DVT Economics Chap 1 2 Students

Development Economics
Chapters 1 and 2;
Department of Economics, College of
Business and Economics, Addis Ababa
University, Ethiopia
12/25/2023 Tsegabirhann W.Giorgis Abay, CBE, AAU 1

Brief Evolution of Dvt Ecocs-Context 1
• It can dates back to the classical economics(Adam Smith, 1776
& Others), since economics contributed to the understanding
of human welfare, Indeed Efficiency determines human well-
being.
• They argued that markets would act to co-ordinate people’s
plans i.e. the “invisible hand” of Adam Smith would take care
the coordination of the economy.
• Say’s law. “supply creates its own demand” focusing on
creating productive capacity;
 The economy is inherently stable and this is achieved since
prices and wages are fully flexible.
 The economy is always at its full employment equilibrium
• Systematic study of Devt Ecocs started after WWII in 1945,
the Marshall Plan of Reconstructing Europe.
Origins of Marshall Plan
1. After World War I, the European economy had been greatly
damaged, and a deep recession lasted well into the 1920s
2. After six years of WWII, much of Europe was devastated with
millions killed or injured. In European nations, the economies were
well below their pre-war levels - agricultural production was 83% of
1938 levels, industrial production was 88%, and exports only 59%
• Shortages of goods, fuel, coal, leading to hundreds of death by freezing; The
European nations had all but exhausted their foreign exchange reserves during
the war, and the Marshall Plan aid represented almost their sole means of
importing goods from abroad;
• Rationing, e.g. Britain, 1947 power cuts
• Churchill, ‘a rubble heap, a breeding ground of hate’
• Most major cities had been badly damaged, with industrial production especially
hard-hit
• High unemployment and food shortages led to strikes and unrest in several west
European countries, a breeding place for expansion of communism
• Europe under two spheres of control: US sphere (West Europe) & Soviet sphere
of influence (East Europe)
Origins of the Marshall Plan-U.S. Economic Interest
• The US was the only major power whose

infrastructure had not been significantly
harmed during WWII,
• The long-term health of the U.S. economy
was dependent on trade; continued
prosperity required markets to export surplus
goods. Marshall Plan aid would largely be
used by the Europeans to buy manufactured
goods and raw materials from the US.

Marshall Plan-Containment Policy Against
Communism
• Marshall Plan was the centerpiece of the new doctrine of
containment policy against communism, aid as an instrument of
foreign policy
• An unofficial goal was the containment of growing Soviet influence
in Europe
• Creation of NATO in 1949
• During the negotiation for the Marshall Plan, Americans – pushed
the importance of free trade and European unity to form a
bulwark(a solid wall-like structure raised for defense) against
communism.
• Korea war of early 1950s (1950-1952)
• China communist Revolution of 1949
• High workers and communist movement in Western Europe,
Greece, France, Italy
Marshall Plan-Note
• Officially named the European Recovery Program (ERP), 4 yrs
government intervention, 1947-1951.
• Primary plan of the United States for rebuilding the allied countries
of Europe and repelling communism after World War II
• Named for United States Secretary of State George Marshall
• Western European countries asked for $22 billion in aid, but
President Truman (USA) cut this to $17 billion in the bill he
presented to Congress.
• In the same year, the participating countries (Austria, Belgium,
Denmark, France, West Germany, Great Britain, Greece, Iceland,
Italy, Luxembourg, the Netherlands, Norway, Sweden, Switzerland,
Turkey, and the United States) signed an accord establishing a
master coordinating agency, the Organization for European
Economic Cooperation (later called the Organization for Economic
Cooperation and Development, OECD)
• IMF & World Bank created in this context.

Aims of the Marshall Plan
• Stop spread of Communism
• Help economies of Europe recover;
rebuild European prosperity
• Provide a market for American goods
How successful was the Plan?
 $12-13 billion dollars poured into 16 non-Communist European states;
 Some $13 billion of economic and technical assistance—equivalent to around
$130 billion in 2006—was given to help the recovery of the European countries
that had joined in the Organization for Economic Cooperation and Development,
(OECD)
 1948 to 1952 saw the fastest period of growth in European history
 Industrial production increased by 35%
 Standards of living increased dramatically
 Allowed the nations of Western Europe to relax austerity measures and
rationing, reducing discontent and bringing political stability.
 Communist influence on Europe was greatly reduced.
 Trade relations helped forge the North Atlantic Alliance, NATO.
 Note Europe was rebuilt, not built for 1st time.
 Appropriate institutions, Human Resources, knowledge, culture was
there endogenously developed. This is contrary to the experience of
former colonized countries including SSA. What they needed most
was financial capital as there were established institutions,
knowledge, human resources, and development culture.
Europe under sphere of Influences Late 1940s-
Early 1990s
Bipolar Global Competition, Aid-Context 3
• Cold war, bipolar competition for global dominance, revealed
in competing ideologies, liberal free market capitalism and
socialist central planning.
• Dvt Ecocs as a instrument of the ideological fight, which was
the guise for the competition for global dominance.
• Aid was based on the experience of the “Marshall Plan”,
which assumed institutions and HRD & HRM, exogenous
values had to be imposed on the newly liberated countries.
Marshall plan as a Dvt Model for newly decolonized
countries.
• Dvt Aid, technical assistance, God-fatherhood as an
instrument of global competition.
• USAID since 1961, as an instrument of USA’s foreign Policy
Colonialism Collapsing
• Colonialism failed apart owing to the relative
power shift to the USA and USSR, both of
which did not have interest in colonial power.
• They were not for direct colonialism, but for
expanding their spheres of influence
indirectly, what some call it “neocolonialism”
• Formal political liberation of most African,
Latin American and Asian countries in the
1950s, 1960s with no clear ideology, theory of
their own, no or weak institutional capacity.
Prime Objective of Newly Liberated Countries-Context 4
1. Political consolidation as prime objective; no

genuine commitment for dvt!
2. Development assistance as an extension of
global competition for global dominance,
based on Europe’s Model
3. No endogenous institutions for development,
a. Endogenous institutions & knowledge, were
unconsciously replaced.
b. Unlike Europe, non of Ethiopian religious schools
evolved to universities .

