Growth and Development Economics – Lecture 1
Chapter 1
Development
= the process of improving the quality of all human lives and capabilities by raising people’s levels of
living, self-esteem, and freedom
How living levels differ around the world
Living standards: stylized sets of material living conditions
4-strata schema created by Hans Rosling
Lowest stratum: Second-lowest stratum Second-highest Highest stratum:
extreme poverty; stratum rich
multidimensionally
poor
Amount >1 billion Close to 3 billion >2 billion Close to 1 billion
$/day $1.90 a day per person $3.80 a day per person $15 a day per person $75 a day per
Solidly middle income person
Employment Subsistence economy Informal, in companies not Jobs not very stable Formal jobs with at
registered and without and often informal least some
worker protections or in protection
own small family enterprise
Cooking Open fire, smoke exits Basic, but use of kerosene Manufactured burners Modern appliances,
through hole in the roof or some other improved with improved fuel if including microwave,
energy source not electric plates dishwasher etc.
Food and Food insecure, majority May be food insecure or Usually food secure, Rich and diverse
nutrition of food grown by family vulnerable to falling into but many vulnerable diet, though obesity
Often malnourished food insecurity to fall into food may bring other
insecurity health risks
Clothing Used, worn, may be Inexpensive, often used, Inexpensive, new Well-fitting, perhaps
inadequate not well fitting, perhaps when purchased and designer
Flip-flops or even bare inadequate for weather worn/less-expensive Multiple, new,
feet Worn shoes and rubber- shoes comfortable dress
soled shoes and sport shoes
Education Majority now able to Finish primary school and Finish primary school, Complete high
attend primary school on average attend couple some finish school; +/- attend at
but may not complete it years longer secondary school least 1 year of post-
secondary education
Housing Self-constructed, natural Partly and perhaps fully Modest, but better Modern,
or found materials, often self-constructed, improved constructed, if not manufactured,
mud floor, corrugated tin roof comfortable professionally
Rural areas Rural and urban areas Urban areas constructed
Suburban
Furnishings Any pallet or bed, table, Basic tables and seatings, Electricity, purchased Filled with consumer
chair, or shelf is self- fans if electricity, power tables, chairs, beds; goods and durables,
constructed; no connection may be illegal fans or even a room WIFI, home
electricity and improvised AC, space heater, entertainment
television centres
Water Hand-carried in buckets From tap, typically Piped directly to Safe water taps
from public, often outdoors and perhaps a house site; may need throughout the
unsanitary sources +50-metre walk, needs treating house
self-treating with chlorine
or boiling
Sanitation Pit latrine or open Latrine Toilets, but many lack Hygienic, modern
defecation full indoor plumbing bathroom plumbing
Transportation On foot Bicycle Motor bike Car
Subsistence economy
= an economy in which production is mainly for personal consumption and the standard of living yields
little more than basic necessities of life, food, shelter and clothing
How countries are classified by their average levels of development
The World Bank classifies countries according to 4 ranges of average national income: (1) Low
(2) Lower-Middle (3) Upper-Middle (4) High
• Have been strong income growth in average incomes in a majority of low- and middle-income
countries
• Note, typical country may have people living at very different income levels or living standards
strata
,Gross national income (GNI)
= total domestic and foreign output claimed by residents of a country; consisting of: 𝐺𝐷𝑃 +
𝑓𝑎𝑐𝑡𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒𝑠 𝑒𝑎𝑟𝑛𝑒𝑑 𝑏𝑦 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠 −
𝑖𝑛𝑐𝑜𝑚𝑒 𝑒𝑎𝑟𝑛𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑒𝑐𝑜𝑛𝑜𝑚𝑦 𝑏𝑦 𝑛𝑜𝑛𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠
• Low-income country (LIC): GNI per capita of <$996 in 2018
- About 10% of the world’s population; majority located in sub-Saharan Africa
• Lower-middle income country (LMC): GNI per capita between $996 and $3,895 in 2018
• Upper-middle income country (UMC): GNI per capita between $3,896 and $12,055 in 2018
• High income country (HIC): GNI per capita of at least $12,055 in 2018
à the UN’s designation of ‘least-developed countries’ is similar to the LICs; low education and health,
high economic vulnerability and low income
As recently as 1990, half of the global population lived in low-income countries
à biggest factor in this improvement is the rapid income growth in China and India
• But averages only tell part of the story; well-being cannot be measured by income
alone
- United Nations Development Programme (UNDP) classifies countries considering
their health and education attainments as well in the Human Development Index
(HDI)
Economics and development studies
Development economics: study of how economies are transformed from stagnation to growth and
from low-income to high-income status, and overcome problems of extreme poverty
• Next to traditional economic topics, social, political and institutional mechanisms are also
addressed
Central role of women
Women play a central role, because on one side they tend to be poorer than men in all forms and on
the other hand they have the primary responsibility for child rearing; they spend more money on their
children than fathers do and transmit values
à development in its essence represents the whole gamut of change by which a social system
moves away from a condition of life widely perceived as unsatisfactory toward a situation or
condition of life regarded as materially and spiritually better
