1.00
Economic Development: A Global Challenge
The World consists of over 200 countries, a patchwork of different
cultures, religions, legal systems and economies. Despite these
differences most policy makers have a common objective: to improve
the living standards of their citizens.
"I guess what we mean by economic development is a situation where
people are really able to fulfill their true potential, without
having lives shortened by ill health ot by living in severe
poverty ' Dr. Anthony Venables LSE
"Economic Development can also be defined by the standard of
living: how rich are poeple, not only in monetary terms but in all
aspects of their lives " Dr. Timothy Leunig LSE
In this film we wil look at the dynamics of economic development:
what makes it happen? And why do so many countries lag so far
behind
3:00
Measuring Economic Development
It's important to ask what we mean by high living standards and
how we measure a societies economic development. Most people agree
that a high living standard includes long life expectancy,, no
poverty , low child mortality, access to clean drinking water,
basic healthcare and education.
It is useful to have an single indicator to help assess the degree
of economic development in a country . GDP is such a measure.
This map shows GDP per capita for the year 200o at PPP (purchasing
power parity) which takes into account differences in the living
costs in the different countries. For this reason few countries
are shown with a per capital income of less than a dollar a day.
" A better meausure might be the HDI (Human Development Index) ,
used by the UN, and that not only includes income per head, but
also measures of longevity, and measured of education" Dr.
Timothy Leunig LSE
There are huge variation in income across countries in the world
today and they refelct different levels of economic development.
The range of development is so huge that 80% of world income is
earned by 10% of population of its population, while the remaining
90% of world population currently generates only 20% of world
income. So the standard of living of America, with a per capita
income of $40.000 is world apart from for example Ethiopia with a
per capita income of $800. Indeed some estimates suggests that
almost half of the worlds population lives of less than a dollar a
day. What could possibly explain these differences, and how could
these inequalities be reduced?
5:30
Determinants of Income and Growth
When discussing economic development. it is important to
distinguish between the level of per capita income today and the
growth rate of per capita income over time. For example in 2003,
some of the countries with the highest income levels in the world
were Norway, Canada, the U.S, and Switzerland. BUt the highest
growing countries, mostly included low-income countries, such as
Angola, Chad, China and Mongolia. There is nothing that prevents
poor countries from growing faster than rich coutnries. In fact,
there are many reasons why we would expect this to take place.
Income levels and growth rates vary across time and across
countries. To understand these patterns we need to know what
determines income and growth levels.
The answer is surprisingly simple: Productivity, or the number of
goods and services produced by each worker per hour. Since all
goods and service generate income when they are sold, higher
productivity translates in higher per capita income. If an
American worker is more productive than a worker in Bangladesh,
then the living standards, as measured by input per capita should
be higher in America. Likewise, high growth in productivity
translates into high growth rate of income. The productivity of a
Taiwanese worker has increased more than that of an American
worker over the last few decades, and hence Taiwan has experiences
higher growth than the US. But what the determines productivity?
"In the short run the 3 majot determinants of productivity are:
the skills of the people, the number of machines that they have,
and the quality of those machines, which is another way of saying
technology"Dr. Timothy Leunig LSE
Physical Capital
Physical Capital Refers to structures and equipment used in
production. The more equipment each worker has, the easier it is
for him or her to produce more output per hour. One important
charactertics of capital is that it's produced. so a country can ,
in effect, choose how much it wants to increase its capital stock
each year. The increase in the capital stock is what generally
called investment. The level of investment is related to the
savings rate of a country, which tells us how much of total income
is allocated consumption and how much is saved, and hence
available for the production of capital. A higer savings rate
increases productivity and thus income, but does not permantly
increase the growth rate.
" East Asian Countries built up their manufacturing industries
mainly of the basis of very high domestic savings. In China for
example the savings rate is about 40% of GDP, so there are
enormous domestic savings going into investment.
It is still to some extent a consensus among policy makers that a
country can achieve higher economic growth and increase its living
standard more rapidly by increasing investment. But capital is
likely to exhibit diminishing returns. meaning the first machine
provided to a worker makes him or her much more productive but
with each additional machine provided the worker's additional
output declines. If the return to capital diminishes the growth of
income will at first increase but then subside as the increased in
productivity level off. Due to the diminishing returns of capital
an increase in the capital stock leads to greater improvement in
productivity when the initial stick is low then when it is high.
