concerned with human beings and the social systems by which they
organize their activities o satisfy basic material needs (e.g. food, shelter, clothing) and nonmaterial wants
(e.g. education, knowledge, spiritual fulfillment).
  It is necessary to recognize from the outset that ethical or normative value premises about what is or is
not desirable are central features of the economic discipline in general and of development economics in
particular.

Value premises

- Are an inherent component of both economic analysis and economic policy.

 Concepts or goals such as economic and social equality, the elimination of poverty, universal education,
rising levels of living, national independence, modernization of institutions, rule or law and due process,
access to opportunity, political and economic participation, grassroots democracy, self-reliance, and
personal fulfilment all derive from subjective value judgments about what is desirable and what is not.
 Other values can be sanctity of private property, right of individuals to accumulate unlimited personal
wealth; the preservation of traditional hierarchical social institutions, etc.

(The Important Role of Values in Development Economics)

 Values: Principles, standards, or qualities that a society or groups within it considers worthwhile or
desirable.
 Attitudes: The states of mind or feelings of an individual, group, or society regarding issues such as
material gain, hard work, saving for the future and sharing wealth.
 Institutions: Norms, rules of conduct, and generally accepted ways of doing things. Economic institutions
are humanly devised constraints that shape human interactions, including both informal and formal “rules
of the game” of economic life in the widely used framework of Douglass North.
 Income per capita: Total gross national income of a country divided by its total population.

TRADITIONAL ECONOMIC MEASURES

 What do we mean by Development? In strictly economic terms, development has traditionally meant
achieving sustained rates of growth of income per capita to enable a nation to expand its output at a
rate faster than the growth rate of its population.
 Gross national income - The total domestic and foreign output claimed by residents of a country. It
comprises gross domestic product (GDP) plus factor incomes accruing to residents from abroad, less
income earned in the domestic economy accruing to persons abroad.
Gross national income - Monetary growth of GNI per capita minus the rate of inflation

 Levels and rates of growth of “real” per capita gross national income (GNI) used to 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

Gross domestic product - The total final output of goods and services produced by the country’s territory, by
residents and non-residents, regardless of its allocation between domestic and foreign claims.

“Capability” Approach by Amartya Sen

 Amartya Sen, the 1998 Nobel laureate in economics, argues that the “capability to function” is what
really matters for status as a poor or nonpoor person.
 human goals of economic dev’t as a means to human welfare and freedom
 Poverty cannot be properly measured by income or even by utility as conventionally understood; what
matters fundamentally is not the things a person has - or the feelings these provide - but what a person is,
or can be and does or can do.
 Ex. a book is of little value to an illiterate person
 Functioning - what a person does (or can do) with the commodities of given characteristics that they
come to possess or control. >”being or doing”, people have reason to value can range from being healthy,
being well-nourished and well-clothed to being mobile, having self-esteem, and “taking part in the life of
the community”.
 In richer society, the ability to partake in community life would be extremely difficult without certain
commodities, such as telephone a television or an automobile; it is difficult to function socially in
Singapore or South Korea without an email address.
 One may have a lot of commodities, but these are of little value if they are not what consumers’ desire.
One may have income, but certain commodities essential for well-being such as nutritious foods, may be
unavailable.
 Capabilities as the freedom that people have, given their personal features and their command over
commodities.
 Sen’s much emphasis on health and education

DEVELOPMENT AND HAPPINESS

 Happiness is part of human well-being, and greater happiness may in itself expand an individual’s
capability to function
  One of the findings is that the average level of happiness or satisfaction increases with a country’s average
income.
 For example, roughly four times the percentage of people report that they are not happy or satisfied in
Tanzania, Bangladesh, India and Azerbaijan as in the United States and Sweden.
 Richard Layard identifies seven factors that surveys show affect average national happiness: family
relationships, financial situation, work, community and friends, health, personal freedom, and personal
values.

MILLENNIUM DEVELOPMENT GOALS (MDG)

 A set of eight goals adopted by the United Nations (composed of 189 member countries) in 2000:
1. to eradicate extreme poverty and hunger
2. achieve universal primary education
3. promote genter equality and empower women
4. reduce child mortality
5. improve maternal health
6. combat HIV/AIDS, malaria and other diseases
7. ensure environmental sustainability
8. develop a global partnership for development

**The goals are assigned specific targets to be achieved by 2015.

THREE CORE VALUES OF DEVELOPMENT

 Sustenance: The ability to meet basic needs. The basic goods and services, such as food, clothing and
shelter that are necessary to sustain an average human being at the bare minimum level of living.
 Self-esteem: To be a person. The feeling of worthiness that a society enjoys when its social, political and
economic systems and institutions promote human values such as respect, dignity, integrity and self-
determination.
 Freedom from Serviture: To be able to choose. A situation in which a society has at its disposal a variety
of alternatives from which to satisfy its wants and individuals enjoy real choices according to their
preferences.
 Political freedom, personal security, the rule of law, freedom of expression, political
participation and equality of opportunity.
THE THREE OBJECTIVES OF DEVELOPMENT

1. To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter,
health and protection
2. To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better
education and greater attention to cultural and human values, all of which will serve not only to enhance
material well-being but also to generate greater individual and national self-esteem.
3. To expand the range of economic and social choices available to individuals and nations by freeing them
from servitude and dependence, not only in relation to other people and nation-states, but also to the forces
of ignorance and human misery.