Development Economics Lecture 1 Anne Mikkola Partly using slides of Prof. Haaparanta EXAMS (one of the following) Date: 11.12.2007: Time: 12-14 Place: Porthania II Date: 16.1.2008: Time: 12-14 Place: Economicum lecture room. Faculty exam: 1.3.2008 1
REQUIRED READINGS (preliminary) Debraj Ray (1998): Development Economics. Chapters 1-11. Lecture notes Follow the course webpage as the course proceeds: http://www.valt.helsinki.fi/blogs/mikkola/post50.htm David N. Weil (2005): selected chapters Check the course binder at the department office of materials. OTHER READINGS Charles I Jones (2002): Introduction to Economic Growth. Used in class on growth theories. William Easterly (2001): The Elusive Quest for Growth. Economists Adventures and Misadventures in the Tropics. Jeffrey Sachs (2005): The End of Poverty. Economic Possibilities of our time Anne Mikkola Carrie Miles (2007): Development and Gender Equality: Consequences, Causes, Challenges and Cures HECER Discussion Paper, No. 159. (downloadable from internet) 2
What is development? TOPICS (preliminary) 1. Development Economics: Overview (Ray, Chp. 1-2) 2. Economic Growth theories and empirical evidence: Why are some countries rich and others poor? (Ray Chps 3-4) 3. Population Growth, fertility and changing role of women in development (Ray Chp. 9, Mikkola, and/or Weil Chp. 4-5) 4. History, Expectations, Government, Culture and Development (Ray Chp. 5; Weil, Chp 12, 14) 5. Poverty and its functional impacts (Ray Chp. 8) 6. Inequality : Measuring inequality; Interconnections of Inequality and development (Ray Chp. 6-7) 7. Rural-urban interaction and migration and agriculture (Ray Chp. 10-11) 3
Overview Why development economics? World marching by: need for development Measuring development What is the development? Solutions? History of income growth Why development economics as a separate field of study? Many markets missing: labor, financial, insurance Institutions and public infrastructure may be missing: property rights, laws, transportation Development taking place when there is a developed world elsewhere: aid dependency, technology transfer. Speed of development differs from European experience (medical innovations, directly to the mobile phones) History of colonialism 4
GDP per capita in year 2000, USD, PPP exchange rates Source: David Weil: Economic Growth, 2005 Map of world income per capita, 2002 5
Poverty The total number of people in extreme poverty has been reduced during the last decade. The situation has improved basically because poverty has been reduced in South and East Asia. Poverty has increased in Sub-Saharan Africa and Central Asia. Poverty at household level. View from history: expenditure on food and basic necessities only. 6
What happened in the developed countries? Technological changes (over the past 200 years) industrialization, specialization in the market production out of the household household technology. Engines of liberation (of women). Greenwood et al, RES,2005 changing role of children declining fertility, falling mortality, longer lives, and rising population 7
Self-sufficient economies: clothing from farming to garment, food preparation from fields to bread, water, heating no statistics Industrialization 1: Men leave homes, separate spheres of life 8
Industrialization 2: Servants leave as homework reduces not so many children needed (quantity to quality) Industrialization 3: Children bring utility rather than production services Women s work and its significance reduced Greenwood (2005): In the US, meal preparation, laundry, cleaning took 58 hours per week in 1900, 18 hours in 1975. Men s work get valued monetarily (statistics measure) 9
Industrialization 4: Women to the labor market (and men s towards home). Sexual division of labor starts to fall apart Growth theories that we will study were developed to explain the steady growth experience coinciding with these 200 years of western development. empirical data on incomes values only market based work. We will study these models, but it is good to keep in mind how and why they were developed. 10
Measuring development What do we mean by development? Operational definitions: Millenium Development Goals (MDG s) (to be achieved by 2015) Human Development Index (HDI): achievement of the goals or improvement in the index is a measure of development. MDGs by the UN 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. 11
HID Index, published by UNDP since 1990, is based on 3 measures of quality of life 1. Life expectancy at birth (index of long and healthy life) 2. (2/3) adult literacy rate + (1/3) (secondary and tertiary gross enrollment ratio) (index of knowledge) 3. GDP/capita (index of a decent standard of living). Amartya Sen: Development as Freedom (also a book by that name) We should look at people s capabilities, i.e. their abilities and possibilities to live good life, make choices on one s education, economic activities, freedom to participate in decision making. Avoiding starvation and premature death valued for their own sake. development as freedom. Higher income, ceteris paribus, allows wider set of choices. Inequality in capabilities hard to argue for. Role of political freedoms. 12