This suggests that poor countries should grow faster than rich
countries and would explain why countries such as south Korea have
grown faster than the US. Although the percentage of income going
to investment has been approximately the same over the past 40
years.
Human Capital
Human Capital refers to the stock of knowledge embodied in a
person due to education, training and experience. Highly skilled
labor produce more per hour than low skilled ones. This is an
important reason why developed countries exhibit higher
productivity and higher living standards.
"Human Capital makes people more productive than people would
otherwise be. They would be able to operate different machines
because they can read and write" Dr. Wilhelmus Spanjers, Kingston
University.
Developing countries on the other hand have trouble providing
education to all their citizens and suffer from a low stock of
human capital.
In addition, migration from skilled workers from developing
countries to developed countries, the so-called brain drain, tends
to further reduce human capital in poor countries.
However, just like physical capital, human capital is likeley to
exhbit diminishing returns, so increases in human capital are
unlikely to permanently raise the growht rate of income, but will
definitely increase the overall income level and hence the
standard of living.
Technology,
Finally the most important engine of sustained growth is
technology. Technology is broadly defined as "the bleuprint of the
prodcution process". The better the technology, the more output
is produced, so technological innovation leads to higher
productivity. An explostion of technological advances occured
during the industrial revolution. Innovation, such as the steam
engine, electricity and external combustion machines, all made
workers more productive and spurred a high growth rate. Unlike
physical and human capital technoligy does not exhibit diminishing
returns. Economist today agree that the most important determinant
of economic growth and development is technological innovation.
But the diffusion of tecnology from rich to poor countries is
slow. This lack of technology sharing could potentially explain
the some of the persist growth differentials across countries.
"The main way in which developing countries can succeed in
development is to start with the right sectors. There is no point
whatsoever in aiming for high tech goods. You need to start with
those things that you can do best, which is almost always
textiles. SO we can see that China started off with textiles, it's
now moved on to basic engineering such as microwaves"
13:00
Causes of underdevelopment
Given what we know about what factors determine economic
development and growth, why are some nations stuck at low levels
of development?
No one argument can yet explain underdevelopment, but it's helpful
to examine some differences between rich and poor countries.
Geography
Some countries' geography helps their development. For many
countries, their physical environment provides natural resources,
such as oil and minerals and fertile land for agriculture. Other
countries experience harsh seasons, repeated natural disasters or
barren landscapes from which they must generate food and shelter,
let alone income. An additional geographic characteristic considered
key to development is proximity to a large economic center. Many
of the largest growing asain countries rely on Japan for FDI as
well as a key market. Whereas landlocked or isolated countries
tend to experience less development
" Developing countries may not be able to serve a big market" and
therefore they may have to focus on small-scale production. In
this case they may not be as efficient as industrialized
countries, and this may hamper their development" r. Wilhelmus
Spanjers, Kingston University.
"Africa suffers a unique disadvantage that more places in Africa
are far from the coast and not surprisingly Africa is less
developed than anywhere else in the world "Dr. Timothy Leunig LSE
Geography also affects ED because it influences the social and
political framework within which governments try to develop. Some
countries receive foreign development assistance because of their
political or strategic importance for the major powers. While
other cannot focus their economic resources on economic
development beacuse their physical location leaves them exposed to
their neighbours wars or refugees.
History
The past influences the present and it is clear that most of the
less developed countries were once colonies.
So some scholars have argued that the history of colonialism
scarred regions or entire regions in ways that prevent healthy
economic development. They point to the negative consequences og
colonial practices, such as the extraction of precious resources,
including labor as slaves, the reorganization of agricultural
production. the forced creation of new countries and the
imposition of political structures in congress to the local
culture. In some cases this institutional underdevelopment can be
traced back to a colonial experience.
In many other however the underdevelopment is better explained by
more recent political or economic dislocation suchs as leaders
pursuing war or self-enrichment at the expense of the general
populations welfare. Angola is an example of a country still
recovering from its colonial past. It was both in the grip of an
anticolonial war and a civil war when its colonial master,
portugal , hastily granted its independence in 1975. Rather than
supervising elections Portugla abandoned the country without
formally handing over control to a succeeding government.