• Social system: organisational and institutional structure of a society, including its values,
attitudes, power structure, and traditions
Institutions
= constitutions, laws, regulations, social norms, rules of conduct, and generally accepted ways of
doing things
The meaning of development: Amartya Sen’s ‘capability’ approach
Amartya Sen argues that ‘capability to function’ is what really matters for status as a poor or
non-poor person
• Sen’s approach redefines development by emphasizing that income and wealth are not ends
in themselves but means to human welfare and freedom
• Sen argues that poverty cannot be properly measured by income or utility as
conventionally understood
- What matters fundamentally is not the things a person has – or the feelings these
provide – but what a person is, or can be, and does, or can do
- It is not just the characteristics of commodities consumed, as in the utility approach,
but what use the consumer can and does make of commodities
= called the functionings by Sen
= what people do or can do with the commodities of given characteristics that they come to possess
or control à a valid being or doing
,Disparities in well-being: differences in income do not translate directly into well-being due to
factors like health, education, social climate etc.
Sen identifies 5 sources of disparity between (measured) real incomes and actual advantages:
1. Personal heterogeneities
à such as those connected with disability, illness, age or gender
2. Environmental diversities
à such as infectious diseases in the tropics or the impact of pollution
3. Variations in social climate
à such as the prevalence of crime and violence and social capital
4. Distribution within the family
à economic statistics measure income received in a family, but it may be distributed
unevenly (ex. girls get less medical attention or education)
5. Differences in relational perspectives
à some goods are essential because of local customs and conventions
Thus: looking at real income levels/levels of consumption of specific commodities cannot
suffice as a measure of well-being
• One may have a lot of commodities, but these are of little value if they are not what
consumers desire
• One may have income, but certain commodities essential for well-being, such as nutritious
foods, may be unavailable
• Even when comparing absolutely identical commodities, one has to frame their consumption
in a personal and social context
Functionings are resulting from choices, given capabilities
• Functionings: the actual achievements or states of being
- E.g., being healthy, well-nourished, educated, mobile
• Capabilities: the real freedoms people have to achieve functionings, influenced by personal,
social and environmental factors
à given their personal features and their command over commodities
Subjective well-being according to Sen
= kind of psychological state of being – a functioning – that could be pursued alongside other
functionings such as health and dignity
Sen’s perspective helps explain why development economists have placed so much emphasis
on health and education, and more recently on social inclusion and empowerment
• Growth without development: HICs but poor health and education
• Real income is essential, but to convert the characteristics of commodities into functionings
requires health and education as well as income
Sen’s framework sees development as having both a physical aspect (tangible improvements
in living conditions) and a psychological aspect (freedom and empowerment)
à 3 objectives for broad and human-centred development:
1. Basic needs and essential goods: like food, shelter, healthcare, security
2. Higher living standards and well-being: income, job opportunities, education and cultural
values à greater self-esteem and fulfilment
3. Freedom and choice: expanding the range of economic and social choices
Happiness and development
Happiness is part of human well-being; greater happiness may expand an individual’s capability to
function
à as Sen argued, a person may well regard happiness as an important functioning for her
well-being
• Relationship between income and happiness is diminishing marginal utility
à studies show that financial security is the only one factor affecting happiness
Layard identifies 7 factors that surveys show affect average national happiness:
(1) Family relationships (2) Financial situation (3) Work (4) Community and friends (5) Health (6)
Personal freedom (7) Personal values
, • Importance of these factors may explain why the percentage of people reporting that they are
not happy/satisfied varies so widely among developing countries with similar incomes
Sustainable Development Goals (SDGs): a shared development mission
SDGs: successor to the earlier Millennium Development Goals (MDGs) and is a set of 17 broad goals
to be achieved by 2030, thereby committing to substantial achievements in ending multidimensional
poverty and improving the quality of life
• UN, World Bank, IMF, OECD, WTO, NGOs all had a voice in the formulation
3 new underlying principles of the SDGs:
1. Universality principle: SDGs apply to every nation (with action encouraged from every
sector)
2. Integration principle: all goals must be achieved; to do so it is necessary to account for their
interrelationships
3. Transformation principle: not sufficient to take ‘piecemeal’ steps
à scope and expanded ambition of the SDGs would not have been possible without the 8
adopted Millennium Development Goals (MDGs) as a precedent
• Managed to receive regular and sustained attention from their adoption in 2000 to end date of
2015 (end date of targets to be achieved)
• MDGs acknowledged the multidimensional nature of development and poverty alleviation;
end to poverty requires more than just increasing incomes of the poor
• Created by World Bank, IMF, OECD etc.
