IIUI/IIIE/SPRING2011/PZJ/ED/01 Todaro, M./Smith, S.

, Economic Development, 8th Edition, Washington Concept of development: More than of worlds people live in developing countries, but they enjoy only 16% of worlds income while the richest 20% have 85% of global income. (UNO, Human Development Report 1995) Our primary goal in development must be to reduce the disparities across and within countries. (J. D. Wolfensohn, President World Bank, 1998) Life in rich countries: An average family of four in USA has annual income of about 48000 US$. The family lives in a house with garden. The dwelling has many comfortable features including separate bedroom for each child, consumer durables imported from South Korea or Argentina and other consumer goods like garments imported from developing countries. Both children are healthy and school going. They expect to visit universities and have opportunities to select careers. They have at least three meals a day. Average life expectancy is 77 years. Parents have necessary education and training to secure regular employment, shelter, clothe, food, child education and saving for future consumption. Against these economic benefits they have some non-economic costs including competitive pressure to succeed financial stability. Their ability to relax, to enjoy simple pleasure of life (fresh air, clean water and sunset etc) is constantly at risk due to environmental decay. Life in poor countries: Extended family in Asian village: Asian household comprise of 10 members in average including parents, grand parents, 7 children, uncles and aunts. They have combined per capita annual income of about 250-300 US$. They normally live in one room tenant farmer house on a large agricultural estate owned by an absentee landlord. All members must work all day on land. Adults can not read or write. From five school age children only two go to school without expectation of going beyond primary school. There is often one meal a day. The house has no electricity, water, sanitation, etc. There is sickness, but doctors are in the cities to care rich people. The only relief from daily struggle lies in the spiritual traditions of the people.

City life in South America: There is a sharp contrast in living conditions from one section to another section of urban society. There is a modern stretch of tall buildings and just a few hundred meters away squalid shanties (mud/tin dirty houses) are pressed together. By examining two representative families one a wealthy family from the local ruling class and the other of peasant or handicraft background one cant not oversee wide disparities in living conditions of both families. The wealthy family lives in a multiroom complex on the top floor of a modern building overlooking the sea, while the poor family of peasant/craftsman is cramped into a small shack in a shantytown slum). The rich family has various facilities like sufficient food, luxury consumer durables, caring doctors, modern education, vacation abroad, etc. The poor family of shantytown can also view the sea, but can not afford sufficient food, education and medical care for its members. The family annual is less than 800.00 US$. The children have been in and out of school many times, as they have to support their family financially. Similar situation does exist in the cities of Asia and Africa. The situation in Africa is even worse than in other continents. For example one may observe many small clusters of tiny huts on dry and barren land of Eastern Africa. Each cluster contains extended family and work sharing. There is no money income, because all food, clothing, shelter and other things are made and consumed by the people themselves theirs is a subsistence economy. Here do arise following questions: Why does affluence coexist with dire poverty not only across different continents, but also within the same country or even the same city? Can traditional, low productivity, subsistence societies be transformed into modern, high productivity, high income nations? To what extent are the development aspirations of poor nations helped or hindered by the economic activities of rich nations? By what process and under what conditions do rural subsistence farmers of traditional societies evolve into successful commercial farmers? How poverty can be reduced and living conditions of poor people can be improved? All these questions relate to the problems and prospects of economic development. For that one also has to analyze the relationship between poor and rich nations.

