Development Economics
Subject: Economics
Topic: 7
Cambridge Code: 0455 / 2281
Measuring Development
Development - Improvement in living standards and quality of life
GDP Per Capita
GDP per capita = Total GDP / Population
Advantages:
- Easy to calculate
- International comparison
- Shows output per person
Disadvantages:
- Ignores distribution (inequality)
- Doesn't measure quality of life
- Environmental costs ignored
- Informal economy excluded
- Population differences
Human Development Index (HDI)
HDI - Composite measure of development
Components:
- Health: Life expectancy
- Education: School enrollment, literacy
- Income: GDP per capita (income)
Advantages:
- More comprehensive than GDP
- Captures human wellbeing
- Internationally comparable
Still limitations:
- Doesn't capture inequality
- Doesn't include environmental factors
- Political freedom not included
Characteristics of Developing Countries
Common features:
Economic:
- Low GDP per capita
- High unemployment
- Dependence on agriculture, raw materials
- Limited industrialization
- Low savings rate
Social:
- High poverty
- Poor health and education
- High population growth
- High infant mortality
- Low life expectancy
Infrastructure:
- Poor roads, utilities
- Limited technology
- Limited internet/telecommunications
Political:
- Weak institutions
- Corruption
- Political instability
Causes of Poverty and Underdevelopment
Structural Causes
Colonial legacy:
- Extraction economies
- Poor institutions
- Border disputes
Geography:
- Landlocked (expensive trade)
- Poor climate (drought, disease)
- Limited natural resources
Demographics:
- High population growth
- High dependency ratio
- Migration of skilled workers
Systemic Causes
Low human capital:
- Poor education
- Bad health
- Lack of skills
Low technological development:
- Poor infrastructure
- Limited R&D
- Technology gap
Institutions:
- Weak legal system
- Corruption
- Poor governance
- Difficulty enforcing contracts
Inequality
Income inequality - Unequal distribution of income
Measuring Inequality
Gini Coefficient:
- 0 = Perfect equality
- 1 = Perfect inequality
- Compares actual to perfect equality
Lorenz Curve:
- Shows cumulative distribution
- Diagonal = Equality
- More curved = More inequality
Problems of Inequality
Economic:
- Reduces consumer spending (poor have high MPC)
- Reduces growth potential
- Reduces productivity
Social:
- Crime and violence
- Health problems in unequal societies
- Reduced social cohesion
- Poor life satisfaction
Political:
- Social unrest
- Political instability
- Reduces trust in institutions
Development Strategies
Import Substitution
Strategy: Develop domestic industry behind protection
Method:
- High tariffs on imports
- Subsidies to domestic industry
- Selective government support
Advantages:
- Develops local industry
- Saves foreign currency
- Reduces dependence
Disadvantages:
- Inefficient industries
- High-cost protected firms
- Limited competition
- Export sector neglected
Result: Worked in some countries (5-10 years), then liberalize
Export-Led Growth
Strategy: Develop export industries
Method:
- Low tariffs
- Improve competitiveness
- Attract FDI
- Invest in education
Advantages:
- Access large markets
- Get foreign exchange
- Competitive firms
- Technology transfer
Disadvantages:
- Vulnerable to world prices
- External competition
- May need foreign capital
- Inequality risk
Result: Successful for East Asia tigers (South Korea, Taiwan, Singapore)
Role of Aid
Bilateral aid - From one country to another Multilateral aid - Through organizations (UN, World Bank)
Types
Grant aid:
- Free, no repayment
- Typically for humanitarian
Concessional lending:
- Loans at favorable terms
- Below market rates
- Long repayment periods
Advantages of Aid
- Relieves immediate suffering
- Funds infrastructure
- Provides expertise
- Builds goodwill
Problems with Aid
Dependency:
- Country becomes dependent
- Reduces self-reliance
- Discourages local programs
Inefficiency:
- Corruption diverts aid
- Misuse of funds
- Conditions may be ineffective
Conditionality:
- Aid tied to political conditions
- May enforce inappropriate policies
- Donor priorities over recipient needs
Fair Trade
Fair trade - Ethical trading supporting producers
Principles:
- Fair prices (above world prices)
- Safe working conditions
- Environmental standards
- Direct relationships
Advantages:
- Helps small farmers
- Better income security
- Sustainable practices
Limitations:
- Higher prices for consumers
- Limited scale
- Doesn't address structural issues
- Premium to middlemen sometimes
Sustainable Development
Sustainable development - Meet present needs without compromising future
Goals:
- Reduce poverty
- Improve health/education
- Environmental protection
- Gender equality
- Decent work
- Climate action
Environmental Sustainability
Challenges:
- Polluted air and water (health)
- Deforestation (carbon, biodiversity)
- Climate change (droughts, flooding)
- Resource depletion (fish, minerals)
Solutions:
- Green technologies
- Renewable energy
- Environmental regulations
- Reforestation
Technology and Development
Mobile Technology
Impact:
- Financial inclusion (mobile money)
- Information access
- Business opportunities
- Education access
Internet and E-commerce
Potential:
- Access to markets
- E-learning
- Service delivery
Barriers:
- Infrastructure cost
- Affordability
- Digital literacy
Key Points
- Development: Improvement in living standards
- GDP per capita: Simple but limited measure
- HDI: Better but still incomplete
- Poverty: Caused by structural and systemic factors
- Inequality: Economic, social, political problems
- Import substitution: Develop behind protection
- Export-led: Develop for world markets
- Aid: Helpful but can create dependency
- Fair trade: Ethical trading support
- Sustainable: Balance growth with environmental protection
Practice Questions
- Calculate and compare HDI
- Explain development indicators
- Analyze causes of underdevelopment
- Compare development strategies
- Analyze aid effectiveness
- Explain fair trade benefits/limits
- Discuss sustainable development
Revision Tips
- Know development measures
- Understand causes of poverty
- Know development strategies
- Understand trade-offs
- Know aid issues
- Understand sustainability
- Practice case studies
- Know country examples