Unprepared for nationhood and beset by violent factions and in
extreme poverty Angola became a battleground for international
cold war rivalries. The country rarely had peace until the death of
a rebel leader in 2002. But as in many former colonies its open
to debate what’s the cause of Angolan poverty today. Is it history
or bad governance since independence that has squandered the
countrie’s vast mineral wealth.
Some scholars today conclude that the capitalist system today
creates a neo-colonial system of a northern core and southern
periphery. They hold that because economic benefits accrue to the
most productive the states predominantly in the northern
hemisphere tend to get richer while those in the southern
hemisphere do not.
While this broad argument makes sense there are far to many
exceptions: many high growth countries were once colonies,
including Korea Taiwan and India, as were many high income
countries.
"Some countries that were once colonies have done remarkably well,
the United Stated is an obvious example, Canada and Austriala are
other examples. It isn’t the case that having been a colony
Necessarily means you cannot make the transition/"Dr. Timothy
Leunig LSE
Conversely not all poor countries were once colonies. As a result,
while colonialism undoubtedly influenced the development path of
many countries, like geography it offers only a partial
explanation of the persistence of underdevelopment. What scholars
recognize form history is that in many less developed countries,
state and market institutions, such as a fair judiciary, well
established property right and legal credit institutions are not
yet functioning well.
"But then you look at a country like China fastest growing economy
in the world that doesnt have proper democracy just yet"
For some, violence, political instability, or sheer corruption has
prevented the establishment og the lgal and institutional
infrastructure, which must be in place before real economic
progress can occur. This has been the case with Haiti, one of the
least developed countries in the Western Hemisphere and one of the
poorest in the world. Haiti's economic stagnation is largely the
result of political instability. It continues to suffer the
consequences of a coup in 1991 and domestic and foreign investment
has been slow to return
20.00
While there are concerns about the earths ability to provide for
an ever-growing population, the more pressing issue regarding ED is
the distribution population increases. Poor countries tend to
have much higher population growth rates than rich countries, so
one of the solutions is increased ED in poorer countries Today in
much of the advanced world, populations are growing only through
immigration, their birth rates are at or below replacement rate.
As a result Appr. 90% of population growth takes place in poor
developing countries. How does this impact development. First it
means that an increasing proportion of the world children are
being born into environments in which their families and their
government have fewer resources with which to provide for their
need. In Economic terms, a large proportion in individuals,
coupled with the low quality of their education system is
detrimental to the stock of human capital, and child labor is
likely to become commonplace.
What is the negative Malthusian view? Rapid population growth
presses upon resources, leading to environmentla degradation,
generating political instability, and being an inhibitor to
growth.
22.00
One of the most striking differences between developed and
developig countries is the distribution of income. Poor coutnries
tend to exhibit greater inequality than rich countries. For
instance the richest 5th of the population receive over 60% of
income, while the poorest 5th receives less that 4%.
What cause income inequality?
Kuznet was the first to analyze the relationship between income
and inequality. He found that poor countries displayed greater
income inequality than rich countries. But he also found evidence
that extremely poor countries had a more equal distribution than
less poor countries. So he concluded that income inequalities
increases at the early stages of development but falls at the
later stages of development.
The Kuznet Curve shows and upside down U-shaped realtionship
between income and income inequality. This probably due to the
fact that an economy does not grow equally across sectors. The
manufacturing sectr might grow faster than the agricultural sector
. The benefits of this growth go primarily to the workers in the
manufacturing sector, and hence income inequality increases. But
since manufacturing goods increase all goods in the economy, the
demand for agricultural products eventually rises, and farmers
income increases, as a result income inequality falls in the later
stages of development.
Some of the most unequal societies in the world are to be found in
Latin America. Brazil is the most unequal in the world.
Income inequality can also affect future economic development if
it reduces the average savings rate and if it leads to demands
for more equitable distrubution. If a countries displays a great
deal of large wealth and income inequality, policy makers may be
pressured to redistribute wealth and income through taxation or
other measures or trhogh a one-off distrubution of wealth like
land-reform. The problem with taxation is that it distorts the
incentive to save and thus has a detrimtal effect on growth. The
problem with land reform, is that it requires gret political
determination.
