devecon lecture1 introduction

8/14/2019 Devecon Lecture1 Introduction

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Development economics

Lecture 1: Introduction

Julie Chytilov

[email protected]


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Lecture 1: Introduction2

Overview

Characteristics of underdevelopment

How poor people live

Requirements of the course


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Characteristics of underdevelopment

Both symptoms and causes

Poverty not only having little money

Examples we are going to talk about

Education

Health and well-being

Population growth

Access to financial services


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Sectors of the economy Dominance by agriculture and petty services

Little manufacturing industry

Workers in agriculture

Subsistence farmers

Tenant farmers

Landless laborers

Distribution of employment

Agriculture Industry Services

Low-income 65% 18% 17%

Middle-income 28% 32% 40%

High-income 5% 28% 67%Source: Thirlwall (2006), ILO (2002)


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Diminishing returns in agriculture Land = fixed factor of production -> decreasing marginal product

Limit to employment in agriculture

Many people -> on average earn low income

Family farms

Migration to towns -> large informal sector: street trading, haircutting, shoe-shining, transport,

Labor

MPL

Subsistence wage


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Sectors of the economy


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Low capital accumulation Industry: increasing returns

All factors are variable (vs. fixed land)

Low level of capital Physical

Human

Low capital accumulationpoverty


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Exports dominated by primary commodities Export: primary commodities, low value added

Import: manufactured goods

Ratio of export to import prices = barter terms of trade Terms of trade of primary goods relative to manufactured goods have been

falling down

Prices of primary commodities cyclically volatile

Low level of diversification

Primary commodities as a percentage of exports

East Asia and Pacific 16%

South Asia 22%Latin America and Caribbean 50%

Middle East and North Africa 79%

Sub-Saharan Africa 62%


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Exports dominated by primary commodities

Percentage of merchandise exports (2000)

Agricultural raw

materials Food Fuel

Manufactu

res Metals

Low income 4.2 15.0 23.6 50.9 5.8

Middle income 2.3 9.3 22.2 59.0 4.8

High income 1.6 6.1 5.1 81.9 2.4Sub-Saharan Africa 5.8 16.9 29.0 35.1 8.0

Source: World Development Indicators (2004)


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High export concentrationConcentration and diversification indeces

Concentration

index

Diversification

index

Number of

products

Developing economies 0.110 0.272 260

Developed economies 0.067 0.124 260

Africa 0.309 0.619 258

Zambia 0.415 0.833 129

Uganda 0.559 0.861 65Chad 0.781 0.733 7

China 0.077 0.454 254

India 0.167 0.615 237

Czech Republic 0.080 0.389 246USA 0.094 0.261 257

Source: UNCTAD Handbook of Statistics (2008)


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High export concentration

Coffee 20%

Fish 15%Gold 13%

Other


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Education

Source: World Development Indicators (2004)

Primary Secondary Tertiary Male Female Primary Secondary

Low income 94 46 10 72 53 32 25

Sub-Saharan Africa 87 71 56 43 24

Middle income 111 75 22 92 83 25 20

High income 102 106 61 16 14

Gross enrollment ratio Adult literacy rate Pupil-teacher ratio

Under-provision of education

125 million children receive no primary education, 1/3 in Africa

Gender gap


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Education


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Health and well-being

Low HDI

countries

High HDI

countries

Infant mortality rate (per 1000 births) 104 6Maternal mortality ratio (per 100,000 births) 595 8

Life expectancy 51 77.5

Physicians (per 1000 people) 0.1 2.7

Udaipur

Average BMI index = 17.8 (18.5 = cutoff for being underweight)

55% of adults are anemic 72% at least one symptom of disease

46% report an illness


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Health and well-beingProportion of people aged 15-49 with HIV worldwide living in particular country (2003)

29 million people worldwide, 19 million in Africa (2003)

Lower productivity and income

Virtual generation of orphans (in 2000 estimated 10 million of AIDS orphans in Africa)

Lower life expectancy: in Zimbabwe is 42, in the absence of AIDS is estimated to be 64.