What is Development? What is
Development Economics About?

The Problem : Grave Development Deficit
1. Developing countries, notwithstanding the enormous strides

they have made in the last few decades, display fundamental
economic inadequacies in a wide range of indicators.
a. Levels of physical capital per person are small.
b. Abject poverty: Massive and deep poverty: Denial of the very basic minimum
requirement for survival, violating the right to live.
c. Nutrition levels are low.
d. Other indicators of human capital such as education — both at the primary and
secondary levels — are well below developed-country benchmarks.
e. So are access to sanitation, safe water and housing.
f. Population growth rates are high, and so are infant mortality rates.
g. One could expand this list indefinitely.
2. Why are underdeveloped countries underdeveloped?
3. Why are the developed countries developed?
4. What are the causes (root causes as well as symptoms) of
both development and underdevelopment?
Global Challenges
1. What are the nature, the width and depth of the challenges the
world is facing? What are the hopes of humanity into the future in
the face of global challenges? Can we think of development
without having hope into a better future?
a. Some challenges are lingering: deprivations, poverty, homelessness, joblessness,
marginalization etc.
b. Some are deepening. Different manifestation of inequalities: rich vs. poor income
groups, gender, religious, ethnic, rural-urban, source of livelihood (pastoral,
sedentary agriculture, manufacturing, service industries), Continental divide (SSA
lagging behind), etc.
c. Some are emerging. Violent extremism, organized crime, women & child trafficking,
drugs, epidemics and pandemics, sea piracy, etc. These emerging trends indeed show
the mighty of the poor, the marginalized, the squalor. Who can defeat any person
who carries a time bomb in his/her stomach, willing to blow up for whatever cause?
2. Most of these challenges are mutually reinforcing.
3. Whatever their nature or reach, these challenges have an impact
on people’s well-being in both present and future generations.
(UNDP, 2016, p.iii)
Definitions: Development Economics
No single definition. The definition and
scope of Dvt Ecocs has evolved over
time.
a. Traditional economics- efficient allocation of
scarce resources
b. Political economics- social and political process
& Interaction of political forces/agents/
c. Development economics- Role of values,
attitudes, and institutions.

Definition of Economic Development: 1950s
1. Production Function Approach: Growth=Dvt
2. What is Economic Growth? An increase in Gross
National Product (GNP) or GDP and increased
share of the industrial/specifically the
manufacturing industry/ sector from total GNP.
3. In economic terms, development is the
capacity of a nation to generate and
sustain an annual increase in its GNP of
5% or more.
4. Though a definition of the 1950s, it is still
relevant one.
What Explains such Differences in GNP?
GNP Per Capita (US $)
Country Exchange rate PPP

UK 24,500 23,550
USA 34,260 34,260
Zimbabwe 480 2,590
Bangladesh 380 1,650
China 840 3,940
India 460 2,390
Sri Lanka 870 3,470
Australia, Canada, New Zealand and USA
Stylized Facts about the World Distribution of Per Capita GNP
1. The relative distribution appears to have been quite stable in
the last 50 years or so.
2. Over that period the average per capita income of the richest 5
% was about 32 times that of the poorest 5% – a staggering
disparity.
3. Although the distribution has been stable, there has been a
significant movement of countries within the distribution (for
example the identity of the top and bottom 5% has not
remained the same). The movement up and down relative to
the US has been roughly symmetric, which is why the overall
distribution has not changed a lot.
4. While there has been significant mobility, movement from
below the average to above it, and from above the average to
below it are rare. Most countries have remained roughly in the
same part of the distribution.
Problems with the Growth Approach to Dvt
1. Underreporting of income by developing countries
a. High proportion of income is generated for self-consumption.
b. Prices of non-traded goods are not appropriately reflected in
exchange rates.
c. Markets are not competitive and externalities are not reflected.
2. Can GDP really be an indicator of human development or human
welfare?
 Is a quantity based concept - not quality based
3. Too much focus on material wellbeing at the expense of other
dimensions of life, values, culture, issue of freedom from whatever
suppressive environment
4. Issue of equity, stability and peace taken for granted, as a
byproduct of sustained growth, social devt and welfare of those
non-capitalist subjected to trickling effect
5. Despite its weaknesses, still one of the important dimensions of
development, material well-being, income still constitute the
important aspect of individual well-being, the basis for other
12/25/2023 needs. Tsegabirhann W.Giorgis Abay, CBE, AAU 22
Some Methodological Problems of NCEs(Neoclassical Economists) Approach
to Development
• The major premises, underlying theoretical beliefs behind the production function
approach, neo-classical economics (NCEs) approach to Development include:
1. What is the prime purpose and hence objective of a human person? What is the
purpose and hence objective of a society? For Neoclassical Economists, the prime
purpose and hence objective of a person is utility/profit/ maximization. The utility
maximizing person is extended to society. So the society prime objective is to
maximize social welfare expressed in terms of the sum of the value of production
of goods and services of a given economy at a given time. It undermines other
aspects of human life, values, beliefs, needs, morality, social responsibility etc..
2. Methodological individualism: This is based on the belief that the whole is the
sum of its parts. Yes it works in set theory. But does it work in biological and
societal entities? Is a biological entity a sum of its organs? Is society a sum of its
population? According the GNP, GDP, National Income etc. are the horizontal
summation of sectors which in turn are the sum of industries which in turn is the
sum of individual agents (corporations/firms/ and individual producers).
3. Change and hence development is understood in terms of punctuated changes,
reaching at an equilibrium, remaining stable there and then after a while moving
out to another equilibrium position after some time is elapsed. So change is
punctuated, not continuous process.
Definition of Economic Development: 1970s & 1980s
• Dethronement of GNP in the 1970s and
increasing emphasis on “redistribution from
growth”
• Increasing emphasis on non-economic social
indicators
• Economic development consists of the
reduction or eradication of poverty,
inequality and unemployment within the
context of a growing economy.