Economics and Development Studies: Development economics is not the same as the neo-classical economics of developed nations. Nor is it similar to the Marxist economics of formerly centralized socialist states. It is nothing more or less than the economics of contemporary poor, underdeveloped nations with varying ideological orientations, diverse cultural backgrounds and very complex yet similar problems that usually demand new ideas and novel approaches. Nature of development economics: Traditional Economics (classical and neoclassical) is concerned primarily with the efficient, least-cost allocation of scarce productive resources and with the optimal growth of these resources over time so as to produce an ever-expanding range of goods and services. Neoclassical economics deals with an advanced capitalist world of perfect markets, consumer sovereignty, automatic price adjustment, decisions made on the basis of marginal, private profit and utility calculation and equilibrium outcomes in all product and resource markets. It assumes economic rationality and a purely materialistic and individualistic selfinterested orientation toward economic decision making. Development economics, in addition to being concerned with the efficient allocation of resources and their sustained growth over time, must also deal with economic, social, political and institutional mechanisms, both public and private, necessary to bring rapid and large scale improvements in the living standard of poverty stricken masses of Africa, Asia and Latin America. In these less developed countries commodity and resource markets are highly imperfect, consumers and producers have limited information, major structural changes are taking place, disequilibrium situation often prevail (prices often do not equate demand and supply). In many cases economic calculations are dominated by political and social priorities such as building a new nation, resolving ethnic conflict or preserving cultural and religious traditions. At individual level, family, clan, religious or tribal considerations may take precedence over private, self-interested utility or profit-maximizing considerations. As such, a larger government role and some degree of coordinated economic decision making directed toward transforming the economy are usually viewed as essential components of development economics. Because of the heterogeneity of developing countries and complexity of development process, development economics combine relevant concepts and theories from traditional economic analysis along with new models and broader multidisciplinary approaches derived from studying the historical and contemporary development experiences.

The ultimate purpose of development economics is to help us better understand developing countries in order to improve living conditions of the people of these countries. Main areas of development economics: 1. Meaning of development 2. Sources and pattern of economic growth 3. Theories of economic development and their compatibility 4. Economic development experiences of developed countries 5. Status of women and development process 6. Population growth and economic development 7. Poverty alleviation 8. Health and development 9. Unemployment and migration 10. Education and development 11. Agricultural and rural development 12. Environment and sustainable development 13. International trade and development 14. Industrialization and development 15. International debt problem and economic development 16. Economic policy and development 17. Foreign investment 18. Foreign aid and development 19. Role of public and private sector for development 20. Globalization 21. Development policy options 22. Financial and fiscal policy for development 23. Income distribution Values and development economics: Economics, being a branch of social sciences, deals with human and the fulfillment of their desires. The activities of human are usually rooted in social context. Therefore, social science of economics can claim neither scientific laws nor universal truths. In economics there can only be tendencies, and even these are subject to great variations in different countries and cultures and at different times. Many so called general economic models are in fact based on a set of assumptions about human behavior and economic relationship that may have little
4

or no connection with the realities of developing economies. Value premises (like what is or is not) are central features of economic discipline in general and of development economics in particular. Concepts or goals such as economic and social equality, employment, elimination of poverty, universal education, decent living standard, protection of environment, modernization, democracy, self reliance, etc. all derive from subjective value judgments (what is good or desirable). Similarly private property, right to accumulate unlimited wealth, preservation of traditional institutions, class structure etc are subjective values. Therefore, value premises are an inherent component of both economic analysis and economic policy. Validity of economic analysis should always be evaluated in light of the underlying assumptions or value premises. Once these subjective values have been agreed on by a nation or decision makers of that nation, specific development goals and corresponding public policies can be formulated based on objective (theoretical and quantitative) analyses. Economics as social system: Economics as social system means the interdependent relationship between so called economic and non-economic factors. At national level latter include attitudes toward life, work and authority, bureaucratic, legal and administrative structures, pattern of kinship and religion, cultural traditions, system of land tenure, authority and integrity of government agencies, popular participation in developmental decision making and flexibility or rigidity of economic and social classes. All these factors vary from region to region. At international level we must also consider the organization and rules of conduct of the global economy how they were formulated, who control them and who benefits most from them. These factors are as well quite important keeping in view the spread of market economy and rapid globalization of trade, finance, technology and labor migration. Meaning of development: Traditional view: Prior to 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. Modern view: During the 1960s and 1970s many developing countries experienced high growth, but slow or no progress in employment and equality. The situation in the 1990s even worsened as GNP growth rates turned negative for many LDCs, whereas USA, UK and HIC enjoyed economic boom. In light of these circumstances economic development came to be redefined in terms of the reduction or elimination of poverty, inequality, and unemployment within the context of a growing economy. Accordingly to Dudley Seers: The question to ask about a countrys development is therefore: what has been happening to poverty, unemployment, and inequality? If all three of these have declined from high levels, then beyond doubt this has been a period of development for the country concerned. If one or two, and especially all three have been growing worse, it would be strange to call the result development, even if per capita income doubled. (P. 16) Even World Bank Report 1991 asserted: The challenge of development. is to improve the quality of life. Especially in the worlds poor countries, a better quality of life generally calls for higher incomes- but it involves much more. It encompasses as ends in themselves better education, higher standards of health and nutrition, less poverty, a cleaner environment, more equality of opportunity, greater individual freedom, and a richer cultural life. (P. 17) Development must therefore be conceived of as a multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty. Capabilities Approach (Amartya Sen) According to Aristotle income and wealth are not ends in themselves but instruments for other purposes. Amartya Sen argues that the capability to function is what really matters for status as a poor or nonpoor person. Economic growth can not be sensibly treated as an end in itself. Development has to more concerned with improving lives we lead and the freedom we enjoy. (P.17). What matters for well-being is not just the characteristics of commodities consumed, as in the utility approach, but what use the consumer can and does make of commodities. For example a book is of little value to an illiterate person (except perhaps as cooking