• MDGs assigned responsibilities to rich countries, including increased aid, removal of trade
and investment barriers, and eliminating unsustainable debts of low-income countries
Criticism of the MDGs
1. MDG targets were not ambitious enough
2. Goals were not prioritised
3. Goals were presented and treated in reports as stand-alone objectives; but in reality they are
complements
4. Lack of goals in reducing rich-country agricultural subsidies, improving legal and human rights
of the poor, slowing climate change etc.
à these criticisms of the MDGs led to changes in designing the SDGs
à still criticized for not being prioritised and having too many goals and targets
Chapter 2
Developing countries
= countries primarily in Asia, Africa, the Middle East, Latin America, eastern Europe and the former
Soviet Union that are presently characterised by low levels of living and other development deficits
• Used in the development literature as a synonym for less developed countries, or collectively
low- and middle-income countries
• The developed, high-income countries is the OECD
Human capital
= productive investments in people, such as skills, values, and health resulting from expenditures on
education, on-the-job training programs, and medical care
Classifying levels of national economic development
I: Conventional comparisons of average national income
Best-known system for income comparisons is used by the largest multilateral development bank –
The World Bank Group
= an organisation known as an international financial institution, that provides development
funds to developing countries in the form of interest-bearing loans, grants, and technical
assistance
Chapter 1
Development
= the process of improving the quality of all human lives and capabilities by raising people’s levels of
living, self-esteem, and freedom
How living levels differ around the world
Living standards: stylized sets of material living conditions
4-strata schema created by Hans Rosling
Lowest stratum: Second-lowest stratum Second-highest Highest stratum:
extreme poverty; stratum rich
multidimensionally
poor
Amount >1 billion Close to 3 billion >2 billion Close to 1 billion
$/day $1.90 a day per person $3.80 a day per person $15 a day per person $75 a day per
Solidly middle income person
Employment Subsistence economy Informal, in companies not Jobs not very stable Formal jobs with at
registered and without and often informal least some
worker protections or in protection
own small family enterprise
Cooking Open fire, smoke exits Basic, but use of kerosene Manufactured burners Modern appliances,
through hole in the roof or some other improved with improved fuel if including microwave,
energy source not electric plates dishwasher etc.