World Bank’s Definition of Economic Development: 1990s
• World Bank in its 1991 WDR asserted that the “challenge of
development is to improve the quality of life (QOL).”
• The improved QOL involves higher incomes, better education, higher
standards of health and nutrition, less poverty, a cleaner environment,
more equality of opportunities, greater individual freedom, and a richer
cultural life. (WDR, 1991)
• But note the source material of the World Bank is stating ‘more equality
of opportunities’, ‘greater individual freedom and richer cultural life’ .
This perspective allows a conceptual room for some people to be left
behind, based on neoclassical theory of justice, which believes in
creating a playfield, creating equality of opportunity, the it is up to the
individual whether or not he/she makes it up.
• Hence the society and hence a government of the same society does
not take responsibility to address any collective problem of a given
society and to develop an individual human person. For Neoclassical
Economics, Development is not understood as a human right of every
human person.
Human Rights Approach to Development
1. The UN, Human Rights Declaration of 1948 and briefly
discussing the major issues including the
a. Civil and Political rights
b. Economic, social and cultural rights
c. Collective or group rights (Gender, race, religion,
ethnic, etc.)
“The indivisibility and interdependence of all
human rights – civil, political, economic, social,
and cultural – are fundamental tenets of
international human rights law.” (UN, 2005; Economic, Social
and Cultural Rights, a Handbook, UN, New York and Geneva)
Governments have the duty of respecting,

protecting and fulfilling these human rights.
Economic, Social & Cultural Rights
• In 1966, two separate treaties, covering almost entirely all the

rights enshrined in the Universal Declaration of Human Rights
were adopted after approximately 20 years of negotiations:
one for civil and political rights, the International Covenant on
Civil and Political Rights (ICCPR), and one for economic, social
and cultural rights, the International Covenant on Economic,
Social and Cultural Rights (ICESCR). The ICESCR was adopted by
the United Nations General Assembly on 16 December 1966
and entered into force on 3 January 1976. So it took 28 years
to be enforced at the UN Level, merely because of the fights
among the veto powers.
• HRs evolved over time following global power shifts and
compromises over ideological fight.
(WHO, World Health Organization, Regional office for the Eastern Mediterranean, International
Covenant on Economic, Social and Cultural Rights)
Human Goals of Economic Development :
Amartya Sen’s “Capabilities” Approach: 1985
• Economic growth is not an end in itself and has to enhance
the lives people lead and the freedoms that they enjoy.
• Development can be seen . . . as a process of expanding the
real freedoms that people enjoy. (Amartya Sen, Nobel
laureate in economics)
• Capability to function is what matters for status as a
poor/non-poor person and it goes beyond availability of
commodities
• Capabilities: “freedom that a person has in terms of the
choice of his functionings ,…”
• Functionings is what a person does with commodities of
given characteristics that they possess/control.

Larger Freedom-Trinity of the UN Goals
1. “We will not enjoy development without
security, we will not enjoy security without
development, and we will not enjoy either
without respect for human rights”. UN
Secretary General, Kofi Anan, 2005
2. Development programs should
a. further human rights (goal),
b. be guided by human rights (process) and
c. contribute to the development of the capacities of
‘duty-bearers’ to meet their obligations and/or of
‘rights-holders’ to claim their rights (outcome).
Underlying Theory of Justice Behind Development Intervention
• Is development economics concerned to bring about

change, improve the wellbeing of the majority, the
few or everyone? (UNDP, 2016, p.iii)
• Is development based on merit, create an
opportunity and then let those who can make it
succeed and those who cannot be left behind?
• Or is it based on the principle, that development is a
human right and hence no one should be left behind.
Everyone, every human person, every child, every
student, every farmer, every job seeking young, every
patient deserves the same right and should be not left
behind.
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Substance of Development: Full Freedom
• Human development is all about human freedoms: freedom to
realize the full potential of every human life. (UNDP, 2016, p.iii)
• Over the past quarter-century there has been impressive progress on
many fronts in human development, with people living longer, more
people rising out of extreme poverty and fewer people being
malnourished. Human development has enriched human lives—but
unfortunately not all to the same extent, and even worse, not every
life. (UNDP, 2016, p.iii)
• This is to liberate everyone from all political (suppressions,
operations & violations), economic (constraints, & deprivations),
intellectual (ignorance, lack of information, disinformation that
deprives the understanding and analytical capacity of a person),
psychological and moral degradations, (emotional & spiritual
barriers, shortcomings, hindrances, fear, irresponsibility, negative
values & attitudes to life and others), that hinder the realization of
full potential of every human life.
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Global Consensus on Poverty Eradication
• Different developments contributed towards the recognition of
income distribution/inequity, poverty reduction/eradication/ as
development agenda across the globe;
• The Debt Crisis of the 1980s: Where debtors failed to repay,
started with Mexico in 1982 and invaded L. America, SSA, Asia.
The financial sector of the DCs is based on the credit market. Debt
crisis meant failure and collapse of the credit market, which is the
mainstay of Economies, cities in the DCs, like London, Paris, etc.
• Terrorism which received global attention after Sept 11, 2001, was
evolving since the early 1990s; One of the root causes of terrorism
is absolute poverty, desperation, marginalization, loss of trust,
hope among the youth.
• Ideological Pressure from Socialists: Westerns need to embrace
the issue of inequity which was championed primarily by the
Marxist ideology since the 19th century.
Evolution of Global Consensus in the Fight
Against Poverty & Under Development
• Following the debt crisis in the first half of the
1980s, cancellation of debts was tailored to
anti-poverty strategies, which evolved to the
global ‘Poverty Reduction Program’.
• Then MDGs(millennium devt goals) emerged
that was broader than the poverty reduction
programs
• Then SDGs was designed to persistently fight
poverty and underdevelopment in all its
manifestations across every part of the globe.
Millennium Development Goals-2000-2015- after
1 Eradicate extreme poverty and hunger
2 Achieve universal primary education
3 Promote gender 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 : Trading & Financial

