After studying this chapter you will be able to understand: What the capabilities approach is to development economics? What relationship exists between economic growth and economic development? How education and health improvements promote human capital development?
Chapter 35 Development Economics © 2014 by McGraw-Hill Education What will you learn in this chapter? • What the capabilities approach is to development economics • What relationship exists between economic growth and economic development • How education and health improvements promote human capital development • Why institutions, good governance, industrial policy, and clusters in development are important • How migration and remittances promote development • What the arguments are for and against foreign aid • What role impact evaluation and randomized controlled trials play in measuring program impact © 2014 by McGraw-Hill Education The capabilities approach • The capabilities approach provides a framework for thinking about poverty, inequality, and human development – A capability is something a person is able to be or – The approach looks to improve what individuals can be and can – Institutional and market failures restrict what people can – In contrast, economic growth primarily focuses on expanding the economy © 2014 by McGraw-Hill Education The capabilities approach • GDP growth does not necessarily improve the standard of living for everyone in a country • Policy mechanisms are crucial to translating higher average incomes into improved capabilities for the poorest citizens • There are many reasons to believe that economic development leads to economic growth © 2014 by McGraw-Hill Education The basics of development economics • There are basic aspects to economic development: Human Capital Investment Migration Trade • Policies can be categorized in two ways: Some policies put in place the conditions for economic growth Some policies translate economic growth into greater capabilities for people in a society © 2014 by McGraw-Hill Education The basics of development economics Improvements to health and education can develop human capital Health • Health care facilities don’t exist in many parts of the world • Even where clinics exist, many people don’t use them • National health care programs are not as effective as they could be â 2014 by McGraw-Hill Education Education ã Educated workers are generally more productive • Families living on a few dollars per day often cannot afford school fees • There is a tradeoff between the quantity and quality of education provided The basics of development economics People who live in countries with higher average incomes generally live longer lives Life expectancy (years) Japan 90 85 Vietnam Mexico 80 75 70 Brazil 65 60 United States Liberia 55 Nigeria 50 South Africa 45 40 $100 $1,000 $10,000 $100,000 GDP per capita (logarithmic scale) © 2014 by McGraw-Hill Education Active Learning: Correlation and causation Using the figure below, is higher GDP per capita necessary for longer life expectancy? Life expectancy (years) Japan 90 85 Vietnam Mexico 80 75 70 Brazil 65 60 United States Liberia 55 Nigeria 50 South Africa 45 40 $100 $1,000 $10,000 $100,000 GDP per capita (logarithmic scale) © 2014 by McGraw-Hill Education The basics of development economics • Good governance is also crucially important in economic development • Many basic capabilities rely on having a competent, well-intentioned government and good institutions – Institutions are humanly-devised constraints that shape human interactions • Most development economists agree that the most basic and important task of any government is to create a stable political system – This includes maintaining enforceable property rights and the rule of law © 2014 by McGraw-Hill Education The basics of development economics • Investment is a key concern in promoting growth • Development economists debate what the best way is for developing countries’ governments to handle flows of capital • Industrial policy manages these flows and has two traditional tactics: Import substitution Export-led growth • As governments consider how to develop their industrial sectors, they often choose to focus on promoting not just one industry but clusters – Clusters are networks of independent firms, universities, and businesses that focus on the production of a specific type of good © 2014 by McGraw-Hill Education 10 The basics of development economics • By opening up to foreign markets, countries can gain access to new, cheaper goods and find new customers for their products – Countries benefit when they produce the good for which they have the comparative advantage • The World Trade Organization (WTO) monitors and enforces trade agreements and promotes international free trade © 2014 by McGraw-Hill Education 11 The basics of development economics • The prospect of a better life drives people to move away from home in search of opportunities • It is difficult to legally move into a high-income country – The influx of immigrants can be a highly controversial issue – From the perspective of countries of origin, it provides opportunities to promote development © 2014 by McGraw-Hill Education 12 The basics of development economics Remittances have grown substantially Billions of 2010 U.S dollars 60 50 40 30 20 10 Nigeria Spain Belguim Bangladesh Germany France Mexico Philippines © 2014 by McGraw-Hill Education China India 13 What can aid do? • Foreign aid has long been seen as part of economic development • Taxes and private donations in many countries provide aid to the poor around the world • These donations