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Health and well-being 40% of people are at

risk of malaria

Mostly in developing

countries

> 500 mil. ill every year

> 1 mil. deaths everyyear

Mostly affects children

(Africa 20% of childhood

deaths)

African children have onaverage 1.6-5.4episodes of malariaevery year

Clinical malaria episodes (2004), WHO


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Rapid population growth

Population growth (in %): birth rate death rate

Birth rate: newly born per 1000 population

Death rate: deaths per 1000 population

Age structure Developing countries: children under 15 = 40%

Developed countries


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Fertility

Number of familymembers in poorhouseholds 7-8(median)

USA = 2.5

2.5-5 adults (jointfamilies)

Young (51) = 6 (median)

USA = 1

Source: Banerjee andDuflo (2006)


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Fertility

World Development Indicators (2006)


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Causes and consequences of population growth

Population growth poverty

Living standard

Food supply

Education and health systems

Employment opportunities

Poverty population growth Poor health environment

Help of children when parents are sick or old, household labor

Local institutions promoting high number of children (clan)


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How poor spend their money

Food: 56-78%

Festivals and celebrations: 10% in Udaipur, India, 0% in Nicaragua Tobacco and alcohol:


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Ownership of assets

Land

4% in Mexico, 30% in Pakistan, 37% in Guatemala, 50% in Nicaragua, 65% inPeru, 85% in Panama

Very small landholdings

91

30

11 16

34

1925 26

40

1122

13

38

0

20

40

60

80

100

%

House equipment

Electricity Radio

Black and white TV Colour TV

Fan Telephone

Electric iron Gas/electric/kerosene cooker

Bicykl Motorbike

Water pump Piped waterIndoor latrine

4923

72

17842

21 6

28

7

Large variation in ownership of

assetsPiped water (0% in Udaipur 36% in Guatemala)

Electricity (1.3% in Tanzania 99% in Mexico)

Latrine (0% in Udaipur 100% in Nicaragua)

Karnataka (2007)


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How poor earn their money

Many entrepreneurs

Peru: 69% of urban poor households operate a non-agricultural business

25-98% of rural households operate a farm

Multiple occupations

Lack of specialization

Operation on small scale


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How poor earn their money


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Access to financial institutions

Borrowing

Many people borrow (11% in East Timor; 93% in Pakistan)

Mostly from informal source

Udaipur

Relatives 23%

Moneylender 18%

Shopkeeper 37%

Bank 6%

High interest rate (3-4% per month)

High default rates

Difficult enforcement

Difficult monitoring

No collateral

Microcredit


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Access to financial institutions

Savings

Few people have savings accounts (14%)

Lack of reliable savings products Informal strategies

Rotating Savings and Credit Associations (ROSCAs)

Self-help groups

Insurance

Adjustment in consumption

Informal insurance

Informal social networks

Burial funds

Kitchen parties


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Institutions

Quality of governance

Corruption

Political rights

Regulatory burdens

Protection of property rights

Limits placed on political leaders

Measures

Aggregate governance index

Voice and accountability

Political stability and absence of violence

Government effectiveness

Regulatory burden

Rule of law

Freedom from graft


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Institutions

Correlation btw. institutions and development

Causality?

Economicdevelopment

Institutions

Other factor


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Institutions


Causality?

Exogenous variation in institutions (Acemoglu et al. 2001) Different experience of colonization

Historical mortality

of soldiers and

bishops

Good institutions

Settler societies

Bad extractiveinstitutions

Good institutions

Settler societies


Developed

Under-developed

Australia, New Zealand,North America

Africa, Latin America

Past Today Today


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Institutions


Causality?

Exogenous variation in institutions (Acemoglu et al. 2001) Different experience of colonization

Historical mortality

of soldiers and

bishops

Good institutions

Settler societies


Good institutions

Settler societies


Developed

Under-developed

Australia, New Zealand,North America

Africa, Latin America

Past Today Today

?


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Introduction of the subject of development economics

Basic understanding of

The nature of poverty and underdevelopment

The development difficulties faced by poor countries

Growth theories

Combination of theory and empirical evidence

Lectures Poverty Inequality

Growth models (Harrod-Domar, Solow) Land

Capital

Population

Role of state

Development and environment

Trade Financing economic development

This course aims and structure


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Each week one lecture and one seminar

Short readings for each seminar Read all of them

Prepare presentation on one of them 10%

List of the readings is on the course webpage -> let me know by email, the

readings will be assigned on the first-come-first-served basis Activity at the seminars bonus points

Homework 15%

Mid-term written exam 25%

Final written exam 50%

Consultation hours: Thursday, 1:30-3:30pm, room 602

This course - requirements


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Textbook

Thirlwall, A.P. 2006. Growth and Development, 8th edition. Palgrave MacMillan

Available in the library

Further readings

Todaro, Michael and Stephen C Smith (2005) Economic Development (9th edition),Addison Wesley.

Ray, Debraj (1998) Development Economics

Short readings for the seminars Uploaded on the course website

Literature for this week Thirlwall, pp. 65-84

Banerjee, Abhijit and Esther Duflo. 2006. Economic Lives of the Poor. http://econ-www.mit.edu/files/805

Literature

devecon lecture1 introduction

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