High Human Capital. Low Human Capital. Low Income. High Income. Urban. Rural. Modern. Traditional. Informal Institutions/Markets

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1 Voices of Poor When one is poor, she has no say in public, she feels inferior. She has no food, so there is famine in her house; no clothing, and no progress in her family. --- A poor woman in Uganda For a poor person everything is terrible illness, humiliation, shame. No one needs us. We are like garbage that everyone wants to get rid of. --- A blind woman in Moldova We have to line up for hours before it is our turn to draw water. --- A woman in Malawi Poverty is. low salaries and lack of jobs. And it s also not having medicine, food, and clothes. --- A poor man in Brazil

2 Introduction Over 40 percent of the world s population lives in poverty on less than $2 per day People in developing countries live in poor conditions and lack access to reliable and good health and education facilities A significant section of the society are even deprived of basic necessities of life such as food, good shelter, and safe drinking water.

3 Basic Questions Why do so many people have low standards of living and what are their characteristics? What are the major impediments to the development process? What policies can be adopted to increase the standards of living? What is the role of globalization and foreign aid in the process of development? What is the role of public policies?

4 Definition of Economic Development Development is the process of structural transformation Low Human Capital Low Income Rural Traditional Informal Institutions/Markets High Human Capital High Income Urban Modern Formal Institutions/Markets

5 Main Goals Measure, analyze, and document the trends in the process of structural transformation Analyze factors constraining and inhibiting the process of structural transformation Study policies and strategies which can facilitate such transformation

6 Measurement Issues The issue of measuring development has been controversial and our thinking has evolved over time. The most common and widely used measure of development is per-capita income of a country. Per-capita income is an indicator of purchasing power of inhabitants of a country.

7 GDP and GNI GDP (Gross Domestic Product) is the total value of the final output of goods and services produced in a country. GNI (Gross National Income) is simply GDP plus net flows of foreign factor income. Per-capita income is usually proxied by either GNI per capita or GDP per capita.

8 Identification of Developing Countries According to this definition, developing countries are countries with low per-capita income. The problem of economic development is simply to increase the per-capita income of developing countries. The World Bank uses this definition to distinguish between developing and developed countries.

9 Income Per-Capita of Selected Countries

10 Purchasing Power Parity (PPP) Per-capita income comparison exaggerates the differentials in standards of living between developing and developed countries. The amount of goods and services one can purchase depends on two things: income and the price level. Same amount of income buys fewer goods and services if prices are high compared to the case when prices are low.

11 Purchasing Power Parity (PPP) PPP takes into account price differences across countries. It is calculated using a common set of international prices for all goods and services produced, valuing goods in all countries at U.S. prices. PPP is defined as the number of units of a foreign country s currency required to purchase the identical quantity of goods and services in the local markets as $1 would buy in the United States.

12 A Comparison of Per Capita GNI, 2005

13 World Bank Definition Low Income Countries (LIC) Countries having a PPP per-capita gross income of $976 or less in 2008 Middle Income Countries (MIC) - Countries having a PPP per-capita gross income of more than $976 but less than $11,906 in 2008 High Income Countries (HIC) - Countries having a PPP per-capita gross income of more than $11,906 in 2008

14 World Income Distribution in 2009 No. of Countries Series: SERIES02 Sample Observations 156 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability Per-capita Income ($)

15 Limitations of Per-Capita Income 1. This definition is quite narrow and can be misleading. Changes in per-capita income does not reflect structural change. 2. It ignores the issue of inequality. High growth rate may not ``trickle down. 3. In 50 and 60 s many developing countries did reach their economic growth targets but the standard of living of the masses of people remained for the most part unchanged. 4. Higher per-capita income does not necessarily mean people are happy and satisfied.

16 Income and Happiness

17 New Approach to Development ``Economic growth cannot be sensibly treated as an end in itself. Development has to be more concerned with enhancing the lives we lead and the freedoms we enjoy. Dr. A. K. Sen Development is a multidimensional process involving major changes in social structures, attitudes, institutions as well growth and redistribution. Problems of poverty, inequality, and institutional changes require direct attack and policy interventions. Development is more concerned with enhancing the lives people lead and the freedoms they enjoy. Income and wealth are not in ends in themselves but instruments for other purposes.

18 Capabilities Approach Development process has to be people-centric Development involves three things: 1. Increasing the availability of commodities 2. Expanding the capabilities of individuals to use these goods 3. Enhancing the freedom of choice of people Development is the process of increasing capabilities of human beings.

19 Core Values of Development 1. Sustenance: Sustenance is the ability to meet basic needs of people. 2. Self-Esteem: Sense of worth and self-respect and feeling of not being marginalized are extremely important for individual s well being. 3. Freedom from Servitude: Human freedom, the ability to choose, is essential for the well being of individuals.

20 Human Development Human development has three components: 1. Well being: expanding people s real freedoms or opportunities freedom. 2. Empowerment and agency: enabling people and groups to act to drive valuable outcomes. This requires process freedom. 3. Justice: expanding equity, sustaining outcomes over time and respecting human rights and other goals of society.

21 Components of Human Capital 1. Opportunities Freedom: People should have capabilities and access to goods and services. 2. Process Freedom: People should have means and opportunities to shape their own destiny. They should be empowered to bring about change in their own lives, in their communities, or on a wider scale. Political freedom civil rights and democracy are vital to achieve this goal. The governments must be accountable to the people. 3. Justice: Equity is fundamental to human development. A highly unequal distribution of income, resources, and opportunities: political, social, and economic undercuts opportunities and process freedoms.

22 Human Development

23 Human Development Index Human development index (HDI) is an attempt to capture the broader view of development. Started in 1990 by the United Nations Development Program (UNDP) HDI includes measure of per-capita income, health and education Countries with higher HDI score are considered to be more developed.

24 Original HDI The methodology of calculating HDI has changed over time. Till 2009, HDI for a country was calculated as follows: HDI = 1/3(Life Expectancy)+1/3(Education)+1/3(Per-Capita Income) Education included adult literacy rate and school enrollments. The value of HDI varies between 0 and 1. Till 2009, UNDP classified different countries on the basis HDI values of as follows: Low HD Countries < < Medium HD Countries <.8.8 < High HD Countries <.9 Very High HD Countries >.9

25 Human Development Index Variations for Similar Incomes (2004 Data)

26 Criticisms of Original HDI Ignoring Inequalities: HDI does not take into account inequalities in human development attainments across gender and socio-economic groups. Ignoring Quality Differences: There are enormous differences in quality of education and health status. Life expectancy only captures mortality rate. It does not capture the quality of health. Perfect Substitutability Across the Three Components: In the original HDI one unit of income is treated as equivalent to one unit of health or education. There is no justification for such an assumption. In light of these criticisms, starting 2010 the UNDP has changed the methodology to calculate HDI. We will study the new methodology in the next lecture.

27 Millennium Development Goals In September 2000, the 189 member countries of the United Nations adopted eight Millennium Development Goals (MDGs) committing themselves to eradicate extreme forms of deprivation by 2015.

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30 Criticisms of MDGs Firstly, many critics argue that the goals and targets are not ambitious enough. It merely represents the past rates of improvement witnessed in the 80 s and 90 s. Secondly, goals are not prioritized. Thirdly, classifying people living on less than $ 1 a day as extremely poor is quite arbitrary.

31 Achievements The progress in achieving MDGs has been uneven. The main problems are: 1. Lack of political will 2. Lack of resources such as hospitals, trained staff 3. Corruption 4. Lack of information 5. Shortfall in foreign aid