DEBRE BERHAN UNIVERSITY

COLLEGE OF AGRICULTURE AND NATURAL

RESOURCE
Department of Agricultural Economics
Course Title: Development Economics
Course Code: AgEc3052

By Alelign A.
 Chapter One: Introduction

1.1. Definition and Current Interest in Development Studies

 Different countries enjoy different levels of economic prosperity and levels of

development.

 In the current world there is a wide gap in the standard of living between

countries and as well as between individuals within a country.

 It may be difficult to get the right answer as to why such disparity exists, try to

look for solutions which may help to bridge or reduce the gap.

 Generally, based on their levels of economic development, countries may be

categorized as follows.
 Developed countries (DCs) – those which have developed economies with
high living standards highly industrialized, modern and rich countries;
 Less developed countries (LDCs) – those which are in the process of
development and have low living standards.
 They are also referred as or under developed, less advanced, less
industrialized countries with more of agricultural and traditional
economies.
 High income, middle income and low income countries based on the per
capita income of their respective citizens which depend on the sizes of
economy and population of each country.
 There is also grouping of countries as; first world, second world and third
world counties based on levels of economic development.
 Economic development is the prime objective of the developing
countries, because their economies are only in the early stages of
transformation, currently operating below capacity and didn’t satisfy the
needs of their people.
 Thus, there is an urgent need in these countries for accelerated economic
development, solve their acute socio-economic problems and improve
the quality of lives their poverty stricken people.
 As such development economics is the study of the economies of
developing countries.
 Development economics as separate field of economics emerged very
recently.
 After the second WWII, many countries of Africa &Asia became
 Following these the “dualism” which referred as “developed & developing”
economies came into being in the global economy with a number of other
complications.
 These force some economists to look into relevant ways of describing the
new phenomenon.
 Development economics came out of an effort in studying economies of these
developing countries with a particular refers to the situations they are in.
 So, development economics is a field of economics that is rapidly evolving
its own distinctive analytical and methodological identity.
 It often draws on relevant principles and concepts from other branches of
economics such as Labor Economics, Micro Economics, Macro-Economics,
Public Finance, and Monetary Economics in either a standard form or in a
modified form.
 1.2. Nature of Development Economics
 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 an ever-expanding range of goods
and services.
 Traditional neoclassical economics deals with an advanced capitalist
world of perfect markets; consumer sovereignty; automatic price
adjustments; decisions made on the basis of marginal profit, and utility
calculations; and equilibrium outcomes in all product and resource
markets.
 It assumes economic “rationality” and a purely materialistic,
individualistic, self-interested orientation toward economic decision
 Political economics :- it attempt to merge economic analysis with

practical politics to view economic activity in its political context.

 Political economics goes beyond traditional economics to study 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.

 Political economics is therefore concerned with the relationship between

politics and economics, with a special emphasis on the role of power in

economic decision making.

 Development economics: has an even greater scope than of traditional
economics and political economics.
 In addition to being concerned with the efficient allocation of existing scarce
(or idle) productive resources and with their sustained growth over time,

 It 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 for the peoples of Africa,
Asia, Latin America, and the formerly socialist transition economies.
 Thus development economics, to a greater extent than traditional
neoclassical economics or even political economy, must be concerned
with the economic, cultural, and political requirements for effecting
rapid structural and institutional transformations of entire societies.
• Therefore, DE is study of how economies are transformed from stagnation to
growth and from low income to high-income status, and overcome problems of
absolute poverty.

• DE looks into the factors that account to this disparity in the level of economic
development and the possibility to close the disparity in the economies of the
poor and rich countries.

• It also tries to identify the institutional and structural set up that are pertinent to
the evolution of an economy.

• DE tries to answer questions such as:-

1. Why does affluence co-exist with poverty across different continents,

countries and across people within a nation?

2. How does traditional, subsistent, low productivity society can be transformed

3. How economic development could be measured?

4. To what extent the development aspiration of poor nations helped or

hindered by the economic condition of the rich nations?

5. Is convergence between the developed and developing economies is

possible?

6. What experiences and methods are there to accelerate economic

development of developing nation?
 Development Economics can be defined as a branch of economics that
studies about the process of transformation developing economies into a
developed one.
 It also studies the measurement of economic development; and identify key
variables that matters to development and possibility of closing gap in living
standards among peoples of developed and underdeveloped countries.
 END OF CHAPTER ONE!!!
 Chapter 2: Economic Growth and Development

2.1. Concepts of Economic Growth and Development

 There are cases where people use the term economic growth and
economic development interchangeably. But the two terms are quite
different in their scope and magnitude.