Food and Food insecure, majority May be food insecure or Usually food secure, Rich and diverse
nutrition of food grown by family vulnerable to falling into but many vulnerable diet, though obesity
Often malnourished food insecurity to fall into food may bring other
insecurity health risks
Clothing Used, worn, may be Inexpensive, often used, Inexpensive, new Well-fitting, perhaps
inadequate not well fitting, perhaps when purchased and designer
Flip-flops or even bare inadequate for weather worn/less-expensive Multiple, new,
feet Worn shoes and rubber- shoes comfortable dress
soled shoes and sport shoes
Education Majority now able to Finish primary school and Finish primary school, Complete high
attend primary school on average attend couple some finish school; +/- attend at
but may not complete it years longer secondary school least 1 year of post-
secondary education
Housing Self-constructed, natural Partly and perhaps fully Modest, but better Modern,
or found materials, often self-constructed, improved constructed, if not manufactured,
mud floor, corrugated tin roof comfortable professionally
Rural areas Rural and urban areas Urban areas constructed
Suburban
Furnishings Any pallet or bed, table, Basic tables and seatings, Electricity, purchased Filled with consumer
chair, or shelf is self- fans if electricity, power tables, chairs, beds; goods and durables,
constructed; no connection may be illegal fans or even a room WIFI, home
electricity and improvised AC, space heater, entertainment
television centres
Water Hand-carried in buckets From tap, typically Piped directly to Safe water taps
from public, often outdoors and perhaps a house site; may need throughout the
unsanitary sources +50-metre walk, needs treating house
self-treating with chlorine
or boiling
Sanitation Pit latrine or open Latrine Toilets, but many lack Hygienic, modern
defecation full indoor plumbing bathroom plumbing
Transportation On foot Bicycle Motor bike Car
Subsistence economy
= an economy in which production is mainly for personal consumption and the standard of living yields
little more than basic necessities of life, food, shelter and clothing
How countries are classified by their average levels of development
The World Bank classifies countries according to 4 ranges of average national income: (1) Low
(2) Lower-Middle (3) Upper-Middle (4) High
• Have been strong income growth in average incomes in a majority of low- and middle-income
countries
• Note, typical country may have people living at very different income levels or living standards
strata
,Gross national income (GNI)
= total domestic and foreign output claimed by residents of a country; consisting of: 𝐺𝐷𝑃 +
𝑓𝑎𝑐𝑡𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒𝑠 𝑒𝑎𝑟𝑛𝑒𝑑 𝑏𝑦 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠 −
𝑖𝑛𝑐𝑜𝑚𝑒 𝑒𝑎𝑟𝑛𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑒𝑐𝑜𝑛𝑜𝑚𝑦 𝑏𝑦 𝑛𝑜𝑛𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠
• Low-income country (LIC): GNI per capita of <$996 in 2018
- About 10% of the world’s population; majority located in sub-Saharan Africa
• Lower-middle income country (LMC): GNI per capita between $996 and $3,895 in 2018
• Upper-middle income country (UMC): GNI per capita between $3,896 and $12,055 in 2018
• High income country (HIC): GNI per capita of at least $12,055 in 2018
à the UN’s designation of ‘least-developed countries’ is similar to the LICs; low education and health,
high economic vulnerability and low income
As recently as 1990, half of the global population lived in low-income countries
à biggest factor in this improvement is the rapid income growth in China and India
• But averages only tell part of the story; well-being cannot be measured by income
alone
- United Nations Development Programme (UNDP) classifies countries considering
their health and education attainments as well in the Human Development Index
(HDI)
Economics and development studies
Development economics: study of how economies are transformed from stagnation to growth and
from low-income to high-income status, and overcome problems of extreme poverty
• Next to traditional economic topics, social, political and institutional mechanisms are also
addressed
Central role of women
Women play a central role, because on one side they tend to be poorer than men in all forms and on
the other hand they have the primary responsibility for child rearing; they spend more money on their
children than fathers do and transmit values
à development in its essence represents the whole gamut of change by which a social system
moves away from a condition of life widely perceived as unsatisfactory toward a situation or
condition of life regarded as materially and spiritually better
• Social system: organisational and institutional structure of a society, including its values,
attitudes, power structure, and traditions
Institutions
= constitutions, laws, regulations, social norms, rules of conduct, and generally accepted ways of
doing things
The meaning of development: Amartya Sen’s ‘capability’ approach
Amartya Sen argues that ‘capability to function’ is what really matters for status as a poor or
non-poor person
• Sen’s approach redefines development by emphasizing that income and wealth are not ends
in themselves but means to human welfare and freedom
• Sen argues that poverty cannot be properly measured by income or utility as
conventionally understood
- What matters fundamentally is not the things a person has – or the feelings these
provide – but what a person is, or can be, and does, or can do
- It is not just the characteristics of commodities consumed, as in the utility approach,
but what use the consumer can and does make of commodities
= called the functionings by Sen
= what people do or can do with the commodities of given characteristics that they come to possess
or control à a valid being or doing
,Disparities in well-being: differences in income do not translate directly into well-being due to
factors like health, education, social climate etc.