can be very important, from providing necessities to funding investments • The problem is how to make sure these funds are put to the best use © 2014 by McGraw-Hill Education 14 What can aid do? • Foreign aid started in the wake of WWII, when the U.S distributed $12 billion to help European countries rebuild • The 1947 Truman Doctrine pledged $650 million to spread development • In 2002, at the Monterrey Conference on Financing for Development, the leaders of the world’s most industrialized countries reaffirmed to pledge 0.7 percent of their gross national income • Foreign aid continues and is largely dedicated towards building public goods – The financing gap is the difference between the savings rate and the amount of investment needed for sustainable growth in a country © 2014 by McGraw-Hill Education 15 What can aid do? Over the past 50 years, the amount given in aid has increased in dollar terms, but has fallen in terms of aid as a share of GDP Official development assistance Billions of constant 2009 U.S dollars % of total GNI 140,000 0.6 Constant 2009 dollars 120,000 0.5 % of GNI 100,000 0.4 80,000 0.3 60,000 0.2 40,000 0.1 20,000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 © 2014 by McGraw-Hill Education 16 What can aid do? • Proponents of foreign aid argue that it can help countries break out of the poverty trap – A poverty trap is a self-reinforcing mechanism that causes the poor to stay poor • Foreign aid can be used to break the negative self-reinforcing mechanisms – Can help create positive economic growth and development cycles © 2014 by McGraw-Hill Education 17 What can aid do? • Many governments channel foreign aid through national development agencies • The World Bank is a multinational organization that provides financial and technical assistance to developing countries • The United Nations Development Program (UNDP) is a global UN network that provides knowledge and resources to developing countries © 2014 by McGraw-Hill Education 18 What can aid do? • Not everyone supports sending billions of dollars into poor countries • Historically, some aid has been inefficient and even counterproductive • Not all aid results in growth and/or development in the receiving country – Some argue that aid can hurt countries that receive it © 2014 by McGraw-Hill Education 19 What can aid do? • A group of private investors and institutions is supporting this new breed of socially-minded businesses through impact investing – Impact investing is when firms invest money to generate both financial and social returns – These firms are called social businesses • Impact investors want their money to be a part of creating social change • They are willing to be patient, take greater risks, and accept lower financial returns © 2014 by McGraw-Hill Education 20 What can aid do? • Impact evaluations assess how a program or policy changes lives relative to how they would have changed without it • Randomized controlled trials (RCT) randomly assign subjects into control and treatment groups to assess the causal effect of intervention on an outcome – This makes it so any factor other than the intervention should affect both groups equally © 2014 by McGraw-Hill Education 21 What can aid do? RTCs allow policy-makers and program managers to more confidently channel resources to their best use Impact of programs intended to increase years of education Years in extra schooling per $100 spent 25 20.70 20 15 13.90 10 Information on returns Deworming 0.71 0.27 School uniforms Scholarships 0.03 Progresa © 2014 by McGraw-Hill Education 22 Summary • Development is a field of economics that studies international poverty • The capabilities approach is one way to think about development • The ideas of economic growth and development are similar but not identical • There is general agreement that economic growth will spark economic development â 2014 by McGraw-Hill Education 23 Summary ã Access to more and better schools and health care can develop human capital • Efforts to improve education and health in countries must be of high quality to be effective • Human capital is important for economic development because it allows more productive workers and greater economic growth © 2014 by McGraw-Hill Education 24 Summary • Development is most likely in places where there are strong institutions • Institutions are human-devised constraints that shape human interactions – Strong property rights, rule of law, and a government capable of implementing good policy are important for development • Governments implement industrial policy in an attempt to favor certain industries © 2014 by McGraw-Hill Education 25 Summary • The main industrial policies are import substitution, export-led industrialization, and clustering • Every year, millions of people leave their own country to migrate for better-paying jobs • Foreign aid does not always promote growth and development • Impact evaluations and randomized controlled trials can measure how policies change lives © 2014 by McGraw-Hill Education 26 ... to believe that economic development leads to economic growth © 2014 by McGraw-Hill Education The basics of development economics • There are basic aspects to economic development: Human Capital... McGraw-Hill Education The basics of development economics • Good governance is also crucially important in economic development • Many basic capabilities rely on having a competent, well-intentioned... rights and the rule of law © 2014 by McGraw-Hill Education The basics of development economics • Investment is a key concern in promoting growth • Development economists debate what the best