System; Debt, Landlocked Cs, ICT, Essential Drugs

Sustainable Development Goals (SDGs)-Post 2015 Goals
End Extreme Poverty including Hunger
1 a. End extreme poverty, including absolute income poverty
b. End hunger & achieve food security, appropriate nutrition, & zero child stunting
c. Provide enhanced support for highly vulnerable states & LDCs.
2 Promote Economic Growth & Decent Jobs within Planetary Boundaries

3 Ensure Effective Learning for All Children & Youth for Life & Livelihood
4 Achieve Gender Equality, Social Inclusion, & Human Rights
5 Achieve Health and Wellbeing at all Ages
Improve Agriculture Systems and Raise Rural Prosperity
6
Empower Inclusive, Productive and Resilient Cities
7
Curb Human-Induced Climate Change & Ensure sustainable energy
8
Secure Biodiversity & Ensure Good Management of Water, Oceans, Forests &
9 Natural Resources ;
Transform Governance & Technologies for Sustainable Development
10

Definition of Economic Development: Conclusion
“Development is a multi dimensional process of

change involving 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.” (Todaro and Smith)
Note:
• Dynamic & sustainable process of change
• Inclusiveness: equity & fairness

Definition -Conclusion 2
• Development is both a physical reality and a state of mind
for attaining a better life.
• Three basic core values as a practical guideline for
understanding development
• Life Sustenance: The Ability to Meet Basic Needs
• Self-esteem: To be a Person, self-respect, independence,
sovereignty, avoiding the feeling of inferiority, feeling of
being neglected, dominated, deprived, humiliated, lack of
confidence, Gross appreciation of others at the expense of
once-self.
• Freedom: freedom from the three evils of ‘want, ignorance
and squalor’. Freedom to determine once destiny,
• Three of the core values are inherently related to each other. Low
life sustenance could lead to loss of self-esteem and ecoc
imprisonment.
• Specific components of better life vary from time to time
and from society toTsegabirhann
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society. W.Giorgis Abay, CBE, AAU 37
Broad Development Goals/Objectives
HIGH INCOME & HDI
Income Targets & HD FUNDAMENTAL:
Targets BOTTOM-LINE-
US$15,000 - $20,000
per capita by 2020 SURVIVAL/SUSTAI
NANCE
Quality of
Enables all
Life Meets present
communities needs without
to fully benefit compromising
from the wealth future
INCLUSIVENESS: of the country generations
BASIS FOR SUSTAINABILITY
PEACE
Conclusion: 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 descent, quality, jobs,
better education, and greater attention to cultural and
human values, all of which will serve not only to enhance
material wellbeing but also to generate greater individual
and national self-esteem.
3. To expand the range of economic and social choices
(FREEDOM) 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
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misery.
Tsegabirhann W.Giorgis Abay, CBE, AAU 39
Conclusion
• Development economics focuses primarily on
the economic, social, and institutional
mechanisms needed to bring about rapid and
large-scale improvements in standards of
living for the masses of poor people in
developing nations.
• Development economics must be concerned
with the formulation of appropriate public
policies designed to effect major economic,
institutional, and social transformations of
entire societies in a very short time.
Questions & Issues for Reflections & Discussions
1. Why should we develop? Why should the poor develop? Why do we care to study
the poor, the unemployed, the less developed countries, Africa?
2. How does the concept of “capabilities to function” help us gain insight into
development goals and achievements? Is money enough? Why or why not? How do
you relate the capabilities approach with the MDGs?
3. What do you understand by the MDGs & SDGs and
a. What are the changes in both UN endorsed development goals? Compare
and contrast the MDGs and SDGs.
b. What is there for you in the SDGS as potential young graduates?
c. How do you relate them with thee three core values of development?
4. What does each of the three core values mean to you? Which one of them is more
important to a typical underdeveloped country like Ethiopia? How do you relate
them to your-self, your country and your society? How can the three core values
relate to women’s emancipation?
5. Why is the concept of equality so important? Do you think the concept of efficiency
and equality are consistent to each other? What are the dilemmas? How to address
the dilemmas?
6. Do you think neoclassical economics (at least from the micro and macro courses you
have taken so far) have the conceptual space for understanding and explaining
Inequality?
7. Can one think of development
12/25/2023 without
Tsegabirhann addressing
W.Giorgis inequality?
Abay, CBE, AAU 41
Why Bother about
Development?

Why Bother about Development?-1
• Why as societies, should we bother about the

development of the impoverished people,
Africa, low income countries?
• Why you as an individual are studying about
the poor society instead of focusing on and
learning about something that transforms
your personal life?

Why Bother? Essentially Because-2
• Human beings are social animals. So we care
about others.
• “The world is like the human body: If one
part aches, the rest will feel it; if many parts
hurt, the whole will suffer.”
• There can no longer be two futures, one for
the few rich and the other for the very many
poor. “There will be only one future—or
none at all.”

Why Bother about Development?-Global Factors
• Immigration, some European countries are being threatened
by immigrants owing to low population growth of native
population. So supporting at the source instead of being
engulfed by immigrants.
• Fundamentalism and terrorism: addressing underlying root
causes of terrorism, why people just decide to blow up?
Afghanistan and Somalia, Syria, Iraq, Libya, Tunisia, Egypt
have become breeding grounds for extremism and violent
conflict.
• Globalization of Crime, Somalia Sea Piracy 2011-12
• Global market should expand and increase. You cannot travel
long with impoverished population, as market will be so small.
• Humanity: Globalization of Human Rights
• Global agendas like Environment and Climate Change
Why Bother about Development?-Local Factors
• One of the manifestation of underdevelopment is an abject
poverty, marginalization of social groups, inequity,
unfairness.
• Pandemics is becoming a frequent experience, erupting from
any angle and invading the globe: HIV –AIDs, Covid 19, etc.
• But there are limits that any political body can survive with
such social and economic evils.
• Increasing enlightened public over time: education, access
to media, including electronic media, global labor mobility
etc all these increase public expectations on government,
• Functional legitimacy lasts so far as governments address
societal demands and problems;
• Sustained stability and peace rests on socio-economic
performance, status of living standards of society;
Development is Becoming a Genuine Agenda
• Thus, from both local and global
factors/developments/ there appears to be a
convergence towards making development
as prime agenda of governments.
• If indeed, development has become a prime
political agenda, then it can be taken as a
political capital.

