Devecon Lecture1 Introduction

Development economics Lecture 1: Introduction Julie Chytilová [email protected]

Overview


Characteristics of underdevelopment




How poor people live




Requirements of the course

Development economics Lecture 1: Introduction

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Characteristics of underdevelopment




Both symptoms and causes Poverty not only having little money




Examples we are going to talk about




Education  Health and well-being  Population growth  Access to financial services 

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Sectors of the economy



Dominance by agriculture and petty services Little manufacturing industry Distribution of employment Low-income Middle-income High-income

Agriculture 65% 28% 5%

Industry 18% 32% 28%

Services 17% 40% 67%

Source: Thirlwall (2006), ILO (2002)




Workers in agriculture Subsistence farmers  Tenant farmers  Landless laborers 

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Diminishing returns in agriculture


Land = fixed factor of production -> decreasing marginal product

MPL

Subsistence wage

Labor




Limit to employment in agriculture




Many people -> on average earn low income 

Family farms



Migration to towns -> large informal sector: street trading, haircutting, shoeshining, transport,…

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Sectors of the economy

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Low capital accumulation


Industry: increasing returns




All factors are variable (vs. fixed land)




Low level of capital






Physical



Human

Low capital accumulation poverty

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Exports dominated by primary commodities


Export: primary commodities, low value added




Import: manufactured goods




Ratio of export to import prices = barter terms of trade 

Terms of trade of primary goods relative to manufactured goods have been falling down




Prices of primary commodities cyclically volatile




Low level of diversification

Primary commodities as a percentage of exports East Asia and Pacific South Asia Latin America and Caribbean Middle East and North Africa Sub-Saharan Africa

Development economics Lecture 1: Introduction

16% 22% 50% 79% 62%

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Exports dominated by primary commodities Percentage of merchandise exports (2000)

Low income Middle income High income Sub-Saharan Africa

Agricultura l raw materials 4.2 2.3 1.6 5.8

Food 15.0 9.3 6.1 16.9

Fuel 23.6 22.2 5.1 29.0

Manufactu res 50.9 59.0 81.9 35.1

Metals 5.8 4.8 2.4 8.0

Source: World Development Indicators (2004)

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High export concentration Concentration and diversification indeces Concentration index 0.110 0.067

Diversification index 0.272 0.124

Number of products 260 260

Africa Zambia Uganda Chad

0.309 0.415 0.559 0.781

0.619 0.833 0.861 0.733

258 129 65 7

China India Czech Republic USA

0.077 0.167 0.080 0.094

0.454 0.615 0.389 0.261

254 237 246 257

Developing economies Developed economies

Source: UNCTAD Handbook of Statistics (2008)

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High export concentration Coffee 20% Fish 15% Gold 13% Other <5%

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Education

Low income Sub-Saharan Africa Middle income High income

Gross enrollment ratio Primary Secondary Tertiary 94 46 10 87 111 75 22 102 106 61

Adult literacy rate Male Female 72 53 71 56 92 83

Pupil-teacher ratio Primary Secondary 32 25 43 24 25 20 16 14

Source: World Development Indicators (2004)




Under-provision of education




125 million children receive no primary education, 1/3 in Africa




Gender gap

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Education

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Health and well-being

Infant mortality rate (per 1000 births) Maternal mortality ratio (per 100,000 births) Life expectancy Physicians (per 1000 people)




Low HDI countries 104 595 51 0.1

High HDI countries 6 8 77.5 2.7

Udaipur 

Average BMI index = 17.8 (18.5 = cutoff for being underweight)



55% of adults are anemic



72% at least one symptom of disease



46% report an illness

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Health and well-being Proportion of people aged 15-49 with HIV worldwide living in particular country (2003)







29 million people worldwide, 19 million in Africa (2003) Lower productivity and income Virtual generation of orphans (in 2000 estimated 10 million of AIDS orphans in Africa) Lower life expectancy: in Zimbabwe is 42, in the absence of AIDS is estimated to be 64.

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Health and well-being Clinical malaria episodes (2004), WHO

Development economics Lecture 1: Introduction

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40% of people are at risk of malaria

•

Mostly in developing countries

•

> 500 mil. ill every year

•

> 1 mil. deaths every year

•

Mostly affects children (Africa 20% of childhood deaths)

•

African children have on average 1.6-5.4 episodes of malaria every year

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Rapid population growth

Low-income Middle-income High-inco e

Average annual population growth rate (1990-2005) 2.0% 1.1% 0.7%

Death rate (2005) 10 8 8

Birth rate (2005) 29 16 12

Source: World Development Indicators (2007)




Population growth (in %): birth rate – death rate Birth rate: newly born per 1000 population  Death rate: deaths per 1000 population 




Age structure Developing countries: children under 15 = 40%  Developed countries <20% 




Large and young families

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Fertility Number of family members in poor households 7-8 (median) USA = 2.5

2.5-5 adults (joint families)

Young (<18) / old (>51) = 6 (median) USA = 1

Source: Banerjee and Duflo (2006)

