Chapter 1 Definitions and Concepts of Development

Transcription

1 Chapter 1 Definitions and Concepts of Development At the very beginning of this course I want you to picture in your mind how people around the world live their daily life. Try to think of how the three-quarters of the world s population who are in what so called less-developed or developing countries (LDCs) live compared to those who live in developed countries (DCs). Compare the main differences between the life of people who live in the developed countries to those who live in developing nations, in Africa, Asia and Latin America, in the following categories: Categories DCs LDCs Family Income Housing Food Education Health Jobs Age Environment Living condition disparities Size of the Economy There are more than 200 countries in the world today. They differ in population, area, and resources. o Large area and large population (China, India, ) o Large area, small population (Canada, Australia..) o Small area, large population (Japan, ) o Small area, small population. (Bahrain, Qatar, ) All countries regardless of their size have similar characteristic, which is the economic activity. Economic activity is what people do to cope Page 1 of 20

2 with the economic problem of scarcity. It leads to the production, the distribution, and the consumption of goods and services. Economic activity can be measured in many different ways. But the most useable measures are gross domestic product (GDP) or gross national product (GNP) (It is called now by the World Bank gross national income (GNI)). GDP and GNP (GNI) give estimation to the total market value of all final goods and services produced in a certain period of time. Because the sale of goods and services represent income to those who sell them, GDP and GNP are considered as indicators of national income. GDP means the production inside the country whether the factors of production are locals or foreigners. GNP means the production by local factors of production regardless of their locations. It is the GDP plus factor incomes accruing to residents from abroad, less the income earned in the domestic economy accruing to foreigners. Thus, the wages of Indians who work in Bahrain should be included in Bahrain s GDP and in India s GNP. The difference between GDP and GNP comes from the knowledge of who produce and where the production takes place. GDP and GNP are used to measure the size of the economy. There are two ways to measure GDP (GNP). Nominal GDP is measured in actual market prices (current prices). Real GDP is calculated in constant base-year prices. The base-year is selected by government officials and it changes from time to time to reflect the new reality. The potential GDP represents the maximum amount the economy can produce while maintaining reasonable price stability. Potential output is also sometimes called the high employment level of output. Page 2 of 20

3 When an economy is operating at its potential, unemployment is low and production is high. Potential output is determined by the economy's productive capacity which depends upon the inputs available (capital, labor, land, etc.) and the economy's technological efficiency. Potential GDP tends to grow slowly and steadily because inputs like labor and capital and the level of technology change quite slowly over time. By contrast, actual GDP is subject to large business-cycle swings. If spending patterns change sharply, economic policies (like fiscal and monetary policy) can affect actual output quickly, but the impact of policies on potential output trends operates slowly over a number of years. During business cycles, actual GDP departs from its potential. When the real output declines and the gap between actual and potential is small the economy is in recession. When the real output declines and the gap between actual and potential is large the economy is in depression. Living Standards Living conditions or standards of living can be measured by taking the ratio of the country s income and its population. This measure, where we divide the total value of national output (income) of a country on all citizens, is called per capita income or GDP (GNP) per capita. This measure shows the share of each individual. Using this measure shows that some countries have low or middle income (although some of their population is very rich) while other countries have high income (although some of their population is very poor). Is this a good measure for development?? Page 3 of 20

4 World Bank Classification The world bank classifies all its member countries (185 of them) and all economies with a population of 30,000 or more (another 24; altogether 209) by various classification. One of the most commonly referred to classifications is by per capita income {GNI (previously GNP) per capita}. There are four classifications based on income - high income, upper middle income, middle income and low income. The current basis of the classification is data from Per capita Incomes below $935 fall under low income economies. 2. Per capita Incomes between $936 to $3,705 falls under lower middle income economies. 3. Per capita Incomes between $3706 to $11,455 is classified as upper middle income economies 4. above $11,455 of per capita GNI qualifies as a high income economy. The World Bank, further divides high income economies into two - OECD economies and non- OECD economies. OECD is the Organization for Economic Cooperation and development Classification by income does not necessarily reflect development status. Problems in using per capita income classification: 1. It does not include non-market activities. Because we use market prices to value the goods that are being sold, only market activities are included in gross national income (GNI) per capita. Goods and services that are not marketed are not included. Page 4 of 20