fuel or as a status symbol) or a person with parasitic diseases will be less able to extract nourishment from a given quantity of food than will someone without parasites. For the concept of well-being we need to think beyond the availability of commodities and consider their use, their functioning. According to Sen the functioning of a person is an achievement; what the person succeeds in doing with the commodities and characteristics at his/her command. For example, bicycling has to be distinguished from possessing a bike. Sen identify 5 sources of disparity between real income and actual advantages: Personal heterogeneities (disability, illness, age, gender),

Environmental diversities (Heating/clothing in cold, infections in tropics and pollution) Variation in social climate (crime/violence) Social capital and Differences in relational perspectives (conventions/customs).

Sen defines capabilities as the freedom that a person has in terms of the choice of functioning, given his personal features and his command over commodities. Core values of development Development (is) sustained elevation of an entire society and social system toward a better or more humane life. (P.20) According to Goulet there are at least three basic components or core values for understanding the real meaning of development. These core values sustenance, self-esteem and freedom represent common goals sought by all individuals and societies. (P.21) Three objectives of development: 1. Sustenance: To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health and protection 2. Self-esteem: To raise living standard through higher income, more jobs, better education, greater attention to cultural values in order to enhance material well-being and generate greater self-esteem. 3. Freedom of choice: To expand the range of available choices to individuals and societies by freeing them from servitude and dependence.

Concept of Development Economics (summary):

7

Development economics focuses on classical aspects like efficient resource allocation and steady growth of output and addresses mechanisms needed to bring rapid and large-scale improvement in living standard of the masses of poor in developing nations. Development economics deals with public policies to bring change. Therefore public sector has an important role in development economics. Along with the questions like what/for whom/how much/when goods are produced it is as well important to answer the questions like who make or influence decisions and in whose benefit. Similarly, not only economic variables incomes, prices, savings, but also so called non-economic variables like land revenue arrangement, class structure, credit, education, health, organization, governmental incentives, public administration, attitude toward work, leisure, self-improvement, values, role and attitudes, etc. play important role for economic development. ___________________________________________________________
It is easy to forget that many have a limited understanding of how greatly life in the developing world differs from life in the developed world. The first main point of Chapter 1 is to drive this idea home, while also introducing the idea that actions taken in the developed world can have a profound impact, for better or worse, on the developing world. The second point is to provide an overview of the nature of development economics as a field. A defense of development economics as a distinct field, rather than an agglomeration of other economics sub-fields, is offered. A major theme of the book, that development economics must encompass the study of institutional and social, as well as economic, mechanisms for modernizing an economy while eliminating absolute poverty, is introduced. The plan of the book is introduced through a series of basic questions of development economics. You should be able to intelligently address these questions by the end of the course. Alternative meanings of development are offered, starting with the ability to achieve sustained increases in GNP, and expanding to include other indicators of the quality of life, including absolute poverty, inequality, freedom, and self-esteem. The role of normative values in development economicsa subject dealing with human misery and human potential, with equity as well as efficiency, with cultural change that causes losses as well as gains, and with transfer as well as creation of wealthis stressed. The conclusion is that development is both a physical reality and a state of mind. The meaning and objectives of development include the provision of basic needs, reducing inequality, raising living standards through appropriate economic growth, improving self-

esteem in relation to the developed countries, and expanding freedom of choice in the market and beyond. The growing interdependence between the developed and developing countries is also stressed, with the oil shocks and the debt crisis representing important examples.