Economic Development

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Economic Development
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Measures of economic development

• GDP
• Total value of all goods and services produced in
  a country in a year
• GNP
• GDP plus income earned from investments abroad
• E.g., profits from foreign investment
• PPP

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Purchasing power parity

• Purchasing power parity (PPP)
• How much a common basket of goods and services
  each currency can buy in that country

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GNP per capita
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Human Development Index
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PPP and China

• Economy
• Growth enormously over last 15 years
• How big?
• Depends on how you measure it
• GNP
• U.S. 12.5 trillion
• Japan 4.8 trillion
• Germany 2.7 trillion
• U.K. 2.2 trillion
• France 2.1 trillion
• China 1.8 trillion

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PPP and China

• PPP (purchasing power parity)
• i.e., how much does a bundle of goods cost
• PPP
• U.S. 12,410 trillion
• E.U. 12,180 trillion
• China 8.182 trillion
• If growth rates continue, may overtake U.S. in
  PPP by 2015

On average U.S. person is 30 times richer
measured in
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PPP and China
2003 China consumes 40 of World Cement 1/3 of
growth in oil consumption, 90 of growth in world
steel, 100 increase in copper
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Life Expectancy
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Basic Elements of Development

• Energy resources
• Geography of energy resources is very uneven
• Most developed countries (except Japan and some
  European Countries) have reasonable amounts of
  energy
• Most peripheral countries are energy poor and
  the cost of importing energy is expensive
• Major exceptions Algeria, Ecuador, Gabon,
  Indonesia, Libya, Nigeria, Venezuela, and the
  Persian Gulf States

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Basic Elements of Development

• Land
• Over ½ of the Earths land surface is unsuitable
  for farming
• Good agricultural land is concentrated in
• W. Europe,
• West-central Russia,
• Eastern N. America,
• S.E. Australia,
• parts of Central and South America,
• India,
• E. China,
• and the Rift Valley in Africa

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Agricultural Land
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Basic Elements of Development

• Raw Mineral Resources
• Unevenly distributed
• 5 countries with large concentrations of mineral
  resources
• Russia, U.S., Canada, S. Africa, Australia
• Many countries have only one or two mineral
  resources
• Having all three (energy, land, and mineral
  resources)
• Makes development more likely
• But neither sufficient nor necessary for
  development
• e.g., Japan has neither lots of land, energy or
  minerals Russia has all three

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Overall Economy

• Economy
• 2 dimensions
• Formal economic activity that takes place
  within official channels
• i.e., subject to formal rules, taxes, legal
  structure
• Informal Not officially recognized
• i.e., not reported as income
• Work done in the home
• Subsistence farming (growing crops for food)
• Barter
• Much street trading, informal services
• informal maybe as much as 1/3 of all economic
  activity
• Maybe as much as 2/3 in poor countries

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Formal Economy

• 4 major groupings
• Primary/extractive
• Agriculture, mining and forestry
• Secondary/industrial
• Manufactured goods
• Tertiary/service
• All those activities that are services to others
• Transportation, banking, office work, child care,
  middle management
• Quaternary
• Activities that use and manipulate high-end
  information
• Financial investment, specialized law, medicine,
  communications, banking etc.

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Geography of economic sectors

• Primary
• Much of Africa, Asia.
• 50-75 of labor force (5-10) in West
• Secondary
• Most in West and some developing countries
• 75 in West but declining
• Rapidly expanding
• in China, Brazil, S. Korea, Mexico,
• Taiwan, India and Argentina
• Tertiary/Quaternary
• Mostly in core, e.g., U.S.
• 4 primary
• 22 secondary
• 50 tertiary
• 22 quaternary
• Profits greatest in the Quaternary sector

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Trade, Aid and Debt

• Trade is a key aspect of economic development
• Movement toward a global trading structure
• 4 major trading blocs
• European Union (and some former colonies)
• NAFTA (and some Central and South American
  countries
• The countries of the former Soviet Union
• Japan and other East Asian countries and S.
  Arabia and Bahrain

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Trade, Aid and Debt

• Major changes in patterns of world trade
• Intensification of the trade patterns within and
  between core regions
• At the expense of trade with peripheral countries
  (except for oil)
• Innovations in transport, communications and
  production technology have reduced the importance
  of distance
• Distance used to be key factor in defining
  traditional trading blocks
• Shift in global politics Toward open markets,
  Free trade
• Benefits core much more than periphery
• New Flows
• Changes in the global organization of production
  are increasing some manufacturing flows from some
  semi-peripheral countries