5 It excludes what we produce for ourselves at home such as preparing meals, doing laundry, gardening, etc. It also excludes any activity that has no price such as friends helping each other. Most of agricultural production in less developed countries is not included in the GNI per capita because farmers consume what they produce (self-sufficient) so most of their production does not reach the market. 2. It also excludes economic activity that people hide and do not report to government to avoid taxes and other government regulation or because the activity is illegal. Official statistics ignore this underground economy, which is very substantial in some countries. 3. Does not give the distribution of income. GNI per capita is only a measure of the average level of output per person in the economy. Economic well-being depends both on the size of the income as well as the distribution of the income. 4. People care about their quality of life. A high in GNI per capita may not be all that great if coupled with lack of faith, lack of freedom, insecurity, low literacy, low life expectancy, and low environmental quality, etc. 5. Environmental damage is not deducted from GNI per capita. 6. Health and life expectancy are not directly included in GNI per capita. 7. Political freedom and social justice are not included in GNI per capita. 8. Leisure time, a valuable component of an individual s welfare, is not included in GNI per capita. 9. Governments overstate or understate GNI for different reasons. Page 5 of 20

6 10. Difficulties in collecting data in LDCs. 11. It can be misleading since it does not consider differences in the cost of living. Purchasing Power Parity (PPP) To avoid the problems of fluctuating currency exchange rate when comparing per capita GDP levels between countries, and to account for the differences in the cost of living, Two prominent economists of the University of Pennsylvania (Summer and Heston) in collaboration with the UN established The international comparison project (ICP) to provide an alternative to direct conversion based on exchange rates. ICP publishes Penn World Tables that calculate a purchasing power parity (PPP) index. As it is used by the international organizations, purchasing power parity (PPP) of a country s currency is the number of units of that currency required to purchase the same representative basket of goods and services that a US dollar would buy in the US. This index allows for a more direct comparison of living standards in different countries. A simple example can illustrate the concept. GDP per person in Nigeria in 2003 was about $370 while GDP per person in U.S. in 2003 was about $ However, this number is misleading because $370 in Nigeria can buy a lot more goods and services than $370 in the U.S. would because prices are much lower in Nigeria. GDP per capita measured at PPP, i.e. the per-capita value of Nigerian GDP using a common set of prices (typically U.S. prices) is about $1000. In other words, the average Nigerian earns about Page 6 of 20

7 $370 a year, which because of the fact that prices are lower there than in the U.S., is equivalent to earning $1000 in the U.S. So, PPP prices are used to construct GDP data that can be used to make more valid comparison between one country and another. While using PPP exchange rates for comparison is an improvement over using actual exchange rates, it is still imperfect, and comparisons using the PPP method can still be misleading. 1. Comparing standards of living using the PPP method implicitly assumes that the real value placed on goods is the same in different countries. In reality, what is considered a luxury in one culture could be considered a necessity in another culture! The PPP method does not account for this. 2. A PPP exchange rate varies depending on the choice of goods used for the index. Hence, it is possible to deliberately or accidentally bias a PPP exchange rate by the choice of the basket. 3. PPP could also have difficulty accounting for differences in quality between goods in one country and equivalent goods in another. Human Development Index The latest and most ambitious attempt to analyze the comparative status of socioeconomic development in both developing and developed nations systematically and comprehensively has been undertaken by the United Nations Development Program (UNDP) in its annual series of Human Development Reports. The counter-piece of these reports, which were initiated in 1990, is the construction and refinement of the Human Development Index. Page 7 of 20

8 The Human Development Index (HDI) is an index measuring national socioeconomic development used to rank countries by level of "human development". The HDI is a summary composite index that measures a country's average achievements in three basic aspects of human development: 1. Population health and longevity as measured by life expectancy at birth. 2. Knowledge and Education, as measured by the adult literacy rate (with two-thirds weight) and the combined primary, secondary and tertiary gross enrolment ratio (with one-third weight). 3. Standard of living as measured by real GDP per capita adjusted for the differing purchasing power parity (PPP) of each country s currency to reflect cost of living. Using these three measures of development, the HDI ranks countries into four groups scaled between 0 (lowest human development) and 1 (highest human development). 1. Very high human development (0.900 to 1.0). 2. High human development (0.800 to 0.899). 3. Medium human development ( to 0.799). 4. Low human development (0.0 to 0.499). Calculation of HDI is an evolving methodology, and comparisons should not be made between years (when methods might have varied) but can be made between countries, as issued by the same source. The strength of this measure is that it looks to development as multinational; but the concept of human development is much broader than what can be captured in the HDI, or any other of the composite. The HDI, for example, does not reflect political participation, human Page 8 of 20

