ECON 390 ISSUES AND PROBLEMS IN DEVELOPING ECONOMIES

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ECON 390 ISSUES AND PROBLEMS IN DEVELOPING
ECONOMIES

• Lecture 3 Comparative Development and an
  Introduction to Growth Theory

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Goals for today

• Class updates
• Altered office hours next week Tues. 330-5,
  Thurs. 10-1130
• Poverty and inequality in developing countries
• Quality of health
• Level of education
• Human Development Index (HDI)
• Introduction to Growth Theory
• Rostows stages of growth
• Harrod-Domar model
• Structural change models Lewis model

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Income inequality

• Measure Gini coefficient
• aggregate measure of income inequality,
• ranges from 0 (perfect equality) to 100 (perfect
  inequality)

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Poverty rates

• Measure
• International poverty line 1/day.
• Headcount measure of population whose income
  is below this poverty line

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Income inequality /poverty data
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Quality of health

• Key indicators
• Life expectancy
• Infant mortality rates
• of population with access to sanitation
• of population with access to safe water
• of population with HIV/AIDS, malaria, etc.

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Quality of health data
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Level of education
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Measure of living standards Human Development
Index (HDI)

• Composed by taking average of three separate
  indices
• Life expectancy
• Income
• Education

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Income index

• Goal to compare income (GDP per capita,
  converted using a PPP exchange rate) to a lower
  goalpost of 100 PPP, and an upper goalpost
  of 40,000 PPP.
• Problem need to account for diminishing
  marginal utility of income
• Result Adjust income by taking its natural log
• Calculating income index
• (logGNI per cap -log100)/(log40,000-log100
  )

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Life expectancy index

• Goal to compare life expectancy to a lower
  goalpost of 25 years, and an upper goalpost
  of 85 years.
• Calculating life expectancy index
• (life expectancy 25)/(85-25)

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Education index

• Goal to combine measures of literacy and school
  enrollment
• Calculating adult literacy index
• (Adult literacy rate 0)/(100-0)
• Calculating gross enrollment index
• (school enrollment rate 0)/(100-0)
• Calculating education index
• 2/3(adult literacy index)1/3(gross enrollment
  index)

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HDI data
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Major approaches to theories of economic
development

• Linear Stages of Growth (1950s, 1960s)
• Patterns of Structural change (1970s)
• International Dependence (1970s)
• Neoclassical counterrevolution (1960s,1980s)
• New Growth Theories (1980s,1990s)

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Linear Stages Theories Rostows Stages of Growth

• Stage 1 Traditional (agrarian) society
• Stage 2 Establishment of preconditions for
  take-off
• Stage 3 Take-off
• Stage 4 Drive to maturity
• Stage 5 Age of high mass consumption

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Looking more closely at stage 2 necessary
preconditions for growth

• Increased productivity of agriculture
• Influential modern elite interested in economic
  change
• Provision of infrastructure to enlarge markets
  and specialization
• Rapid capital accumulation
• Leading sectors where innovation/modernization
  take place

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Harrod-Domar Model

• Key idea GNP produced using physical capital,
  labor and other inputs. K can accumulate
  growth is the result of capital accumulation.

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But how well does the Harrod-Domar model really
explain growth?
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Criticisms of Harrod-Domar model

• Savings and investment are necessary for
  increased growth, not sufficient.
• Based primarily on observations of European
  recovery / Marshall Plan
• May not model current process of development very
  well

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Development Miracle Taiwan

• Income in 1950
• 1965-1980 growth rate of 10 p.a. on average
• 1996-2000 average growth 5.7
• 2000 22,646 per capita income (PPP)
• 2006
• Income GDP per capita (PPP) 29,320
• Life expectancy 77.43 years
• Education (data from 2003) 83.6 of employed
  persons have at least a secondary diploma

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Factors in Taiwans success

• Emphasis on education
• Infrastructure Development
• Land Reforms
• High rates of saving and investment
• Diffusion of commercial ideas
• Effective government industrial planning

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Structural Change models

• Goal how does the economy transition from a
  traditional subsistence agriculture-based economy
  to an industrial economy
• Lewis model

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Lewis model

• Underdeveloped economy with 2 sectors
• Traditional, rural subsistence sector
• Modern, urban /industrial sector
• Process of growth modern sector grows by
  absorbing excess labor from the traditional sector