Chapter 2. Common Features
of Under Development:
Comparative Development
Study

What is Development/Underdevelopment?
• Apart from the definition and scope, we need
to understand more as to what we mean by
development and underdevelopment.
• To that effect we will characterize the
undeveloped economies through
comparative development study
• Appreciate the Different Dimensions of under
development and hence the diverse issues of
development

Common Features of & Areas of Heterogeneity
of Under Development
1. Lower levels of living and productivity
2. Lower levels of human capital
3. Higher levels of inequality and absolute poverty
4. Higher population growth rates
5. Greater social fractionalization, fragmentation
6. Larger rural populations but rapid rural-to-urban migration
7. Lower levels of industrialization
8. Adverse geography
9. Underdeveloped financial and other markets
10. Lingering colonial impacts such as poor institutions and
often external dependence.
11. Initial condition of today’s UDCs and DCs are different
Diversity in & Shared Features of Underdevelopment
• The shared mix and severity of these
challenges largely set the development
constraints and policy priorities of a
developing nation
• However, there is diversity among the LDCs.
Though there are shared common problems,
there are differences among the LDCs. This
suggest that development needs to be
contextual, relevant to the particular
situation of a country.
Defining & Characterizing the Developing Countries
1. Economic classification: per capita income based classification :
a. Low income economies (LICs)
b. Middle income economies
 lower middle-income countries (LMCs),
 upper-middle-income countries (UMCs)
c. High income economies,
2. Exceptions: high income countries with one developed sector like oil export but
less education, health of the general public may be classified as developing
economies: Saudi Arabia & United Arab Emirates
3. Another widely used classification is that of the least developed countries
(LDCs), a United Nations designation that as of 2010 included 49 countries, 33 of
them in Africa (Ethiopia is one of them), 15 in Asia, plus Haiti. For inclusion, a
country has to meet each of three criteria:
 Low income,
 Low human capital, and
 High economic vulnerability
4. Such classifications warns against over generalization! We have
diversity among the group LICs, LDCs etc.
How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages?
There are eight significant differences in initial conditions that

define the growth prospects of present LDCs. (Todaro P. Michael
and Smith C. Stephen; 11th edition, 2012; pp: 71-77)
1. Physical and human resource endowments
2. Per capita incomes and levels of GDP in relation to the rest
of the world
3. Climate : Temperate Vs. Equatorial climate
4. Population size, distribution, and growth
5. Historical role of international migration
6. International trade benefits
7. Basic scientific and technological research and development
capabilities
8. Efficacy of domestic institutions

Physical and Human Resource Endowments
1. Physical object gap: factories, roads, and modern

machinery
2. Idea gap = Ingenuity gap: Ability to apply innovative
ideas to solve practical social and technical
problems. knowledge about marketing, distribution,
inventory control, transactions processing, and
worker motivation.
• But, human capital defined as the productive
investments in people, such as education, skills and
health resulting from expenditures on education, on-
the-job training programs, and medical care, is it an
endowment or an outcome of development process?
Divergence/Convergence/ Trends-1
• Are the developing countries “catching up” by growing faster
on average than developed countries? Two Perspectives:
• Divergence: A tendency for per capita income (or output) to
grow faster in higher-income countries than in lower-income
countries so that the income gap widens across countries over
time (as was seen in the two centuries after industrialization
began).
• Convergence: The tendency for per capita income (or output)
to grow faster in lower income countries than in higher-income
countries so that lower-income countries are “catching up”
over time. When countries are hypothesized to converge not
in all cases but other things being equal (particularly savings
rates, labor force growth, and production technologies), then
the term conditional convergence is used.
Drivers of Convergence-Drivers of Catch up
• Technology Transfer, Developing countries need not “reinvent the
wheel”; So LDCs can and should “leapfrog” over some of the earlier
stages of technological development. Thus it will take shorter time to
double output per worker, to catch up. Practically, technology transfer
never was/is free and easy. It proved to be an issue that called for a
deliberate and conscious investment to develop and/or adapt it.
Success has not been automatic with technology transfer.
• As per the traditional neoclassical analysis, due to the law of
diminishing returns, the marginal product of capital and the
profitability of investments would be lower in DCs. The impact of
additional capital on output would be expected to be smaller in a
developed country compared to that of LDCs. So we expect more
investment (both national investment and FDI) until both DCs and LDCs
converge into one level of per capita income. However, due to
sustained innovativeness, the diminishing returns does not seem to
work in practice.
• In general there has been a trend of
divergence between the
development performance of the DCs
and the LDCs. At the dawn of the
industrial era, average real living
standards in the richest countries
were no more than three times as
great as those of the poorest. Today,
the ratio approaches 100 to 1.
• China’s average income was just 3% of that of the

United States in 1980, it was estimated to have
reached 14% of U.S. income by 2007. But in the
same period, the income of the Dem. Rep. of
Congo fell from about 5% of U.S. levels to just 1%.
But globally, evidence for relative convergence is
weak at best, even for the most recent decades.
• Convergence trends experienced in East & South
Asian Countries, India, Malaysia, Thailand,
S.Korea, Brazil, while the opposite in majority of
least developed countries.
Critical Questions & Issues of
Under development: Defining
the Dimensions and Scope of
Development Economics

Major & Critical Questions of Development Economics
1. The critical questions of development economics may be
summarized into:
a. What are the underlying root and symptom causes of
underdevelopment?
b. Why have some economies developed and why is that the LDCs are
lagging behind in the development ladder? Why they failed to develop?
c. What are the common features of underdeveloped economies?
d. Do we have heterogeneity with commonalities? What do the
heterogeneity of LDCs imply?
e. What are the key differences between conditions in today’s developing
countries and those in now developed countries?
2. Yet in order to appreciate the different dimensions of
underdeveloped we can venture for details of questions and
issues of development in order to appreciate the diverse
dimensions of underdevelopment.

