Economics, Institutions, and

Development: A Global
Perspective

Introduction to Development
Economics

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Principles and Concepts:
Economic Development
 What is the real meaning of
development?
 How can one apply economic concepts
and theories to gain a better
understanding of development process?
 Why do some countries develop and
others remain poor?
 What are the sources of development and
how do we measure development?
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Principles and Concepts:
Economic Development
 Does historical record of development
help us understand it better?
 What are the most influential theories of
development and are they compatible?
 Is development process of developing
nations independent or interdependent
with that of developed nations?

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Principles and Concepts:
Economic Development
 Examples of an affluent economy and
subsistence economy.
 Nature of development economics:
 Traditional economics- efficient
allocation of scarce resources
 Political economics- social and political
process
 Development economics- Role of
values, attitudes, and institutions
 So, what do we mean by development?
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Definition of Economic Development:
1950s
 In economic terms, development is the
capacity of a nation to generate and sustain
an annual increase in its GNP of 5% or more.
 Traditional economic measures:
 GDP: is the market value of all final goods and
services produced within a country in a given
period of time
Y=C+I+G+NX
 GNP: is the market value of all final goods and
services produced by permanent residents of a
country in a given period of time
GNP= GDP+ net factor income from abroad
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Definition of Economic Development:

 Common alternative index is the rate of growth of income

per capita or per capita GNP
 Per capita GNP: is the per-head value of final goods
and services produced by permanent residents of a
country in a given period of time. It is converted to USD
using the current exchange rate.
 Classical Economics
 Adam Smith:
 The increased capacity of a country to produce wealth
 Increased wealth implied a higher standard of living for
the country’s citizens

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 Early Development Economist
1950s and 60s
 Continued emphasis on wealth creation (output
and growth)
 W.A. Lewis
 Widening the range of human Choice
 The central problem in the theory of economic
development is to understand the process by which a
community which was previously saving at 4 or 5
percent of its national income ..converts itself into an
economy where voluntary saving is running at 12 to 15
percent of national income, or more
 However, rapid economic growth did not always
translate into reduced poverty or generalized
improvements in standard of living
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Problems:
 Underreporting of income by developing
countries
 High proportion of income is generated
for self-consumption.
 Prices of non-traded goods are not
appropriately reflected in exchange
rates.
 Markets are not competitive and
externalities are not reflected.
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Definition of Economic Development:
1970s
 Dethronement of GNP in the 1970s and
increasing emphasis on “redistribution
from growth”
 Increasing emphasis on non-economic
social indicators
 Economic development consists of the
reduction or elimination of poverty,
inequality and unemployment within the
context of a growing economy.

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 The 1980 and 1990 Calls for a
broader perspective

 Environmental sustainability
 Could wealth expansion be considered positive if it came at
the cost of the environment
 Political and Civic Freedoms
 Was rapid growth worth the sacrifice of political and civic
freedoms and were they necessarily contradictory (in the
short run)
 Human Development
 Paying attention to the “fuller realization of human potential”
 Incorporation of Sen’s concept of “capabilities” and
“functionings”
 Good Governance
 Often interpreted (erroneously) as the arrival of democracy
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 So what has changed over the
years?
 Implicit in all these definitions and approaches is:
 Development as a process as well as an end (goal)
 Expansion of wealth (economic growth)
 Structural, social and cultural transformation
 Achievement of a higher quality of life
 However, earlier definitions:
 Assumed a separation of process and end
 Concentrated on process and
 Assumed the process (growth and structural transformation)
led “naturally” to the end (a higher quality of life)
 Later definitions:
 Assume no separation of process and end
 Attempt to explicitly define (and therefore to measure) quality of life
 And also to estimate the strength of the link between process and
end

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Human goals of economic development :
Sen’s “Capabilities” Approach: 1985
 Economic growth is not an end in itself and has to
enhance the lives people lead and the freedoms
that they enjoy
 Capability to function is what matters for status
as a poor/non-poor person and it goes beyond
availability of commodities
 Capabilities: “freedom that a person has in terms
of the choice of his functionings,…”
 Functionings is what a person does with
commodities of given characteristics that they
possess/control
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 The concept of functionings reflects the various
things a person may value doing
 Therefore, development cannot focus only on
income, but we also need to look at other factors
impacting a person’s capability to function.
 Amartya Sen traced five sources of disparity
between real incomes and actual advantages:
 Personal heterogeneities
 Environmental diversities
 Social climate variations
 Differences in relational perspectives
 Distribution within family

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3. The Special Challenge of
Development
 Because economic development is:
 largely a normative concept and
 Speaks often to the process of institutional development
(the gradual construction of the institutional infrastructure
of an advanced capitalist economy)
 It poses particular challenges:
 We need to be aware of the premises underlying general
economic models and whether they apply
 Each country’s developmental objectives must be
ascertained and kept in mind in determining optimal
approaches
 Cultural systems, social systems and the global context are
all important in determining both what is possible and what
is optimal 15
Definition of Economic Development:
1990s
 World Bank in its 1991 WDR asserted that
the “challenge of development is to improve
the quality of life.”
 The improved QOL involves higher incomes,
better education, higher standards of health
and nutrition, less poverty, a cleaner
environment, more equality of opportunities,
greater individual freedom, and a richer cultural
life.

