Global Econ - Development Economics - lecture

8/9/2019 Global Econ - Development Economics - lecture

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Development Issues

Dr. Katherine Sauer

Global Economic Issues

ECON 241

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Most of the people in the world do not have an acceptablestandard of living. - access to food

- access to clean water

- adequate housing

- job opportunities

- access to health care

- education

Why should you care?

Countries are linked together by trade, finance, the environment,

migration, disease, etc

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Poverty

The Cycle ofPoverty:

Low Income

Low Savings

Low InvestmentLow Consumption

Low Productivity

Where could the cycle be broken?

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Hunger

Hunger is an extreme manifestation of poverty.

There are 842 million undernourished people in the world.

The vast majority live in developing nations.

3/4 live in rural areas.

The majority are women.

The suffering of 800 million hungry people represents athreat to economic growth and political stability on a global

scale. - FAO Director-General Jaques Diouf

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hunger

low availability

of food

low access to

food (economic

or physical)

low food

production

low imports

of food

poverty

interrupted

access to markets

The Relationship Between Poverty and Hunger:

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Globally, there is more than enough food produced to nourish

everyone.

There is an unequal distribution of food within and across

countries.

Most food emergencies are caused by natural disasters, conflicts,

or economic crisis.

Poverty makes people more vulnerable to any emergency.

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What can be done?

Short Run:- public food distribution

- food-for-work programs

Long Run:

- irrigation projects (prevent consequences of drought)

- improve rural roads (improve access to markets)

- government policies to decrease unemployment

- government policies to grant land ownership

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Example: Vietnams economic reforms (1986)

- farmers received legal control of their land- farmers were allowed to sell as much as they wanted

- taxes on agricultural goods were lowered

- rural infrastructure was built

As a result of the reforms, per capita food production doubled

and agricultural exports increased.

Over the 1990s, the percent of undernourished people fell from

27% to 19%.

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There is no formula for making poor countries rich.

We do have an understanding of some key things that rich

countries have in common.

- stages of economic development

- human capital- health

- property rights

- effective government institutions

- openness to trade

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1. Stages of Economic Development

Pre-Industrial

leading sector

production process

consumer products

major factor that

influences

economic growth

- agriculture

- human-nature interaction

- labor and natural resource intensive

- food

- handmade clothing

- natures productivity

(fertile soil, rainfall, etc)

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Industrial

leading sector

production process

consumer products

major factor that

influences

economic growth

- industry

- human-machine interaction

- capital intensive

- manufactured goods

- labor productivity

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Post-Industrial

leading sector

production process

consumer products

major factor that

influences

economic growth

- services

- human-human interaction

- knowledge intensive

- information / knowledge services

- innovation / intellectual property

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Three Broad Objectives of Sustainable Development

Social- full employment

- equity

- security

- education

- health

Economic- economic growth

- efficiency

- stability

Environmental- healthy environment

to live in

- rational use of non-

renewable resources

- conservation ofrenewable resources

The challenge is to balance all three at once.

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2. Human Capital

H

uman capital encompasses a persons knowledge, ability, andskills.

Most human capital is built through education and training.

Governments fund public education because a bettereducated population contributes to faster and sustainable

development.

Firms invest in employee training because they expect to

cover the costs through higher profits from higher worker

productivity.

Individuals spend time and money on higher education

because they expect to earn higher wages.14


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But, there may not be a return on education if

- it is of low quality

- the knowledge/skills learned dont match market demand- there is slow economic growth (low demand for new

workers)

- workers are paid the same regardless of skill (centrally

planned economies)

Ex: Philippines and Vietnam

- both had higher adult literacy than neighboring countries

- until recently, each was growing slowly

- Vietnam was centrally planned

- Philippines were isolated economically

- Vietnam adopted market based reforms

- Philippines exported skilled workers and imported their

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Even when primary schooling is available, many poor childrenwork instead of going to school.