 Economic Growth refers to increase in the total output of final goods and

services in a country over a long period of time.

 Economic Development can be define as a high level and uniformly

accessible material wellbeing.

 It is the degree of betterment as well as equity in distribution of material
welfare among a society. It is not a mere increase in the level of income
 Development is more general and multidimensional process.
 It includes removal of poverty, malnutrition, access to clean water, raising life
expectancy, reduction in infant mortality, increased access to schooling, etc.
 Economic development refers to a fundamental change in the structure of the
economy.
 Structural change refers to changes in the nature and relative importance of
different sectors in the economy.
 Development is the transformation of the economy via changes that are the key
elements of the economy.
 Economic Development is the process focusing on both qualitative and
quantitative growth of the economy.
 These includes the following,
  Falling share of agriculture and a rising share of non agricultural
sector ( such as industry) in the GDP,
 Rising share of population living in urban areas,
 Increases in the rates of accumulation of capital;
 Changes in demographic compositions
 Change in employment structure, etc.

 Economic Growth is only a necessary component of economic

development but not a sufficient condition.

 The happening of economic development associated with the

overall improvement in lives or welfare of the vast majority of
people.
 Note that: Economic growth can take place without Economic
development, but Economic development can’t take place without
economic growth.
 Economic growth may occur due to the rise in the income of the few
while majorities remain unaffected.
 Economic growth is considered as an engine of development.
 Development represent the whole gamut of change by which an entire
social system,
 changed to the diverse basic needs and evolving aspirations of
individuals and social groups within that system,
 moves away from a condition of life widely perceived as unsatisfactory
toward a situation of life regarded as materially and spiritually better.
Difference between Economic Growth and Economic Development
Point of view Economic development Economic growth

Meaning Is the process of rise in national Is the rise in the value of

income by changing the everything produced in the
structure of the economy country

Focus Concerned with structural Concerned with increases in the

changes in the economy economy’s output

Outcome Development relates to growth Growth relates to a gradual

of human capital indexes, a increase in one of the components
decrease in inequality figures, of Gross Domestic Product:
and structural changes that consumption, government
improve the general spending, investment,
population’s quality of life net exports
 saving and investment along output of goods and services in the
with progressive changes in country like increase the income in
socio-economic structure of savings, in investment etc.
country (institutional and
technological changes)

Measurement  Qualitative Quantitative

 HDI,GDI, HPI, PQLI  Increase in real GDP.

Effect Brings qualitative and Brings quantitative changes the

quantitative changes in the economy
economy
 Therefore, any comprehensive definition of development
combines a number of dimensions. Which includes,
 Low levels of material poverty
 Low level of unemployment
 Relative equality
 Democratization of political life
 True national independence
 Good literacy and educational levels
 Relatively equal status for women and participation by women
 Sustainable ability to meet future needs
 Famous definition given by Julius Nyerere, the former president of Tanzania.
 Development is the building of a society in which all members have equal
rights and equal opportunities, in which all can live at peace with their
neighbours without suffering or imposing injustice, being exploited or
exploiting; in which all have gradually increasing basic levels of material
welfare before any individual lives in luxury.
Major aspects of Development:
•Economic development
•Social development
•Political development
Economic development:

•A process of improving the quality of human life through increasing per capita

income, reducing poverty, and enhancing individual economic opportunities.

 A sustained wealth creation process that works within the
framework of community parameters to maximize the efficient
utilization of community resources for economic gain for the
population of a country.
 An improvement in the efficiency of resource use so that the
same or greater output of goods and services is produced with
smaller inputs.
 Economic development includes:
 economic growth
 changes in the distribution of income and wealth
 Fail of poverty, inequality and unemployment
Social Development
 The promotion of health, education, equality and the
strengthening of social organizations and cultural aspects.
 The ultimate objective of social development is to bring about
sustained improvement in the well-being of the individual, family,
community and society at large.
 The dimensions of social development are:
 Social welfare and security
 Social welfare: the overall well-being of a society and the
provision of a wide range of social services for the benefit of
individual citizens.
 Social security: concerns to social protection including poverty, old
age, provision of retirement pensions, disability insurance, medical
care, unemployment insurance, basic needs, education etc.
 Generally related to social development ,
•Health
•Education
•Housing
•Water and sanitation
•Urban and rural development
•Social institutions and organizations
•Land reform, and
•Cultural development

• These and other aspects of social development are crucial.