Critical Questions of Devt Ecocs 2
What explains Development Performance? Why are some
growing/developing while others are lagging?
1. We were all poor 1,000 years ago, or more. Sustained growth in per-
capita income started only (some) 200 years ago: called Industrial
Revolution. What explains the sustained growth/development/ in
income of few countries, over the last 200 years, since the industrial
revolution? What explains the failure of many countries, to do so?
2. What are the sources of national and international economic
growth? Why do some countries make rapid progress toward
development while many others remain poor?
3. What constraints most hold back accelerated growth, depending
on local conditions?
4. What are the causes of extreme poverty and what policies have
been most effective for improving the lives of the poorest of the
poor?

Broad Dimensions of Underdevelopment (Multi-dimensionality of

Underdevelopment):
 Is rapid population growth threatening the economic progress of developing
nations?
 Why is there so much unemployment and underemployment in the developing
world, especially in the cities, and why do people continue to migrate to the
cities from rural areas even when their chances of finding a conventional job are
very slim?
 Wealthier societies are also healthier ones because they have more resources for
improving nutrition and health care. But does better health also help spur
successful development? What is the impact of poor public health on the
prospects for development, and what is needed to address these problems?
 Do educational systems in developing countries really promote economic
development, or are they simply a mechanism to enable certain select groups or
classes of people to maintain positions of wealth, power, and influence?
 As more than half the people in developing countries still reside in rural areas,
how can agricultural and rural development best be promoted? Are higher
agricultural prices sufficient to stimulate food production, or are rural
institutional changes (land redistribution, roads, transport, education, credit,
etc.) also needed?
Sustainability Issues
1. What do we mean by “environmentally
sustainable development”? Are there serious
economic costs of pursuing sustainable
development as opposed to simple output
growth, and who bears the major
responsibility for global environmental damage
—the rich North or the poor South?
2. Institutional sustainability
3. Cultural Sustainability
Critical Questions of Devt Ecocs 5-1
Relative Role of Government and Market and Policy Making
1. Why do so many developing countries select
such poor development policies, and what can
be done to improve these choices?
2. What is the role of financial and fiscal policy in
promoting development? Do large military
expenditures stimulate or retard economic
growth?
3. What is microfinance, and what are its potential
and limitations for reducing poverty and spurring
grassroots development?
Relative Role of Government and Market and Policy Making
1. Are free markets and economic privatization the answer to development
problems, or do governments in developing countries still have major roles
to play in their economies?
2. A central issue in development is the interaction between governments and
markets. WDR 1991. But how to ensure the developmental interaction
between governments and markets?
3. Competitive market are the best way yet found for efficiently organizing the
production and distribution of goods and services. Yet how to bring about
such competitive markets?
4. Yet the competitive market requires to be built. If there is no well-matured
private sector, strong free market institutions, the next option is the
government for both developing the private sector and to directly involve in
the production of goods and services
5. Different perspectives on the role of government
a. Government as A Regulator (in line with WB, IMF)
b. Government as Facilitator of Dvt (in line with WB, IMF)
c. Government as a ‘player’ direct Producer, investor: infrastructure,
strategic sectors (Proponents of Developmental State)
6.
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It is not a question of state or market: each has a large and irreplaceable
Tsegabirhann W.Giorgis Abay, CBE, AAU 65
role. WDR, 1991
Income distribution; Non-inclusive Political
Economy:
1. Who benefits from the growth and
development? and why? What sustains
inequity in a given country?
2. How did the extremes between rich and poor
be so very great?
3. How can improvements in the role and status of
women have an especially beneficial impact on
development prospects?

Critical Questions of Devt Ecocs- 7
Underdevelopment is the mother of every type of political
problem!!
1. How to ensure sustainable peace and stability? What are the
underlying economic, political, social and institutional causes
of conflict and instability?
2. How to establish national consensus, and avoid divisive
politics?
3. How to establish a strong and cohesive nation-state?
4. How to establish and sustain a strong and effective
government?
5. Should Democracy come first and development latter or Vice
Versa? Can both be attained simultaneously?
6. Is Democracy a matter of design and wish or is it an
evolutionary process requiring socio-economic and political
foundations?
Globalization and the External Competitive Environment
1. Is underdevelopment an internally (domestically) or externally
(internationally) induced phenomenon?
2. What is meant by globalization, and how is it affecting the developing
countries? Can it be an option?
3. Is expanded international trade desirable from the point of view of the
development of poor nations? Who gains from trade, and how are the
advantages distributed among nations?
4. When and under what conditions, if any, should governments in
developing countries adopt a policy of foreign-exchange control, raise
tariffs, or set quotas on the importation of certain “nonessential” goods
in order to promote their own industrialization or to ameliorate chronic
balance of payments problems? What has been the impact of
International Monetary Fund “stabilization programs” and World Bank
“structural adjustment” lending on the balance of payments and growth
prospects of heavily indebted less developed countries?
5. Should exports of primary products such as agricultural commodities be
promoted, or should all developing countries attempt to industrialize by
developing their own manufacturing industries as rapidly as possible?
Globalization and the External Competitive Environment-2

1. How did so many developing nations get into such serious
foreign-debt problems, and what are the implications of debt
problems for economic development? How do financial crises
affect development?
2. What is the impact of foreign economic aid from rich countries?
Should developing countries continue to seek such aid, and if so,
under what conditions and for what purposes? Should
developed countries continue to offer such aid, and if so, under
what conditions and for what purposes?
3. Should multinational corporations be encouraged to invest (FDI)
in the economies of poor nations, and if so, under what
conditions? How have the emergence of the “global factory” and
the globalization of trade and finance influenced international
economic relations?
Conclusion Points
• Development is a complex process of change
• It is multi dimensional involving quite
diverse, economic, social and political
problems including stability and peace issues.
• Though there has been success stories in
many East and South Asian countries, LDCs
have not been catching up over the past 6 or
so decades since the 1950s and 1960s

