After studying this chapter you will be able to understand: What the capabilities approach is to development economics? What relationship exists between economic growth and economic development? How education and health improvements promote human capital development?
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Chapter 35
Development Economics
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economics.
economic development.
human capital development.
clusters in development are important.
trials play in measuring program impact.
What will you learn in this chapter?
• The capabilities approach provides a
framework for thinking about poverty,
inequality, and human development
– A capabilityis something a person is able to be or
do.
can be and can do.
people can do.
expanding the economy.
The capabilities approach
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• GDP growth does not necessarily improve the
standard of living for everyone in a country
• Policy mechanisms are crucial to translating
higher average incomes into improved
capabilities for the poorest citizens
• There are many reasons to believe that
economic development leads to economic
growth
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• There are basic aspects to economic
development:
• Policies can be categorized in two ways:
economic growth.
2 Some policies translate economic growth into
greater capabilities for people in a society
The basics of development economics
Human Capital Migration
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• Health care facilities don’t
exist in many parts of the
world.
• Even where clinics exist,
many people don’t use
them.
• National health care
programs are not as
effective as they could be.
The basics of development economics
• Educated workers are generally more productive.
• Families living on a few dollars per day often cannot afford school fees.
• There is a tradeoff between the quantity and quality of education provided.
Improvements to health and education can develop
human capital.
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People who live in countries with higher average
The basics of development economics
Life expectancy (years)
GDP per capita (logarithmic scale)
40
45
50
55
60
65
70
75
80
85
90
Mexico
South
Brazil United States Japan
Nigeria
Vietnam
Liberia
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Using the figure below, is higher GDP per capita
necessary for longer life expectancy?
Active Learning: Correlation and causation
Life expectancy (years)
GDP per capita (logarithmic scale)
40
45
50
55
60
65
70
75
80
85
90
Mexico
South
Brazil United States Japan
Nigeria
Vietnam
Liberia
economic development.
well-intentioned government and good institutions.
–Institutionsare humanly-devised constraints that shape
human interactions.
basic and important task of any government is to
create a stable political system.
rights and the rule of law.
The basics of development economics
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• Investment is a key concern in promoting growth.
• Development economists debate what the best way is for
developing countries’ governments to handle flows of
capital.
• Industrial policymanages these flows and has two
traditional tactics:
• As governments consider how to develop their industrial
sectors, they often choose to focus on promoting not just
one industry but clusters.
–Clustersare networks of independent firms, universities, and
businesses that focus on the production of a specific type of
good.
Import substitution Export-led growth
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• By opening up to foreign markets, countries
can gain access to new, cheaper goods and find
new customers for their products
which they have the comparative advantage.
and enforces trade agreements and promotes
international free trade
The basics of development economics
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• The prospect of a better life drives people to
move away from home in search of
opportunities
• It is difficult to legally move into a high-income
country
controversial issue.
provides opportunities to promote development.
The basics of development economics
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Remittances have grownsubstantially
The basics of development economics
0
In Chi
10
20
30
40
50
60
Billions of 2010 U.S dollars
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• Foreign aid has long been seen as part of
economic development
• Taxes and private donations in many
countries provide aid to the poor around
the world
• These donations can be very important,
from providing necessities to funding
investments
• The problem is how to make sure these
funds are put to the best use
What can aid do?
distributed $12 billion to help European countries
rebuild.
spread development.
Development, the leaders of the world’s most
industrialized countries reaffirmed to pledge 0.7
percent of their gross national income.
– The financing gapis the difference between the savings
rate and the amount of investment needed for sustainable
growth in a country.
What can aid do?
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Over the past 50 years, the amount given in aid has increased
in dollar terms, but has fallen in terms of aid as a share of GDP.
0 0.1 0.2 0.3 0.4 0.5 0.6
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Constant 2009 dollars
% of GNI
Billions of constant 2009 U.S dollars % of total GNI
Official development assistance
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• Proponents of foreign aid argue that it can
help countries break out of the poverty trap
– A poverty trapis a self-reinforcing mechanism that
causes the poor to stay poor.
• Foreign aid can be used to break the negative
self-reinforcing mechanisms
development cycles.
What can aid do?
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• Many governments channel foreign aid
through national development agencies
• The World Bankis a multinational organization
that provides financial and technical assistance
to developing countries
• The United Nations Development Program
(UNDP)is a global UN network that provides
knowledge and resources to developing
countries
What can aid do?
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• Not everyone supports sending billions of
dollars into poor countries
• Historically, some aid has been inefficient and
even counterproductive
• Not all aid results in growth and/or
development in the receiving country
receive it.
What can aid do?
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supporting this new breed of socially-minded
businesses through impact investing.
–Impact investingis when firms invest money to generate
both financial and social returns.
– These firms are called social businesses.
creating social change.
accept lower financial returns.
What can aid do?
• Impact evaluations assess how a program or
policy changes lives relative to how they would
have changed without it
• Randomized controlled trials (RCT)randomly
assign subjects into control and treatment
groups to assess the causal effect of
intervention on an outcome
intervention should affect both groups equally.
What can aid do?
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RTCs allow policy-makers and program managers to
more confidently channel resources to their best
use
20.70
13.90
0
5
10
15
20
25
Information
on returns
Deworming School
uniforms Scholarships Progresa
Years in extra schooling per $100 spent
Impact of programs intended to increase years of education
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• Development is a field of economics that
studies international poverty
• The capabilities approach is one way to think
about development
• The ideas of economic growth and
development are similar but not identical
• There is general agreement that economic
growth will spark economic development
Summary
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• Access to more and better schools and health
care can develop human capital
• Efforts to improve education and health in
countries must be of high quality to be
effective
• Human capital is important for economic
development because it allows more
productive workers and greater economic
growth
Summary
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• Development is most likely in places where
there are strong institutions
• Institutions are human-devised constraints
that shape human interactions
government capable of implementing good policy
are important for development.
• Governments implement industrial policy in an
attempt to favor certain industries
Summary
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• The main industrial policies are import
substitution, export-led industrialization, and
clustering
• Every year, millions of people leave their own
country to migrate for better-paying jobs
• Foreign aid does not always promote growth
and development
• Impact evaluations and randomized controlled
trials can measure how policies change lives
Summary