9 poverty or gender inequalities. HDI and the other composite indices can only offer a broad proxy on these issues. Limitations of HDI: 1. It does not take into account the other aspects of development so it is subjective. 2. It does not give the distributions of income. GDP per capita, which is the third component of HDI, does not address the chronic and desperate level of income inequality in developing countries 3. It includes only the marketing activities. 4. Difficulties in collecting data in LCD s 5. It is arguable. THE NATURE OF DEVELOPMENT ECONOMICS Traditional neoclassical economic is concerned primarily with the efficient, least-cost allocation of scarce resources and with the optimal growth of these resources over time. Political economy is concerned with the relationship between politics and economics, with special emphasis on the role of power in economic decision making; i.e., how certain groups of economic and political elites influence the allocation of scarce productive resources now and in the future, either exclusively for their own benefit or for that of the larger population as well. Development Economics is concerned with efficient allocation of scarce resources as well as the economic, social, cultural, and political requirements for affecting rapid structural and institutional transformations of entire societies in a manner that will most Page 9 of 20

10 efficiently bring the fruits of economic progress to the broadest segment of their populations. Although development economics focuses on the understanding of the problems of economic and social progress in poor nations, but the values, attitudes and institutions (domestic and international) play important role in the overall development because economic investigations cannot be considered separately from their institutional, social, and political contexts, especially when one must deal with the human dilemmas of hunger, poverty, and ill health that plague so much of the world s population. The following is a comparison of some of the economic issues and how they are reflected in both DCs and LDCs DCs LDCs Markets perfect Highly imperfect Information Prices Equilibrium Decisions Assumptions Highly available to both producers and consumers Adjust automatically and lead to equilibrium between demand and supply Exist in all product and resource markets. Made on the basis of the marginal Economic rationality and a purely materialistic, individualistic selfinterested orientation and profit maximization. consumers and producers have limited information Do not equate demand and supply Potential for multiple equilibria rather than single equilibrium are common, and disequilibrium situations often prevail. Dominated by political and social priorities. Family, clan, religious or tribal consideration may take precedence over private, selfinterested utility or profitmaximizing calculations Page 10 of 20

11 MEANING AND NATURE OF DEVELOPMENT Because the term development may have different meanings to different people, it is important to define what exactly we mean by this terminology, so we can distinguish between countries accordingly. At the end of this chapter, when we refer to the development concept we mean sustainable human development concept. Economic Growth: Economic Growth is a process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income. It is often measured by rate of change of GDP (GNI) or the per capita output (GDP or GNI per person) (percent increase in GDP per year, or GDP per capita per year) The growth of GDP per capita or GNI per capita is a better indicator of growth than GDP or GNI because if the population grows faster than output, output (GDP or GNI) could grow while output per person (GDP or GNP per capita) falls in this case it is misleading to say growth is occurring. Note that it is possible for a nation s economic output per person to increase (growth), but a large number of people can have their income decrease at the same time if the increase in output is earned by a small percentage of the population. For example, if 80% of the population is in traditional agriculture and 20% are in the modern sector then the average income per person can increase due to large gains by the modern sector minority but the income of the 80% of the population in the traditional sector can simultaneously be falling over time. Thus an increase in GDP per capita is insufficient to say development is occurring. Page 11 of 20

12 Refinement of the Concept Prior to the 1970s, development was nearly always seen as an economic phenomenon in which rapid gains in overall and per capita GNP growth would either trickle down to the masses in the form of jobs and other economic opportunities or create the necessary conditions for the wider distribution of the economic and social benefits of growth. Problems of poverty, discrimination, unemployment, and income distribution were of secondary importance to getting the growth job done During 1970s and 1980s, economic development came to be redefined in terms of reduction or elimination of poverty, inequality, and unemployment within the context of a growing economy. The experience of 1960s and 1970s until now have showed that many developing countries experienced relatively high rates of per capita income but showed little or no improvement or even actual decline in employment, equality, and the real incomes of the majority of the population. Actually there was no development but underdevelopment in many African, Asian and Latin American countries. By the earlier traditional growth definition, these countries were developing; by the newer poverty, equality, and employment criteria they were not. The situation in 1980s and 1990s became worse as economic growth rate turned negative for many LDCs because of foreign-debt problems which forced many countries to cut back in their already limited social and economic programs. The concept of development has been broadened from its purely economic definition as the size and increase in income of the Page 12 of 20

