Course: Development Finance: FIN-4208

Instructor: Sonia Munmun

CHAPTER-1
Economics, Institutions, and
Development: A Global Perspective

In this Lecture:
The facts: who are the poor? How many?
Development economics and its relationship with
traditional
economics
and
political
economics
Why study Finance and development?
Economics and social system
Meaning of development
Objectives of development

Some facts about poverty:

43% of the world people live on less than $2.5 a day;
20% (1.2 billion) on less than $1.25 a day.
The GDP of the poorest 41 nations (a quarter of the
world's countries) is less than the wealth of the world's
seven richest people combined.
Nearly a billion people entered the 21st century unable
to read a book or signs their names.
Approximately 300 to 500 million people are infected
with malaria. Approximately 3 million people as a
result.
Some 1.1 billion people in developing countries have
inadequate access to water & 2.6 billion lack basic
sanitation.

Additional facts about poverty:

1 billion children live in poverty (1 in 2 in the world).
640 million live without adequate shelter, 270 million
have no access to health services.
According to UNICEF, 30,000 children die each day due
to poverty. They 'die quietly in some of the poorest
villages on earth, far removed from the scrutiny and
the conscience of the world. Being meek & week in life
makes these dying multitudes even more invisible in
death.'

Economics and Development Studies

Economic development is one of the newest,

most exciting, and most challenging branches of
the broader disciplines of economics and political
economy.
Is it really a distinct branch of economics?

The Nature of Development Economics

Traditional Economics:
Efficient allocation of scarce resources
Optimal growth of these resources over time
To produce ever expanding range of goods and
services
Classical and neo-classical economics
Neo-classical economics deals with:
Perfect market
Consumer sovereignty
Automatic price adjustment
Utility calculation
Equilibrium outcome
Assumes economic rationality, materialistic, self
interested orientation towards decision making

The Nature of Development Economics

Political Economy:

The attempt to merge economic analysis with practical

politicsto view economic activity in its political contextrelationship between politics and economics.

Greater scope than 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

Emphasis on the role of power in economic decision

making

The Nature of Development Economics

Development Economics:

Has even greater scope

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.

In addition to being 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 and
large-scale improvements in levels of living

The ultimate purpose 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.

Why Study Finance and Development

Real meaning of development

Sources of national & international growth
Women empowerment and their role in economic
development
Poverty: causes & policies
Unemployment and migration related issues
Foreign debt and its implication
Imposition of foreign exchange control, tariff,
quota on non-essential items

Why Study Finance and Development

More practical reasons to care:

Growing interdependence between the developed and

developing countries

Global warming

AIDS, Avian flu virus

Migration

Terrorism

Systematic risks: debt crisis and the Asian financial crisis,

recent global economic crisis

Economics as a Social System: The need to

go beyond simple economics
Economics and economic system must be viewed in a
broader perspective than traditional economics

Must be analyzed within the context of overall social system

(both national and international)

Social system means interdependent relationship

between economic and non-economic factors:
- Attitude towards life, work and authority
- Public and pvt. bureaucratic, legal and administrative
structure
- Pattern of kinship and religion
- Cultural tradition
- The authority and integrity of govt. agencies
- The flexibility or rigidity of economic and social classes
- These factors vary widely

The Meaning of Development

Traditional economic measure

The new view of economic development
Sen's capability approach

The Meaning of Development: Traditional

Economic Measure

Capacity of a nation to achieve sustained rates of

growth of income per capita to expand its output
at a rate faster than the growth rate of its population.
Alternative economic index of development:

Development= rate of growth of income per

capita or per capita GNP> Rate of growth of
population
Planned alteration of the structure of production and
employment from agriculture to manufacturing and
service industry.

The Meaning of Development: Traditional

Economic Measure

Causal reference to non-economic social indicators:

schooling, health, housing etc.
Until recently development seen as an economic
phenomenon
Problems of poverty, income distribution
unemployment were secondary importance
Limitations of traditional economic measure

The Meaning of Development: The New

Economic View of Development

It emerged in the 1970s as levels of livings despite

growth remained unchanged (1950-1960)

Economic development came to be refined in

terms of the reduction or elimination of poverty,
inequality and unemployment

If all three decline from high level in any country,

there has been development in that country

The challenge of development. is to improve

the quality of life

The Meaning of Development: The New

Economic View of Development

Development
is
now
conceived
as
a
multidimensional process involving major changes
in:

Social structure, popular attitudes

National institutions as well as the acceleration

of economic growth

The reduction of inequality and the eradication

of poverty

The Meaning of Development: Sen's

Capability Approach

Sen argues that the capability to functioning is

really matters for status as a poor or non-poor person

Sen defines capabilities as the freedom that a

person has in terms of choice of functioning, given his
personal features and his command over commodities

Functioning can be defined as what people do or

can do with the commodities of given characteristics
they come to posses or control

Development has to be more concerned with

enhancing the lives we lead and the freedom we
enjoy

The Meaning of Development: Sen's

Capability Approach
Poverty cannot be properly measured directly by
income or even by utility; what matters is not the
things a person has or the feelings these provides,
but what a person is, or can be, and does, or
can do.

One may have lot of commodities; but these are of

little value if they are not what consumers desire.

It is clear that income or consumption, or purely

subjective pleasure or desire fulfillment, can not be
define well-being in any adequate sense

The Core Values of Development

Core value serve as a conceptual basis and practical
guideline for understanding the inner meaning of
development: Sustenance, Self-Esteem & Freedom.
1. Sustenance: The ability to meet the 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.

In the absence or in critically short supply of any one of

these, a condition of absolute underdevelopment
exists.

Rising per capita incomes, the elimination of absolute

poverty,greater
employment
opportunities,
and
lessening income inequalities constitute the necessary
but not the sufficient conditions for development.

The Core Values of Development

2. 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.

Or, self-esteem is a sense of worth and self-respect

Not being used by others as a tool for their own ends

The nature and form of this self-esteem may vary from

society to society and from culture to culture

Worthiness and esteem are increasingly conferred TO

material values in developed ones that possess
economic wealth and technological power

The Core Values of Development

3. Freedom from Servitude: To be able to choose:
Human freedom: freedom from imposition of material
conditions of life and from social servitude

Freedom includes political freedom, including personal

security, the rule of law, freedom of expression, political
participation & equality of opportunity

The advantage of economic growth is not that wealth

increases happiness, but that it increases the range of
human choice

The Objectives of Development

At least following three objectives:
1. To increase the availability and widen the distribution
of basic life sustaining goods such as food, shelter,
health and protection
2. To raise level of living, including, in addition to
higher incomes, the provision of more jobs, better
education, and greater attention to cultural and human
values, so as to enhance material well-being & 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

THANK YOU

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