Least Livable Countries by HDI, 2004 1. Sierra Leone 16. Tanzania 2. Niger 17. Benin 3. Burkina Faso 18. Guinea 4. Mali 19. Rwanda 5. Burundi 20. East Timor 6. Guinea-Bissau 21. Senegal 7. Mozambique 22. Eritrea 8. Ethiopia 23. Gambia 9. Central African Republic 24. Djibouti 10. Congo, Dem. Rep. of the 25. Haiti 11. Chad 26. Mauritania 12. Angola 27. Nigeria 13. Malawi 28. Madagascar 14. Zambia 29. Yemen 15. Côte d Ivoire 30. Kenya 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Norway Sweden Australia Canada Netherlands Belgium Iceland United States Japan Ireland Switzerland United Kingdom Finland Austria Luxembourg Most Livable Countries by HDI, 2004 16. France 17. Denmark 18. New Zealand 19. Germany 20. Spain 21. Italy 22. Israel 23. Greece 24. Singapore 25. Portugal 26. Slovenia 27. Korea, South 28. Barbados 29. Cyprus 30. Malta 13
What do these tell about the concept of development and problems of development? Development is seen as an improvement in incomes (and eradication in poverty), health, education, equality in incomes (both locally and globally), achievement of gender equality, and good environment. Problems in achieving development are seen as interlinked: low incomes go together with low education and high inequality, etc. But what is the nature of linkage? Why are income levels and income inequality related? Or are they? What do we mean by income, inequality, and poverty? What type of policies are needed to achieve the goals? Does aid work? Does debt reduction help? What is the role of national policy making? 14
Solutions? Easterly (2001): failed attempts decade after decade to help Africa to growth path investments on machines etc. (see Harrod-Domar later on) failure to produce education population control lending debt problem debt forgiveness Jeffrey Sachs (2005): end the poverty by increasing aid. Do it all at once through the UN Income is not everything Even though Sub-Saharan economies have not grown, they have advanced in many other respects (showing in HDI-indices as well). expected life-times at birth have increased, adult literacy rates have increased better education The impacts of HIV/AIDS can be seen clearly (Zambia, Botswana). 15
Growth of income in the history - what do we learn? Long run development of GDP per capita reveals interesting aspects of development Source for the figures is A. Maddison: The World Economy, Historical Statistics, OECD. The figures are US 1990 dollars at PPP exchange rates. Year Egypt Sahel & W- A Tanzania Taiwan Nepal L-A Mexico Brazil Finland UK 1500 475 415 416 425 451 714 1700 475 415 527 568 638 1250 1820 475 415 499 397 692 759 646 781 1707 1900 902 (1913) 550 (1870) 539 (1913) 1366 678 1668 4450 1950 910 424 924 496 2356 1672 4253 6939 1960 991 459 1492 607 3155 2335 6230 8645 1970 1254 567 2980 653 4320 3057 9577 10767 1980 2069 593 5869 637 6289 5198 12949 12931 1990 2522 540 9886 808 6119 4923 16866 16430 2000 2920 524 16642 999 7218 5556 20235 19817 16
What do we learn from this? 1. by around 1500 income levels were quite equal around the world (with the exception of UK). 2. by 1700 the situation had changed: Latin America (North America also, US income 527 $ by 1700, Canada 800 $ for European immigrants, 400 $ for indigenous people) and Europe. The most dramatic increase in income in UK. 3. from 1800 on Europe (and North America) have grown much faster than other regions reaching very high relative incomes by 2000. 4. incomes in some other areas have also grown. E.g. Latin America and Egypt. The most dramatic change has taken place in South East Asia (example here is Taiwan. Earlier, Japan started to grow by late 1800 s). 5. not all Asia has experienced sustained income growth: e.g. Nepal, though during the last two decades it has started to grow. 6. the most serious trouble spot is Sub-Saharan Africa (presented here through Tanzania). Tanzania grew during the first decade of its independence, then growth first slowed down and finally stopped completely. A case of a development trap? 17
7. Many poor countries have experienced a decline in incomes also at least temporarily since 1970: here Brazil, Nepal and Tanzania. 8. All in all, great divergence in incomes at least since early 1800 s. How to explain the divergence and the diversity in individual country experiences? South-Korea and Tanzania had equally high incomes in 1960, but now South Korea is many times richer. Why? The divergence of the rich and the poor Graph by Prof. Pertti Haaparanta 18