13 country and its people to a larger scope that includes the human aspects and the sustainability framework. So, what is Development? "The basic purpose of development is to enlarge people's choices. In principle, these choices can be infinite and can change over time. People often value achievements that do not show up at all, or not immediately, in income or growth figures: greater access to knowledge, better nutrition and health services, more secure livelihoods, security against crime and physical violence, satisfying leisure hours, political and cultural freedoms and sense of participation in community activities. The objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives." Mahbub ul Haq Founder of the Human Development Report "Human development, as an approach, is concerned with what I take to be the basic development idea: namely, advancing the richness of human life, rather than the richness of the economy in which human beings live, which is only a part of it." Prof. Amartya Sen Professor of Economics, Harvard University Nobel Laureate in Economics, 1998 "Human development and human rights are enshrined in today s world. But they have not yet become the core values of our reality. The stability and success of any country will not be secure until we are able to spread the benefits in a more equitable manner. The obscene wealth of the few cannot be at the expense of the hungry and the destitute." Reverend Desmond M. Tutu Anglican Archbishop Emeritus of Cape Town Development (Economic, Human and Sustainable): In general, development refers to a process in which something passes by degrees to a different stage (especially a more advanced or mature stage). Thus, we can define development as Page 13 of 20

14 the process of improvement in a country's economic and social conditions through the efficient utilization of the country s natural and human resources in order to expand production, create wealth, and improve people's lives. Development is about much more than the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives that they value. Fundamental to enlarging these choices is building human capabilities the range of things that people can do or be in life. The most basic capabilities for human development include the ability: 1. to enjoy long, healthy, and creative lives, 2. to have greater access to knowledge, 3. to have access to the resources needed for a decent standard of living, 4. to have more secure livelihoods, 5. to be secure against crime and physical violence, 6. to have satisfying leisure hours, 7. to have political and cultural freedoms, and 8. to have sense of participation in community activities. Development is based on the priority of human well-being, and enlarge the range of people choices. It is both a physical reality and a state of mind. Development is a multidimensional process that involves major structural, institutional, and technological changes in the country. Page 14 of 20

15 It implies changes in economic, social, political, and cultural structures; changes in people s attitudes; changes in national institutions and reallocation of resources to a more efficient use that lead to higher income for masses of people, an increase in productive capacity, a better education, a higher standard of health and nutrition, a reduction or elimination of poverty, inequality, and unemployment, a cleaner environment, more equality of opportunity, greater individual freedom, and a richer cultural life. Development primarily comes from within; it mainly depends on internal efforts with gradual process that may take decades. Development secured the means for obtaining a better life for current generation and future generations as well. Development in all societies must have the following objectives: 1. Sustenance - The ability to meet basic needs. All people have certain basic needs without which life would be impossible, such as food, shelter, health, and security. Rising per capita incomes for as many people as possible, the elimination of absolute poverty, greater employment opportunities, and lessening income inequalities constitute the necessary but not the sufficient conditions for development. 2. Empowerment - To be able to choose. The expansion of men and women's capabilities and choices increases their ability to exercise those choices free of hunger, want, and dependence not only in relation to other people and nation states but also to the forces of ignorance and human misery. It also increases their opportunity to participate in decision-making affecting their lives and to enjoy human, economic, and political freedom. Freedom involves an expanded range of choices for societies and their members with fewer external constraints. One important factor that increases freedom of choices is wealth. Page 15 of 20

16 Wealth can enable people to gain greater control over nature and environment than they would have if they remain poor. Human freedom should include personal security, the rule of law, freedom of expression, political participation, and equality of opportunity. 3. Co-operation - Development is concerned with the ways in which people work together and interact with a sense of belonging that is important for personal fulfillment, well-being and a sense of purpose and meaning 4. Equity - The expansion of capabilities and opportunities means more than income - it also means equity, such as an educational system to which everybody should have access. 5. Self-Esteem - to be a person. Self-esteem means a sense of worth and self respect, of not being used as a tool by others for their own ends. Creating conditions conductive to the growth of people self-esteem through the establishment of social, political, and economic systems and institutions which promote human dignity and respect. These conditions can work through provision of more jobs, better education, and greater attention to cultural and humanistic values. 6. Sustainability - The needs of this generation must be met without compromising the right of future generations to be free of poverty and deprivation and to exercise their basic capabilities through persistent education and health programs, and through preserving the environment 7. Security - Particularly the security of livelihood. People need to be freed from threats, such as disease or repression and from sudden harmful disruptions in their lives. Page 16 of 20