Political development: Freedom of political expression and
participation.
 There are three important factors in political development.
 Desirability of competitive election
 Role of opposition parties, and
 Freedom to free speech
 For these factors, good governance and democracy; tolerance,
active participation, high level of interest and information, and
support for the state from citizens part are very important aspects
of political development.
 We can conclude that development at least must comprise of
fundamental human needs (to all societies and cultures at all
times).
 2.2. Core Values of Development

 There are three basic components or core values serve as a

conceptual basis and practical guideline for understanding the
inner meaning of development.

 These core values are sustenance, self-esteem, and freedom

represent common goals sought by all individuals and societies.

 Let us therefore examine each in turn.

1. Sustenance: the ability to meet basic needs
 The basic goods and services, such as food, shelter, health,
protection that are necessary to sustain an average human being at
the bare minimum level of living.
 A basic function of all economic activity is to provide as many
people as possible with the means of overcoming the helplessness
and misery arising from a lack of food, shelter, health, and
protection.
 To this extent, we may claim that economic development is a
necessary condition for the improvement in the quality of life that
is development.
2. Self-esteem: to be a person
 A sense of worth and self-respect, of not being used as a tool by
others for their own ends.
 All peoples and societies seek some basic form of self-esteem,
although they may call it authenticity, identity, dignity, respect,
admiration, recognition.
 •The feeling of worthiness that a society enjoys when its social,
political, and economic systems and institutions promote human
values such as respect, identity, honor, dignity, integrity, and self
determination.
3. Freedom: 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.

 Freedom encompasses: freedom from servitude (nature, misery,

oppressive institutions, beliefs, other people etc) expanded range of
choices various components of political freedom, including personal
security, the rule of law, freedom of expression, political
participation, and equality of opportunity.

 Development is a process of improving the quality of all human

lives and capabilities by raising: people’s levels of living ,self-
 Objectives of Development
 Development in all societies must have at least the 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 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
wellbeing 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.
 2.3. Measuring Economic Growth and Economic Development:
Key Indicators
1. GDP:-The first simple way of measuring Economic growth is give as follows

 Suppose we have GDP figures for two periods; Y t initial GDP for year t and

Yt +1 GDP in the next period, for year t + 1

g = ∆Yt / Yt, ------------1

g – Growth rate of GDP,

Yt = initial GDP and ∆Y – is change in GDP

∆Yt = Yt +1 - Yt

 The GDP growth rate as state in equation one will be misleading unless a number of
adjustments are made into it.
 A. The first adjustment to be made is on price(RGDP).

Some of the major indicators of development may include;
• Increased access to economic resources: this related to reduction in
unemployment, poverty and inequality in distribution.
• Increased life expectancy: the ultimate goal of human being is to
enjoy a long life.
• This is related with access to basic health services and good living
environment among other things.
• Increased access to education
• Increase in per capita income: refers to improvement in living
standards of the people, average.
 Human development Index (HDI)
 HDI - is a development index introduced by United Nations
Development Program (UNDP) to measure and compare human
development status of countries.
 It is a comprehensive and holistic measure that attempts to rank
countries on a scale between zero (lowest) to one (highest).
 The HDI is computed based on three goals or end products of
development: life expectancy, education and per capita growth indices.
 The development performance of each country is measured with respect
to the achievements made in these indicators and summarizing this, a
single index – HDI - is constructed for each country.
 a) Life Expectancy Index (LEI)
• UNDP sets the maximum goal for life expectancy to be attained as 85
years while the minimum as 25 years.
• Then LEI shows by how much a country achieved expectancy from
the minimum 25 to the maximum 85 years.
• Suppose L denote the life expectancy that a country currently
achieved. LEI is computed as:
LEI = (L – 25) / (85 - 25) = (L – 25)/ 60; 0 ≤ LEI ≥ 1

• If LEI = 0, implies that country achieved nothing in improving the

longevity of life, the current average life (L) is simply 25 years.
 If LEI = 1, imply that country achieved the maximum longevity. L =
85 years.
 This index is a proxy of access in basic health care services that the
country has for its population

b) Educational index (EI) - this index measures knowledge and

capacity of citizens to access information.
 This is computed from the weighted average of adult literacy rate
in percentage weighted by 2/3, and the combination of school
enrollment rate at primary, secondary and tertiary level weighted
by 1/3. It is assumed the maximum achievement both for adult
literacy and school enrolment rates are 100%, the minimum 0%.
 Let’s denote currently achieved enrollment rate by Ɍ (people
currently attending schools of different levels) and adult literacy
 Then education Index will be;
EI = Ɍ/3 + 2A/3 = (Ɍ + 2A) / 3 ; 0 ≤ EI ≥1

c) Per capita income index (PCIX) - this measure improvement in

living standards of people on average.
• It stated that the minimum adjusted per capita income (denoted by
ӯmin) is 100 dollar and the maximum per capita income (ӯmax) be
achieved at 40,000 dollar.
• If denotes the currently achieved level of per capita income, then
income index measures how far a country goes to close the gap
between the minimum and maximum income.
• Assuming is currently achieved level of PCI, then we have