- as poverty is eliminated, child labor declines

There exists a gender gap in education.M

any girls do not go toschool because of cultural norms, early childbearing, and limited

employment opportunities for women.

- as poverty is eliminated, the gender gap remains

- national policies are needed to close the gap

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3. Health Issues

Communicable and largely preventable diseases kill millions ofpeople in developing countries each year.

(HIV/AIDS, malaria, tuberculosis)

4. Property Rights

In the developed world, property rights are clearly defined. In the

developing world, property rights are often informal.

Ex: In Malawi, homes are built on community land. They are

passed down to children from their parents. The local chief

settles any boundary disputes. Even though youve owned the

home and land for many years, technically you dont own it

because you have no formal property right for it.17


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Millions of people in developing nations dont own their land,

homes, or other assets because of a lack of formal property rights.

In developed nations, people can use their assets as collateral to

obtain a loan. Without formal property rights, people in

developing nations often cannot get loans from banks.

dead capital: assets that cant be used to borrow against

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5. Effective Government Institutions

Countries need effective governments in order to develop

economically.

- laws / law enforcement / courts

- basic infrastructure

- ability to collect taxes

- low corruption- no excessive regulation

- responsible fiscal and monetary policy

- chronic deficit spending can lead to:

higher taxes

inflation

default

- loose monetary policy leads to inflation

- tight monetary policy can lead to a recession19


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Cycle ofPolitical Instability

poverty and social

conflict

political instability

and threat of a

property rights

violation

low domestic and

foreign investment

low economic

growth

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6. Openness to Trade

Among the poor countries in the 1970s and 1980s,closed grew 0.7% per capita annually

open grew 4.5% per capita annually

Trade-Not-Aid: If developing nations were able to trade morefreely with wealthy countries, their incomes would increase and

they would likely need less foreign aid.

- Bangladesh faces an average tariff amount of 14% on

exports to the US.

- France faces an average tariff of 1%.

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Foreign Aid: (humanitarian or development)

- 2 types of sources- government

- private

Government- national government bilateral aid programs

(ex: US Agency for International Development or

the OECDs Development Assistance Committee)

- international institutions

(ex: World Bank or IMF)

Private

- charitable organizations

- nongovernment organizations (NGOs)22


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Common aid-related terms:

grant transfer made in cash, goods, or services for which no

payment is required

loan (aka credit) a transfer for which repayment is required

grant element a measure of the concessionality of a loan,

determined by the difference between the interest rate on the loan

and the market interest rate

official development assistance (ODA) grants or loans provided

on concessional financial terms (with a grant element of at least

25%) by the official sector with promotion of economicdevelopment and welfare as the objective

tied aid ODA that is used by the donating country to build

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2007 ODA

(millions ofUS dollars)

Source: OECD

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In 1970, at the UN General Assembly, rich nations pledged to

spend 0.7% of their GNI on ODA.

2007 ODA

as a share of

GNI

Source: OECD 25


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Source: OECD

Recently, the EU has pledged to spend 0.56% of GNI on poverty

reduction by 2010 and 0.7% by 2015.

Other OECD countries are targeting 0.35

% of GNI.

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Source: OECD27


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Does aid make a difference in development?

- 4 views on the link between aid and economic growth

1. It has been argued that aid is needed to break poor countries out

of the poverty trap.

- Developing nations often lack a minimum amount of

capital (infrastructure, human capital, public administration)to support modern economic activity.

Key to breaking the poverty trap is investment in physical and

human capital.

Funds for investment have to come from external sources.

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2. There is a positive relationship between economic growth and

aid, but the returns to aid are diminishing.

- limits to absorptive capacity and other constraints- type of aid matters

3. The effect of aid depends on

- quality of policies and institutions- country characteristics

4. There is no effect of aid on growth (or negative effect).

- unproductive projects

- graft / corruption

- pressure on currency to appreciate

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Global Econ - Development Economics - lecture