Development economics

Lecture 1: Introduction

Julie Chytilová
chytilova@fsv.cuni.cz
 Overview

Characteristics of underdevelopment

How poor people live

Requirements of the course

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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
Agriculture Industry Services
Low-income 65% 18% 17%
Middle-income 28% 32% 40%
High-income 5% 28% 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, shoe-
shining, 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 16%
South Asia 22%
Latin America and Caribbean 50%
Middle East and North Africa 79%
Sub-Saharan Africa 62%

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 Exports dominated by primary commodities

Percentage of merchandise exports (2000)

Agricultura
l raw Manufactu
materials Food Fuel res Metals
Low income 4.2 15.0 23.6 50.9 5.8
Middle income 2.3 9.3 22.2 59.0 4.8
High income 1.6 6.1 5.1 81.9 2.4
Sub-Saharan Africa 5.8 16.9 29.0 35.1 8.0
Source: World Development Indicators (2004)

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 High export concentration
Concentration and diversification indeces
Concentration Diversification Number of
index index products
Developing economies 0.110 0.272 260
Developed economies 0.067 0.124 260

Africa 0.309 0.619 258

Zambia 0.415 0.833 129
Uganda 0.559 0.861 65
Chad 0.781 0.733 7

China 0.077 0.454 254

India 0.167 0.615 237
Czech Republic 0.080 0.389 246
USA 0.094 0.261 257
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

Gross enrollment ratio Adult literacy rate Pupil-teacher ratio

Primary Secondary Tertiary Male Female Primary Secondary
Low income 94 46 10 72 53 32 25
Sub-Saharan Africa 87 71 56 43 24
Middle income 111 75 22 92 83 25 20
High income 102 106 61 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

Low HDI High HDI

countries countries
Infant mortality rate (per 1000 births) 104 6
Maternal mortality ratio (per 100,000 births) 595 8
Life expectancy 51 77.5
Physicians (per 1000 people) 0.1 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
• 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

Average annual
population growth Death rate Birth rate
rate (1990-2005) (2005) (2005)
Low-income 2.0% 10 29
Middle-income 1.1% 8 16
High-inco e 0.7% 8 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)

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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

House equipment
72

20 40 60 80 100

Large variation in ownership of 91 Karnataka (2007)
assets
Piped water (0% in Udaipur –
28 17
%
36% in Guatemala) 42 40
34 8 38
Electricity
(1.3% in Tanzania – 30 21 6 23
25 26 7 22 49
16 19
99% in Mexico) 11 11 13
Latrine(0% in Udaipur –
0

100% in Nicaragua) Electricity Radio

Black and white TV Colour TV
Fan Telephone
Electric iron Gas/electric/kerosene cooker
Bicykl Motorbike
Water pump 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 Today Today

Good institutions Good institutions

Australia, New Zealand,
North America Settler societies Developed
Settler societies

Historical mortality
of soldiers and
bishops

Africa, Latin America Bad extractive Bad extractive

Under-developed
institutions institutions

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 Institutions

Correlation btw. institutions and development

 Causality?
 Exogenous variation in institutions (Acemoglu et al. 2001)

Different experience of colonization

Past Today Today

Good institutions Good institutions

Australia, New Zealand,
North America Settler societies Developed
Settler societies

Historical mortality
of soldiers and
?
bishops

Africa, Latin America Bad extractive Bad extractive

Under-developed
institutions institutions

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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 10%
 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

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://econ-
www.mit.edu/files/805

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