17 Sen s Capabilities Approach The view that income and wealth are not ends by themselves but instruments for other purposes goes back in history to the Islamic teachings. Recently, one of the greatest thinkers in development and a 1998 Nobel laureate in economics, Amartya Sen argues that the capability to function is what really matters. As Sen put it Economic growth cannot be sensibly treated as an end in itself. Development has to be more concerned with enhancing the lives we lead and the freedoms we enjoy. What matters for well being is not the thing a person has- or the feelings it provides- but what use a person can and does of this thing. To make any sense of the concept of human well being in general and poverty in particular, we need to think beyond the availability of commodities and consider their use. What a person does with the commodities that they possess or control is called by Sen functionings. The functionings is what a person does (or can do) with the commodities at his own command. For example, bicycling has to be distinguished from possessing a bike. It has to be distinguished also from the happiness generated by bicycling. Freedom of choice, or control of one s own life, is itself a central aspect of most understandings of well-being. Sen identifies five sources of disparity between (measured) real incomes and actual advantages. 1. Personal heterogeneities, such as those connected with disability, illness, age, or gender. 2. Environmental diversities, such as heating and clothing requirements in the cold, infectious diseases in the tropics, or the impact of pollution. Page 17 of 20

18 3. Variation in social climate, such as prevalence of crime and violence. 4. Differences in relational perspectives. For example, to appear in public without shame may require higher standards of clothing and other visible consumption in a richer society than in a poorer one. For example, being relatively poor in a rich community can prevent a person from achieving some elementary functionings such as taking part in the life of the community even though his income may be much higher than the level of income at which members of poorer communities can function with great ease and success. For example, it is difficult to function socially in Singapore or South Korea without an address. 5. Distribution within the family. Economic statistics measure incomes received in a family. But family resources may be distributed unevenly, for example when boys get more education than girls Sen defines capabilities as the freedom that a person has in terms of the choice of functionings, given his personal features and his command over commodities. Capabilities are determined in part by income, utility, health, and education. Human beings are born with certain potential capabilities. The purpose of development is to create an environment in which all people can expand their capabilities, and opportunities can be enlarged for both present and future generations. To Amartya Sen, development should be thought of as a process during which individuals' "capabilities to function" are enhanced. Page 18 of 20

19 The Millennium Development Goals(MDG): Targets and Indicators In September 2000, UN adopted eight Millennium Development Goals (MDGs) to be achieved by The MDGs aknowledge the multidimentional nature of development and poverty alleviation. An end to poverty requires more than just increasing incomes of the poor. The eight goals are ambistious and some observers suspect that they can be achieved by These goals are summarized as follows: Goal 1. Eradicate extreme poverty and hunger o Target for 2015: Reduce by half the proportion of people living on less than a dollar a day and those who suffer from hunger Goal 2. Achieve universal primary education o Target for 2015: Ensure that all boys and girls complete primary schooling Goal 3. Promote gender equality and empower women o Target for 2005: Eliminate gender disparity in primary and secondary education (preferred) o Target for 2015, Eliminate gender disparity at all levels Goal 4. Reduce child mortality o Target for 2015: Reduce by two thirds the mortality rate among children under five Goal 5. Improve maternal health o Target for 2015: Reduce by three quarters the ratio of women dying in child birth Goal 6. Combat HIV/AIDS, malaria and other diseases o Target for 2015: Halt and begin to reverse the spread of HIV/AIDS and the incidence of malaria and other major diseases Goal 7. Ensure environmental sustainability Page 19 of 20

20 o General Target: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources o Target for 2015: Reduce by half the proportion of people without sustainable access to safe drinking water o Target for 2020: Achieve significant improvement in lives of at least 100 million slum dwellers, by 2020 Goal 8. Develop a global partnership for development o Targets: Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system that includes a commitment to good governance, development, and poverty reduction, nationally and internationally Address the least developed countries' special needs and the special needs of land locked and small islands developing states. Deal comprehensively with the debt problems of developing countries Develop and implement strategies for decent and productive work for youth. In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communications Page 20 of 20