PCIX = ; 0 ≤ PCIX ≥ 1.
• Note that the indicator for living standards is based on the
logarithm of adjusted per capita income.
 HDI – it is obtained the average of the sum of the three indices
computed separately above.
 HDI =

0 ≤ HDI ≥1
 Human Development Index creates for each country a final
coefficient (number) its values range from 0 to 1.
 HDI ranks countries into four groups:
 Low human development (0.0 to 0.499),
 Medium human development(0.50 to 0.799),
 High human development (0.80 to 0.90), and
 Very high human development (0.90 to 1.0).
 Exercise; - Suppose we have the following information on the
basic indicators of a country; current Life expectancy 70 years,
Adult rate 60%, School enrollment rate 48% and Adjusted PCI

$ 2000. Compute HDI of the country.

 LEI = ( 70 -25) / (85 - 25) = 45/60 = 0.75
 EI = [2*0.60 + 0.48] / 3 = 1.68/3 = 0.56
 PCIX = [log 2000 – log100] / (log40000 – log100) = (3.301– 2) /
(4.602 - 2)

= 1.301 / 2.062 = 0.50

 HDI = = 1.81/3 = 0.603
 Under which group this country include?
 This country is grouped under medium income level country.
 LIMITATIONS OF HDI

• The three indicators are not the only indicators of human

development. There can be others like infant mortality, nutrition,
equality, etc.
 The weighting scheme for calculating the four components of HDI
seems arbitrary.
• The HDI measures relative rather than absolute human
development so that if all countries improve their HDI value at
the same weighted rate.
• A country having high HDI may shift the focus from the
high inequality unemployment and poverty found within it.
 2. PHYSICAL QUALITY OF LIFE INDEX (PQLI)
 It was invented by M.D. Morris in 1979.
 He constructed a composite Physical Quality of Life Index (PQLI)
relating to 23 developing countries for a comparative study.
 He combined three component indicators of infant mortality, life
expectancy at age one and basic literacy at age 15 to measure
performance in meeting the most basic needs of the people.
 The PQLI shows improvement in the quality of life when people
enjoy the fruits of economic progress with increase in life
expectancy (LE), fall in infant mortality rate (IMR) and rise in
basic literacy rate (BLR).
• Each indicator lends itself to international comparison.
• Taking Gabon’s infant mortality rate of 229 per thousand live births as the worst
rate in 1950, Morris sets it at 0. At the upper end, the best achievement is set at 9
per thousand for the year 2000.
• Again, taking Vietnam’s life expectancy at age one as 38 years in 1950, Morris
sets it at 0 of the life expectancy index. The upper limit is set at 77 years for men
and women combined for the year 2000.
• Lastly, the basic literacy rate at 15 years is taken as the literacy index.

Table : Maximum and minimum values of components

Dimension Maximu Minimu Ra

m m nge
Infant mortality rate 229 9 220
Life expectancy at age one 77 38 39
Basic literacy rate 100 0 100
 On the basis of the values of the component indicators given in
the above Table, we can construct the PQLI on the basis of the
three Indices in the following manner :

 Calculate the PQLI for India on the basis of 2001 Census data for
these variables : IMR = 67, LE = 65 years, and BL = 65%.
 Limitations of PQLI
 The PQLI tries to measure “quality of life” directly rather than
indirectly. But it has its limitations.

1. Morris admits that PQLI is a limited measure of basic needs.

2. It supplements but does not supplant the GNP.

3. It does not explain the changing structure of economic and social

organisation. It does not measure economic development.

4. Similarly, it does not measure total welfare of social welfare.

5. Morris has been criticised for using equal weights for the three
variables of his PQLI which undermine the value of the index in a
comparative analysis of different countries.
 Other types of measurement: Read by your self for further
information.
• The UNDP’s “Human Poverty Index”
•UNICEF’s “Child-Welfare” Index
•The “Happy Planet” Index
•The UNDP’s “Gender Empowerment Measure”
•The “Global Peace Index”
•Freedom House’s “Freedom Rankings”