Questions and Issues for Reflections and Deliberations
• What are the major lessons you learned so far from this
characterization of development and definition of
development economics?
• What common problems/characteristics/ of underdeveloped
have you observed/learned/?
• What are the possible drivers of convergence of
development? How effective have they been in closing the
development gaps of the LDCs and the DCs?
• What should be the relative role of government in economic
development? Why?
• What is meant by the statement that many developing
nations are subject to “dominance, dependence, and
vulnerability” in their relations with rich nations? Can you
give some examples?
Root Causes and Symptoms of
Under Development : Issue of
Long-Term Development

Dimensions, Symptoms, Correlates of Underdevelopment
• Too many manifestations, dimensions, symptoms,

correlates of underdevelopment,
• Are all dimensions, causes, dimensions, symptoms,
correlates equally important? Should we give equal
weight for every type of problem? Which are the
causes and which are the effects? Which of the
causes are the root causes and which are the
intermediate or proxy causes?
• If we treat all problems and dimensions of
underdevelopment to be equal, then we may end up
into vicious cycle approach to the problems and
challenges faced by least developed countries.
Vicious circle of poverty (VCP): "Implies a circular
constellation of forces tending to act and react in such a way
as to keep a country in the state of poverty". (Nurkse)

Correlates of Economic Growth Vs Fundamental Causes
• The correlates of economic growth, such as physical capital, human
capital, and technology, could be too many factors
• If Indeed, technology, physical capital & human capital are
important factors that explain development, then, why do certain
societies fail to improve their technologies, invest more in physical
capital, and accumulate more human capital?
• How did South Korea and Singapore manage to grow, while Nigeria
& Congo failed to take advantage of their growth opportunities?
Note that Nigeria & Congo are two of the naturally endowed
countries with large potential for sustained development. Ethiopia
was by far better endowed with natural resources than Japan in the
early 20th century. Why does Ethiopia failed and Japan succeeded
despite such difference in resources potentials?
• What else other than resources do explain underdevelopment?
Why did the relatively resource endowed countries failed and the
other succeeded?
What are the causes of a Headache?
• There are a number of causes of headache. Different sickness
show similar/same/ symptoms.
• Diagnosis-1: The physician listens to and asks the complaints of
the patient.
• Diagnosis-2: Then she/he/ recommends for further
examination using different medical technologies: laboratory
tests, MRI, X-ray, etc.
• Successful treatment: First prescription may not be effective.
there may be certain degree of trial and error. when the
actual(real/root) cause is identified and then effective
medication taken on the basis of prescription of the doctor,
• Yet the way the way the patient manages her/his/ self matters.
i.e. implementation matters a lot to reclaim healthy body.

Major Dvt Methodological Approaches
1. Which of these are the causes and which are
the effects?
2. Out of the causes which you may have
identified,
a) Which ones of them are long-run causes
of development?
b) Which ones are root causes and which are
symptoms?

Fundamental Cause or Symptoms?
• Any theory that focuses on the intervening variables
(proximate causes) alone, without understanding the
underlying driving forces, would be incomplete.
• Understanding fundamental causes is central to attain
development/growth/ objectives, since attempting to
increase growth merely by focusing on proximate causes
would be tantamount to dealing with symptoms of diseases
without understanding what the diseases themselves are.
• Fundamental causes can only have a big impact on economic
growth if they affect parameters and policies that have a
first-order influence on physical and human capital and
technology.
(Acemoglu, 2009; Introduction to Modern Economic Growth;
Princeton University Press; Princeton and Oxford; USA and UK)
Fundamental/Root/ Causes of
Underdevelopment
• For Acemoglu, 2009 the fundamental causes
of underdevelopment include the following:
a. Geography
b. Initial condition
c. Institutions
d. Culture
e. Politics

1.Geography
• Climate
• Landlocked countries have clear disadvantage
• Prevalence of Malaria
• For detail see diagrammatic presentation by
(Todaro & Smith,11th edition, 2011, p.84)

1. Geography Determined Colonial Regime
• Geography affected the types of colonies established
• High mortality rates in colonial areas (high prevalence of
malaria) dictated extractive colonial regime. Colonizers ruled
at arm’s length and avoided large, long-term settlement. Their
interest could be summarized as “steal fast and get out” or
“get locals to steal for you.” Unfavorable institutions were
therefore established, favoring extraction over production
incentives.
• Less hazardous climate led to investment and expansion of
plantations. where mortality was low, populations were not
dense, and exploitation of resources required substantial
efforts by colonists, institutions broadly encouraging
investments, notably constraints on executives and
protection from expropriation, were established.
2.Economic Institutions-1
• Economic institutions, which play an important role in
comparative development, are defined as the “rules of
the game” of economic life. As such, institutions
provide the underpinning of a market economy by
establishing the rules of property rights and contract
enforcement; improving coordination; restricting
coercive, fraudulent, and anticompetitive behavior—
providing access to opportunities for the broad
population; constraining the power of elites; and
managing conflict more generally. Moreover,
institutions include social insurance (which also serves
to legitimize market competition) and the provision of
predictable macroeconomic stability.
2.Economic Institutions-2
• Postcolonial institutional quality has a strong impact on the
effectiveness of the private, public, and citizen (or civil society)
sectors. Democratic governance, rule of law, and constraints on
elites will encourage more and better quality public goods. Better
property rights protections and contract enforcement for ordinary
citizens and broad access to economic opportunities will spur
private investments. And institutions will affect the ability of civil
society to organize and act effectively as a force independent of
state and market.
• Forces that protect narrow elites in ways that limit access of the
broader population to opportunities for advancement are major
obstacles to successful economic development. If institutions are
highly resistant to attempts at reform, this helps clarify why
development is so challenging.
• Poor institutions have generally proved very resistant to efforts
at reform
2. Non Colonized Countries
• Never-colonized countries also show a dramatic range in
performance; Ethiopia and Afghanistan remain very poor,
Thailand is in the lower-middle range, Turkey is in the upper-
middle range, and Japan is among the very wealthiest
countries; China, starting among the poorest countries 30
years ago, is now rapidly ascending the income tables. The
quality of institutions (and inequality) undoubtedly mattered in
non-colonized societies;
• It is generally true that legacies of colonialism, slavery, and
Cold War dictatorships have affected the growth prospects of
LDCs
• Economic and social development will often be impossible
without corresponding changes in the social, political, legal,
and economic institutions of a nation.
3. Initial Conditions
• Pre-colonial institutions also mattered to the extent
that they had influence on the type of colonial
regime established.
• Why the colonizers were strong to colonize and why
the colonized were vulnerable to colonialism?
• Since apparent political liberalization in the 1960s of
most countries, why should it take so long to
develop, irrespective of the impact of slave trade and
colonialism?
• Colonial impact on inequity led to inbuilt long-run
factor that affected the peace and stability of a
country and institutions that sustained inequity.
4. Culture
• Cultural factors may also matter in
influencing the degree of emphasis on
education, postcolonial institutional quality,
and the effectiveness of civil society, though
the precise roles of culture are not clearly
established in relation to the economic
factors surveyed.
• Asian values as one explaining factor of Asian
growth