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Fertility

World Development Indicators (2006) Development economics Lecture 1: Introduction

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Causes and consequences of population growth





Population growth  poverty 

Living standard



Food supply



Education and health systems



Employment opportunities

Poverty  population growth 

Poor health environment



Help of children when parents are sick or old, household labor



Local institutions promoting high number of children (clan)

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How poor spend their money


Food: 56-78%




Festivals and celebrations: 10% in Udaipur, India, 0% in Nicaragua




Tobacco and alcohol: <1% in Peru, 8.1% in Mexico




Radio ownership: 11% in Udaipur, 60% in Nicaragua, 70% in South Africa and Peru




TV ownership: 0% in Udaipur, 40% in Nicaragua

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Ownership of assets Land 4% in Mexico, 30% in Pakistan, 37% in Guatemala, 50% in Nicaragua, 65% in Peru, 85% in Panama



Very small landholdings

(1.3% in Tanzania – 99% in Mexico)

20 40 60 80 100



Latrine

0





Large

variation in ownership of

Piped

water (0% in Udaipur – 36% in Guatemala) Electricity

(0% in Udaipur – 100% in Nicaragua)

Development economics Lecture 1: Introduction

%

assets

House equipment

72 91

Karnataka (2007)

42 30

34

21

11

16

6 19

Electricity Black and white TV Fan Electric iron Bicykl Water pump Indoor latrine

25

8 26

28 40 7 11

23 22

17 38 49 13

Radio Colour TV Telephone Gas/electric/kerosene cooker Motorbike Piped water

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How poor earn their money


Many entrepreneurs 

Peru: 69% of urban poor households operate a non-agricultural business



25-98% of rural households operate a farm




Multiple occupations




Lack of specialization




Operation on small scale

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How poor earn their money

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Access to financial institutions Borrowing


Many people borrow (11% in East Timor; 93% in Pakistan)




Mostly from informal source




Udaipur









Relatives 23%



Moneylender 18%



Shopkeeper 37%



Bank 6%

High interest rate (3-4% per month) 

High default rates



Difficult enforcement



Difficult monitoring



No collateral

Microcredit

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Access to financial institutions Savings


Few people have savings accounts (14%)




Lack of reliable savings products




Informal strategies 

Rotating Savings and Credit Associations (ROSCAs)



Self-help groups

Insurance


Adjustment in consumption




Informal insurance 

Informal social networks



Burial funds



Kitchen parties

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Institutions


Quality of governance Corruption  Political rights  Regulatory burdens 




Protection of property rights Limits placed on political leaders




Measures






Aggregate governance index







Voice and accountability Political stability and absence of violence Government effectiveness Regulatory burden Rule of law Freedom from graft

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Institutions


Correlation btw. institutions and development 

Causality?

Institutions

Economic development

Other factor

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Institutions


Correlation btw. institutions and development 

Causality?



Exogenous variation in institutions (Acemoglu et al. 2001)


Different experience of colonization Past

Australia, New Zealand, North America

Today

Today

Good institutions

Good institutions

Settler societies

Settler societies

Developed

Bad extractive institutions

Bad extractive institutions

Under-developed

Historical mortality of soldiers and bishops

Africa, Latin America

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Institutions


Correlation btw. institutions and development 

Causality?



Exogenous variation in institutions (Acemoglu et al. 2001)


Different experience of colonization Past

Australia, New Zealand, North America

Today

Good institutions

Good institutions

Settler societies

Settler societies

Historical mortality of soldiers and bishops

Africa, Latin America

Development economics Lecture 1: Introduction

Today

Developed

? Bad extractive institutions

Bad extractive institutions

Under-developed

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This course – aims and structure



Introduction of the subject of development economics Basic understanding of The nature of poverty and underdevelopment  The development difficulties faced by poor countries  Growth theories 




Combination of theory and empirical evidence




Lectures          

Poverty Inequality Growth models (Harrod-Domar, Solow) Land Capital Population Role of state Development and environment Trade Financing economic development

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This course - requirements


Each week one lecture and one seminar




Short readings for each seminar 

Read all of them



Prepare presentation on one of them



List of the readings is on the course webpage -> let me know by email, the readings will be assigned on the first-come-first-served basis

10%




Activity at the seminars

bonus points




Homework

15%




Mid-term written exam

25%




Final written exam

50%




Consultation hours: Thursday, 1:30-3:30pm, room 602

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Literature


Textbook Thirlwall, A.P. 2006. Growth and Development, 8th edition. Palgrave MacMillan  Available in the library 




Further readings Todaro, Michael and Stephen C Smith (2005) Economic Development (9th edition), Addison Wesley.  Ray, Debraj (1998) Development Economics 




Short readings for the seminars 




Uploaded on the course website

Literature for this week Thirlwall, pp. 65-84  Banerjee, Abhijit and Esther Duflo. 2006. Economic Lives of the Poor. http://econwww.mit.edu/files/805 

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