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 Economic factors
 capital
 Labor
 Natural resources
 technology
 established markets (labour, financial, goods)
 Non-economic factors (institutional, social,
values)
 attitudes toward life and work
 public and private structures
 cultural traditions
 systems of land tenure, property rights
 integrity of government agencies

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Definition of Economic Development:

• Conclusion:
“Development is a multi dimensional
process involving 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.” (Todaro and
Smith)
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 Development is both a physical reality and a
state of mind for attaining a better life.
 Three basic core values as a practical guideline
for understanding development
 Sustenance
 Self-esteem
 Freedom
 Specific components of better life vary from time
to time and from society to society.
 Three Objectives of Development:
 Increase availability and distribution of basic
goods
 Raise levels of living
 Expand range of social and economic choices
available to individuals
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 Implications
for Development Economics

Positive Economics Normative Economics

Development Economics

Economic Growth Structural Transformation Development

• Theories of Growth • Development of • Equity

• General economic Institutions • Sustainability
models • Working with multiple • Cultural and Social
equilibria Integrity
• Social and Cultural • Defining Social
Transformation Objectives
• The Role of Government
• Role of internal and
External Institutions
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 The Concept of
Development

Definitions, Theories and

Contemporary Perspectives

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Definitions of Development

 For almost every writer a different definition

of development exists
 Important to first distinguish between:
 a. Development as a state or condition-
static
 b. Development as a process or course of
change- dynamic

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Meaning of Development-Todaro

 Development is not purely an economic

phenomenon but rather a multi-dimensional
process involving reorganization and
reorientation of entire economic AND social
system
 Development is process of improving the
quality of all human lives with three equally
important aspects. These are:

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Todaro’s Three Objectives of Development
 1. Raising peoples’ living levels, i.e. incomes
and consumption, levels of food, medical
services, education through relevant growth
processes
 2. Creating conditions conducive to the growth
of peoples’ self-esteem through the
establishment of social, political and economic
systems and institutions which promote human
dignity and respect
 3. Increasing peoples’ freedom to choose by
enlarging the range of their choice variables,
e.g. varieties of goods and services

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Alternative Interpretations of Development
(Mabogunje)

 Development as Economic Growth- too

often commodity output as opposed to people
is emphasized-measures of growth in GNP.
Note here the persistence of a dual economy
where the export sector contains small
number of workers but draws technology as
opposed to traditional sector where most
people work and is dominated by inefficient
technology
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Alternative Interpretations of Development
 Development as Modernization-
emphasizes process of social change which
is required to produce economic
advancement; examines changes in social,
psychological and political processes;
 How to develop wealth oriented behavior and
values in individuals; profit seeking rather
than subsistence and self sufficiency
 Shift from commodity to human approach
with investment in education and skill training

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Alternative Interpretations of Development
 Development as Distributive Justice- view
development as improving basic needs
 Interest in social justice which has raised three
issues:
 1.Nature of goods and services provided by
governments
 2. Matter of access of these public goods to
different social classes
 3. How burden of development can be shared
among these classes
 Target groups include small farmers, landless,
urban under-employed and unemployed
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Alternative Interpretations of Development
 Development as Distributive Justice- view
development as improving basic needs
 Interest in social justice which has raised three issues:

 1.Nature of goods and services provided by

governments
 2. Matter of access of these public goods to different
social classes
 3. How burden of development can be shared among
these classes
 Target groups include small farmers, landless, urban
under-employed and unemployed

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Marxist View of Development
 Emphasizes Mode of Production - elements
and activities necessary to produce and
reproduce real, material life
 Capitalist (market economy) mode depends
on wage labor whose labor power produces a
surplus which is accumulated and
appropriated by the employer-result is often
class conflict in capitalist societies

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Neocolonial Dependence Model
 Outgrowth of Marxist thinking-Dos Santos
 Existence of underdevelopment due to historical evolution of
an unequal international capitalist system of rich country-
poor country relations
 Sets up center (developed countries) versus periphery
(developing countries) contrast
 Attempts to become self-reliant and progressive are
surpressed by this relationship
 Moreover certain elites in the developing world (e.g
landlords, entrepreneurs, merchants) enjoy high incomes,
social status and political power and thus perpetuate
inequality and conformity and are rewarded
 They serve international power groups such as multi-national
firms, assistance agencies (World Bank) and other agents

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Sustainable Development
 Defined as development that is likely to achieve lasting
satisfaction of human needs and improvement of the quality of
life and encompasses:
 Help for the very poorest who are left with no option but to
destroy their environment to survive
 Idea of self-reliant development with natural resource constraints
 Cost effective development using different economic criteria to
the traditional –i.e. development should not degrade
environment
 Important issues of health control, appropriate technologies,
food self-reliance, clean water and shelter for all
 People centered activities are necessary- human beings are the
resources in the concept

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