Development Economics: A Policy Analysis Approach

Eckhard Siggel

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9780754642930
• eBook ISBN: 9781351944779
• Topic: Social Sciences
• Subtopic: Business General
• Index: Social Sciences

This innovative textbook focuses upon economic policy in the context of developing countries. The aim is to show how economic theory can be applied to the real and urgent challenges facing the developing world. To achieve its unique policy focus the text includes seventeen country case studies (in the form of assigned questions) as well as comprehensive theoretical coverage. The topics covered by the book are those most relevant to the developing world such as how to accelerate economic growth, ways in which foreign savings can be used to promote development, and the choice of policies to successfully stabilize inflationary and debt-burdened economies. The country case studies featured are those most closely illustrative of the theory. Solutions for nine of the cases are provided in the text; solutions for the other eight are made available to instructors. Development Economics: A Policy Analysis Approach is ideal for undergraduate and introductory graduate courses. It provides a hands-on guide to making and assessing economic policy decisions in the developing world.

Chapter 1

Economic Development: Concept and Measurement

Many economic concepts are widely used but rarely defined with some degree of precision. Economic development is one of these concepts. Its meaning is best apprehended by comparison with economic growth and by thinking about its measurement. The present chapter is devoted to defining these concepts and to discussing their measurement. The attempt to define development and growth in sections 1.1 and 1.2 is followed by a discussion of the income distribution and poverty in section 1.3, and an examination of the problems arising in international comparisons of income levels in 1.4. The chapter concludes with a short discussion of composite development indicators, notably the Human Development Index, which is examined in more detail in the first of our case studies. The other two case studies of this chapter deal with the purchasing power parity (PPP) approach to international income comparisons, as well as with an approach to overcome certain problems in deflating the national accounts.

1.1 The Concept of Economic Development

Economic development is understood to be a process, which leads a country from a state of underdevelopment, characterized by low income and a poor quality of life, to one of higher living standards for a large majority of its people. This rather general definition has a normative connotation, since it describes development as a desirable process, the outcome of which is an increased level of welfare. Its disadvantage lies in its generality, leaving open the question of how exactly the level of development is to be measured. More specific indicators exist, but they tend to narrow down the concept of development. It is therefore necessary to apply several, rather than only one measure.

If the average level of income of a country is taken as an indicator of its standard of living, the question remains whether an increase of the level of income is shared by a large proportion of the population or by only a minority. In other words, it is important to know whether the distribution of income has changed over time and in what direction. Since the average income level hides information about the distribution of income among a country’s citizens, a second indicator is needed to describe the distribution of income. In section 1.3 we introduce the most frequently used method of measuring the income distribution, as well as a method of integrating growth and distributional objectives.

Another characteristic of economic development is that improvements of the living standard are normally accompanied by changes in the structure of the economy. Structural changes have become known as development criteria in their own right, for instance the increasing importance of the industrial and service sectors relative that of the primary sector. Economic development can therefore also be described as a process of growth and structural change, where the latter may refer to changes in the sector composition or to other structural effects.

High average income, even if distributed in a socially acceptable way, is not a guarantee for the fulfilment of human needs in areas such as education, health care, longevity, or personal freedom. It has therefore become standard practice to define economic development by reference to sets of indicators measuring these aspects. The Human Development Index, computed and published annually since 1990 by the UNDP, is a composite indicator of several welfare aspects including education, health, and per person income. It is the subject of the first case study, where it is explained in some detail.

The concept of national income as measured in the national accounts is not a perfect measure of material well-being, nor of the level of production, because it fails to include various forms of income that are either not marketed or unrecorded, such as the value of housework, child raising and various activities associated with subsistence agriculture and the informal sector. The level of subsistence and informal sector activities is usually estimated by national statistics bureaus and added on to the national accounts, but many other activities, in particular female work in the household, are not included in the concepts of domestic production and income. This is a shortcoming from the point of view of trying to measure all economic activity, but it is widely accepted because of the difficulty of measuring other activities.

In spite of these limitations, the average or per capita level of income is often used as a broad indicator of the level of development. The reason for this usage is threefold: data availability, relative comparability of this measure across countries, and a strong correlation with other indicators of well-being. Indicators of education and health, for instance, tend to be positively related to the level of per capita income. However, it is always possible to find a group of countries in particular time periods, for which such a correlation is either insignificant or even negative. This point was made by Amartya Sen, who showed that for a group of countries like China, Sri Lanka, Brazil, Mexico and South Africa, the correlation between GNP per head and the life expectancy at birth seemed to be negative (Sen, 1989). For a very large number of countries, however, the correlation between these indicators can be shown to be positive and significant.

Accepting the average level of income as (however imperfect) a measure of the level of development of a country amounts to equating the process of development with that of economic growth. It follows from the earlier discussion that the concept of economic development is a wider and more complex one than that of economic growth. However, economic development rarely occurs without growth. When production and income are stationary, any improvement of the living standard of the poor comes at the expense of others. A simple redistribution of income from the rich to the poor rarely makes a society better off in the longer run.

Finally, a further and very important difference between economic development and growth is the consideration of institutions. The formation of institutions, both private and public, and their governance is a distinguishing feature of economic development. While most traditional approaches in economics are limited to analysing non-institutional factors, attention has recently shifted towards analyzes of institutional growth covering private firms, government, as well as norms and networks of the civil society. This new emphasis in development economics is clearly visible in the fact that two recent World Development Reports of the World Bank (2002 and 2003) are dedicated to building and transforming institutions. The latter Report also contributes to a widening of the concept of economic development by adding the dimension of sustainability.

1.2 Measurement of Economic Growth

Economic growth is an increase in real income or production (GDP or GNP) of an economy. In order to result in an increase in living standards, economic growth has to occur in terms of per capita income. In other words, income has to grow faster than the population. When measuring per capita income and its growth, we must first remember the differences between national income, gross national product (GNP), and gross domestic product (GDP), although they do not matter for the present purpose. While GDP is the total value of all economic activities that take place within the geog...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgements
• Dedication
• 1 Economic Development: Concept and Measurement
• 2 Economic Growth and its Determinants
• 3 Financing Economic Growth from Domestic Sources
• 4 Financing Economic Growth from External Sources
• 5 International Trade and Development
• 6 External Balance and the Exchange Rate
• 7 Regional Integration and Monetary Union
• 8 Stabilization, Structural Adjustment and the Role of the IMF
• 9 Cost-Benefit Analysis and Competitiveness
• 10 Privatization and Public Sector Reform
• Index