5. Politics
• Politics has multiple effects on development, including:
1. It provides developmental leadership,
2. Sustainable Peace and Stability are essential
preconditions for development,
3. Democratic governance is a preferred governance system
of a given country. This requires regularly conducted free
and fair elections as a minimum precondition.
4. Responsive governance system, a democratic system that
is all inclusive at all times, at all decision making levels
and periods. This goes beyond electoral democracy.
Inclusive political landscape, responsive governance
system are minimum requirements for effective
developmental leadership.
Questions and Issues for Reflections & Discussions
1. Discuss the need for distinguishing between root
(fundamental) causes and symptoms.
2. What is geographical determinism? Discuss
3. Compare and contrast the significance of each of the
fundamental causes, geography, institutions and initial
conditions
4. Compare and discuss each of the three core values of
development with root causes of underdevelopment
5. Discuss what institutions are and their roles in
development
6. Discuss the significance of culture in explaining
development
Measuring Development &
Growth

Measuring Dvt/Growth/
a. Note that the methodological, measurement and estimation issues
are quite broad and demanding, involving qualitative and
quantitative methodological approaches though economics so far
has the inclination towards quantitative techniques. So here, only
cursory review hoping students will strengthen their readings on
the subject
b. GDP/GNP Measures and Estimation;
c. Millennium Development Goals (MDG’s) (to be achieved by 2015)
d. Human Development Index (HDI): achievement of the goals or
improvement in the index is a measure of development
e. Measuring values, culture, norms, self-esteem, freedom,
institutions remains challenging , poverty, inequity (both income &
none income,) are complex, challenge and so far the achievement
is incomplete. Here only sketchy presentation for exposure

Traditional Economic Measures
1. GDP: is the market value of all final goods and services produced within a country in a given
period of time
Y=C+I+G+NX
2. GNP: is the market value of all final goods and services produced by permanent residents of a
country in a given period of time
GNP= GDP+ net factor income from abroad
3. Common alternative index is the rate of growth of income per capita or per capita
GNP
a. Per capita GNP: is the per-head value of final goods and services produced by
permanent residents of a country in a given period of time. It is converted to
USD using the current exchange rate. This measure (Per capita GNP/GDP/ are
exaggerated by the use of official foreign-exchange rates to convert national
currency figures into U.S. dollars. This conversion does not measure the
relative domestic purchasing power of different currencies.
b. Purchasing Power Parity (PPP) Measure: Researchers have tried to compare
relative GNIs and GDPs by using purchasing power parity (PPP) instead of
exchange rates as conversion factors. PPP is calculated using a common set of
international prices for all goods and services. the number of units of a
country’s currency required to purchase the same of basket of goods and
services in the local market that a US $1 would buy in the USA. Under PPP,
exchange rates should adjust to equalize the price of a common basket of
goods and services across countries. Penn World Tables rank countries using
the PPP method.
Human Development Index (HDI)
1. Initiated in 1990 and undertaken by UNDP in its
annual series of HDRs. So first HDR published by
UNDP since 1990
2. HDI is based on 3 goals & hence measures of quality
of life
a. Longevity: Life expectancy at birth (index of long and
healthy life)
b. Index of knowledge: (2/3) adult literacy rate + (1/3)
(secondary and tertiary gross enrollment ratio)
c. Standard of living : GDP/capita (index of a decent standard
of living).
3. Weighted average: HDI= 1/3(Income index)+1/3(Life
expectancy index)+1/3(education index)
Human Development Index
Ranks 175 countries into 3 groups
a. Low human development = 0.00-0.099
b. Medium human development = 0.5-0.799
c. High human development = 0.80-1.00
Country HDI GDP rank-HDI rank
Low HD: Tanzania 0.436 +21
Medium HD: Turkey 0.735 -21
High HD: Canada 0.936 +3

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Development Economics

12/25/2023 Tsegabirhann W.Giorgis Abay, CBE, AAU 1

• The US was the only major power whose

12/25/2023 Tsegabirhann W.Giorgis Abay, CBE, AAU 4

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1. Political consolidation as prime objective; no

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1. Developing countries, notwithstanding the enormous strides

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GNP Per Capita (US $)

Country Exchange rate PPP

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Governments have the duty of respecting,

• In 1966, two separate treaties, covering almost entirely all the

12/25/2023 Tsegabirhann W.Giorgis Abay, CBE, AAU 28

• Is development economics concerned to bring about

2 Achieve universal primary education

3 Promote gender 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 : Trading & Financial

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2 Promote Economic Growth & Decent Jobs within Planetary Boundaries

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“Development is a multi dimensional process of

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• Why as societies, should we bother about the

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There are eight significant differences in initial conditions that

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1. Physical object gap: factories, roads, and modern

• China’s average income was just 3% of that of the

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Broad Dimensions of Underdevelopment (Multi-dimensionality of

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Globalization and the External Competitive Environment-2

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• Too many manifestations, dimensions, symptoms,

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Country HDI GDP rank-HDI rank

Low HD: Tanzania 0.436 +21

Medium HD: Turkey 0.735 -21

High HD: Canada 0.936 +3

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