26.00
Production Structure and the Dual Economy
Another striking difference between poor and rich countries is the
size of the rural sector. In poor countries most of the population
lives in the countries side, while in rich countries most of the
population lives in the cities. According to the World Bank more
than 30% of output in low income countries comes from Agriculture.
This figure is only 1-7% in rich countries. While 72 % of the
labor force lives in a rural setting and only 20% in rich
countries. The physical and human capital stock machinery
fertilizers and crop management in the agricultural sector
indeveloping countries is typically very low and results in low
productivity. And because of large variability in conditions and
in world prices for staple food, agriculture is inherently risky.
Since farmers in developing countries have no other income sources
, and are living close to the subsistence level, income shocks can
be devastating. Dependant on a few vulnerable crops, and reliant
on imported oil, Ethiopia lacks sufficient foreign exchange
earnings. Agriculture makes up more that 80% of its exports, and
employs more than 85% of its population. The country has to
diversify its economy, if it isever going to escape its reliance
on foreign aid.
As the country makes the transition form agriculture to an
industrialized economy, the so-called 'dual economy' phenomenon
may arise. Since industrialization typically occurs in the urban
areas, two economies emerge within the coutnry. The rural economy
remains at the old level of development, while the urban economy
exhibits the modernizations found in more developed
coutnries.Higer wages and better labor conditions encourages
workers to move into urban areas, away from the impoverished
conditions in the rural sector. This migration has to occur when a
country industrializes
?? In the short run it can have a terrible effect when people leav
the farms and move to the towns there may not be jobs to
accomodate them.
But many poor countries experience excessove labor flows, causing
high unemployment and urban poverty. Higer urban wages and greater
job security are not only due to greater productivity and
manufacturing, but also arise because of labor unions, and because
employers are willing to pay higher wages in order to attract good
quality workers. Because of these wages labor supply exceeds the
demand for labor. So many people flowing into the cities find
themselves either unemployment or working in the service sector
where the wages are more flexible. Indeed the two most striking
characteristics of large cities in developing countries are high
unemployment and a large service sector feuturing domestic help,
shoe shining and street venders. Rapid industrialization also
results in the growth of the informal sector, meaning insecure
jobs, jobs which are badly paid, jobs where people have few social
rights.
30.00
Credit markets
A final obvious difference between rich and poor countries is that
less developed countries usually lack a well-functioning financial
system and domestic credit market. The purpose of the financial
system is to Channel funds from savers to borrowers with
productive investment opportunities. The problem facing credit
market in both rich and poor countries is that of assymetric
information, where the borrower has more information about the use
of the funds than the lender. Since the lender cannot distringuish
between good and bad credit risk they may not provide any funds at
all. YOu would typically want to have either very clear control
and knowledge about what they're doing with your money, or you
want to make sure that if they mess up you have another way of
getting your money back. Solutions include establishing property
rights and implementing a legal system forcing borrowers to repay
debts. But the legal systems of poor countries tend not to
protect property rights or reinforce payments of debt very well.
So formal credit markets in less developed countries are often
almost non-existent. Recently there have been some sucessful
attempts by non-profit organisations to provide credit to the very
poor in the developing countries, so-called micro-credit
institutions. Obviously very poor borrowers can't provide
collateral, so the banks lends very small amounts to groups of
borrowers on the condition that if anyone in the group defaults
onthe debt, none of the group can seek loans again. The most
famous example of sucha bank is the Grameen Bank, in Bangladesh,
which lends money mostly to women and claims a 98% repayment rate.
By 2004, it had 3.7 million borrowers.
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Conclusion
As we have seen a number of factors affect economic development.
Under Ideal circumstances investments in physical capital, human
capital and technology, combine to produce growing incomes. Yet
circumstances are not always ideal. Geography, history,
underdeveloped state and market institutions, population growth,
inequality, dual economies and inadequate credit markets
contribute to the persistance of widespread poverty in the world.
Goverment policies can significantly change the prospects for
development, as successes in East Asia have shown.
But there is still much that we do not know about the forces that
make countries fail or succeed, although we are much more
knowledgeable than we were 50 years ago, there is much work left
to do.
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