Sen identifies 5 sources of disparity between (measured) real incomes and actual advantages:
1. Personal heterogeneities
à such as those connected with disability, illness, age or gender
2. Environmental diversities
à such as infectious diseases in the tropics or the impact of pollution
3. Variations in social climate
à such as the prevalence of crime and violence and social capital
4. Distribution within the family
à economic statistics measure income received in a family, but it may be distributed
unevenly (ex. girls get less medical attention or education)
5. Differences in relational perspectives
à some goods are essential because of local customs and conventions
Thus: looking at real income levels/levels of consumption of specific commodities cannot
suffice as a measure of well-being
• One may have a lot of commodities, but these are of little value if they are not what
consumers desire
• One may have income, but certain commodities essential for well-being, such as nutritious
foods, may be unavailable
• Even when comparing absolutely identical commodities, one has to frame their consumption
in a personal and social context
Functionings are resulting from choices, given capabilities
• Functionings: the actual achievements or states of being
- E.g., being healthy, well-nourished, educated, mobile
• Capabilities: the real freedoms people have to achieve functionings, influenced by personal,
social and environmental factors
à given their personal features and their command over commodities
Subjective well-being according to Sen
= kind of psychological state of being – a functioning – that could be pursued alongside other
functionings such as health and dignity
Sen’s perspective helps explain why development economists have placed so much emphasis
on health and education, and more recently on social inclusion and empowerment
• Growth without development: HICs but poor health and education
• Real income is essential, but to convert the characteristics of commodities into functionings
requires health and education as well as income
Sen’s framework sees development as having both a physical aspect (tangible improvements
in living conditions) and a psychological aspect (freedom and empowerment)
à 3 objectives for broad and human-centred development:
1. Basic needs and essential goods: like food, shelter, healthcare, security
2. Higher living standards and well-being: income, job opportunities, education and cultural
values à greater self-esteem and fulfilment
3. Freedom and choice: expanding the range of economic and social choices
Happiness and development
Happiness is part of human well-being; greater happiness may expand an individual’s capability to
function
à as Sen argued, a person may well regard happiness as an important functioning for her
well-being
• Relationship between income and happiness is diminishing marginal utility
à studies show that financial security is the only one factor affecting happiness
Layard identifies 7 factors that surveys show affect average national happiness:
(1) Family relationships (2) Financial situation (3) Work (4) Community and friends (5) Health (6)
Personal freedom (7) Personal values
, • Importance of these factors may explain why the percentage of people reporting that they are
not happy/satisfied varies so widely among developing countries with similar incomes
Sustainable Development Goals (SDGs): a shared development mission
SDGs: successor to the earlier Millennium Development Goals (MDGs) and is a set of 17 broad goals
to be achieved by 2030, thereby committing to substantial achievements in ending multidimensional
poverty and improving the quality of life
• UN, World Bank, IMF, OECD, WTO, NGOs all had a voice in the formulation
3 new underlying principles of the SDGs:
1. Universality principle: SDGs apply to every nation (with action encouraged from every
sector)
2. Integration principle: all goals must be achieved; to do so it is necessary to account for their
interrelationships
3. Transformation principle: not sufficient to take ‘piecemeal’ steps
à scope and expanded ambition of the SDGs would not have been possible without the 8
adopted Millennium Development Goals (MDGs) as a precedent
• Managed to receive regular and sustained attention from their adoption in 2000 to end date of
2015 (end date of targets to be achieved)
• MDGs acknowledged the multidimensional nature of development and poverty alleviation;
end to poverty requires more than just increasing incomes of the poor
• Created by World Bank, IMF, OECD etc.
• MDGs assigned responsibilities to rich countries, including increased aid, removal of trade
and investment barriers, and eliminating unsustainable debts of low-income countries
Criticism of the MDGs
1. MDG targets were not ambitious enough
2. Goals were not prioritised
3. Goals were presented and treated in reports as stand-alone objectives; but in reality they are
complements
4. Lack of goals in reducing rich-country agricultural subsidies, improving legal and human rights
of the poor, slowing climate change etc.
à these criticisms of the MDGs led to changes in designing the SDGs
à still criticized for not being prioritised and having too many goals and targets
Chapter 2
Developing countries
= countries primarily in Asia, Africa, the Middle East, Latin America, eastern Europe and the former
Soviet Union that are presently characterised by low levels of living and other development deficits
• Used in the development literature as a synonym for less developed countries, or collectively
low- and middle-income countries
• The developed, high-income countries is the OECD
Human capital
= productive investments in people, such as skills, values, and health resulting from expenditures on
education, on-the-job training programs, and medical care
Classifying levels of national economic development
I: Conventional comparisons of average national income
Best-known system for income comparisons is used by the largest multilateral development bank –
The World Bank Group
= an organisation known as an international financial institution, that provides development
funds to developing countries in the form of interest-bearing loans, grants, and technical
assistance