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Trade and development

• Can poorer countries trade their way out of
  poverty?
• Elasticity of demand
• Degree to which demand changes in response to
  price changes
• Peripheral countries depend upon primary activity
  for their exports (raw materials, cash crops)
• These exports have stable demand (low elasticity)
• ie., quantities consumed dont increase that much
  
• with either increased wealth of customers (i.e.,
  dont buy that much more)
• or with change in the price of the commodity

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Trade and development

• Core countries export high-tech goods and
  services that have high demand (high elasticity)
• Customers will buy more as they get wealthy
• Customers respond more to changing price signals

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Import Substitution

• Strategy replace imported manufactured goods
  with goods produced in your country
• Establish tariff barriers (import taxes) to help
  manufacturing grow in your country
• Internal contradiction/unintended consequences
• Need to remove tariff barriers at the appropriate
  time but this is very difficult to achieve
  because it dramatically increases uncertainty
  once the tariffs are removed
• May require large amounts of start-up capital
• Might work if beginning with simple products like
  textiles

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Debt financing and the Debt trap

• Borrow money from the core to develop industries
• industrialize, generate growth and profits, pay
  back debt
• Problem
• if the project fails then stuck with the debt
• Borrow more money to service the original debt or
  to finance new development projects
• Over time debt accumulates and country ends up
  simply trying to pay off the interestand never
  gets to the capital
• Global debt
• 1.5 trillion owed by low and middle income
  countries to high-income countries (unlikely to
  be ever paid back)
• Interest flows 250B to Western banks
• 41B in new loans

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Debt financing and the Debt trap
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Pathways to regional development

• Development trajectories
• Historical in origin
• Cumulative in nature
• Initial Advantage
• Contingent (involving a degree of chance
  variatione.g., computer industry and Silicon
  Valleywhy Silicon Valley?
• External Economies
• Generally, New growth will occur in places
  offering external economies
• Existing labor markets, infrastructure, business
  milieu, social capital

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Pathways to regional development

• Localization economies
• External economies may evolve into localization
  economies
• Cost savings accruing to particular industries as
  a result of those industries clustering at a
  specific location
• i.e., the existence of a cluster of like
  industries leads to competitive advantage for
  the industries of that region
• Agglomeration Economies
• Interdependence between firms
• generates cost savings
• Spreads the success of growth throughout the
  region

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Agglomeration Economies

• Backward Linkages
• inputs from supplier firms
• Forward Linkages
• Outputs to consumer firms
• Ancillary linkages
• Across firms via subcontracting
• Maintenance repair, security, recycling,
  business services
• Tertiary services
• Demand for housing, utilities, infrastructure,
  retail, education, personal services
• Government Structure
• Larger tax base, possibility of debt financing,
  improved schools, environment etc., all of which
  propel growth

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Cumulative Causation and Backwash effects

• Cumulative causation (Gunnar Myrdal)
• The build up of advantages that occurs in
  specific geographic settings as a result of
• external economies, agglomeration effects and
  localization economies
• Backwash effects
• The attractiveness of one place may draw
  resources (labor, capital, talent) from other
  places making it more difficult to achieve growth
  in those places (e.g., Primate Cities in
  semi-peripheral and peripheral countries)

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Cumulative Causation and Backwash effects

• Spread effects
• Growth in new regions
• If demand in the growing region is so high that
  producers cant satisfy it
• Investors in the other regions may be able to
  develop a local capacity to meet that demand
• Diseconomies of Agglomeration
• Negative effects of too much growth
• Higher prices for land, labor
• Congestion and pollution
• Waste disposal
• Exhausted infrastructure
• Narrowing of entrepreneurial risk
• lock-in to particular production technologies
  and business strategies

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New Windows of Locational Opportunity

• When new growth sectors emerge
• e.g., high-tech in the 1950s
• Not tied down by enormous investments in
  factories or industrial infrastructure
• If diseconomies of agglomeration are occurring in
  existing growth regions
• e.g., US manufacturing belt in 50s-70s
• New windows of locational opportunity may emerge
• Causes growth to occur in new areas
• e.g., California and high tech

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New Windows of Locational Opportunity

• Deindustrialization
• Shifts of investment in new region may lead to
  decline in growth in older regions
• Creative Destruction
• Active withdrawal of investment
• from regions/places/economic sectors that yield
  lower rates of profit
• to regions/places/economic sectors that yield
  higher rates of profit
• Environmentally sustainable capitalism and
  creative destruction?

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Government Intervention

• Grow poorer regions
• (via cumulative causation)
• Help declining regions stabilize
• Strategies and results vary
• Government investment in infrastructure
• EU development fund
• Tax breaks for location in poorer areas
• Local/State Gov. in U.S.
• Congestion Taxes
• London
• Growth Poles
• Difficult to select the right set of industries