What is development economics Flashcards
(11 cards)
What is development economics?
A branch of economics that deals with economic aspects of the
development process in low income countries.
Its focus is not only on methods of promoting economic development,
economic growth and structural change but also on improving the potential
for the mass of the population, for example, through health, education and
workplace conditions, whether through public or private channels.
What should the aim
of development
policy be?
Increasing human wellbeing as an overarching
objective… but what metrics should we target in practice?
* Income growth?
* Structural transformation?
* Poverty reduction?
* People’s potential / their freedom?
- Health
- Education
- Political and civil rights
* Subjective wellbeing?
What are the advantages of targeting income growth?
Targeting income has clear advantages
* Relatively easy to define and measure
* Captures a large share of the variation in the other
dimensions we care about (more on this below!)
* Constitutes a very immediate way of identifying
countries, groups, and individuals in need.
* For instance, the World Bank bases its operations on
the following categorisation:
* Low income
* Lower middle income
* Upper middle income
* High income
What are the advantages of targeting structural transformation?
Development as structural transformation
* “The industrialized countries”
* Development depends not only on the amount of
income, but also on how that income is generated
* Growth of industry and services implies new forms of
social organization, new dynamics – “modernization”
* Division of labour as the quintessential feature of
social development
What are the advantages of targeting Poverty reduction?
Development as poverty reduction
* Taking inequality into account
* Acknowledging diminishing marginal returns to
income
* Consumption rather than income
* Absolute and relative poverty
* Absolute poverty line, example: 2.15 US$ per day
* Relative poverty line, example: half of median income
What are the advantages of targeting People’s potential / their freedom?
- Health
- Education
- Political and civil rights
Amartya Sen: Development as Freedom
* Development is about allowing people to realize their
full potential as human beings – i.e. about expanding
their “capabilities”.
* “Functionings”: The things we do
* “Capabilities”: the set of functionings available to us.
* Income is one means for increasing capabilities but
not the only one.
Health, education, political and civil rights etc. are
important development outcomes in their own right.
What are the advantages of targeting development as subjective wellbeing?
Development as subjective wellbeing
* Focus on Subjective wellbeing (“happiness”, “life-satisfaction”)
* The main attraction is that people have
different preferences over different
dimensions of well-being
* A subjective measure lets them decide for
themselves how to weigh these different
dimensions against each other and provides a
“summary” indicator.
Potential drawbacks:
* Methodology: Are answers comparable across cultures?
* Conceptual/philosophical: Adaptation, lack of knowledge about the full
spectrum of possibilities
* John Stuart Mill: “better to be Socrates dissatisfied than a fool satisfied”.
Does the poverty, health and life satisfaction correlate with income?
Yes, the different
dimensions correlate
with income quite
strongly, se figure 6,7,8
What are the big questions in development economics?
Once we have defined the objectives of development policy, the
challenge is finding the most effective solutions to attain them.
For a long time, development economists have approached this
challenge by formulating big questions:
* What causes poverty?
* How much faith should we place in free markets?
* Is democracy good for the poor?
* Does foreign aid have a role to play?
While certainly important, the big questions are overwhelming (and
may leave us feeling hopeless)
What is a classic dispute over big questions - The Manhatten Quarrel?
The Manhattan quarrel
Jeffrey Sachs (Columbia):
* Poor countries are trapped (e.g., due to weather,
diseases, geography, institutions, etc.)
* Foreign investment can push them out of the trap and
kick-start the development process.
* In The End of Poverty (2005), he argued that if the rich
world had committed $195 billion to foreign aid per
year from 2005 to 2025, poverty could have been
entirely eliminated.
William Easterly (NYU):
* Aid does more bad than good: it prevents people from
searching for their own solutions, while corrupting and
undermining local institutions and creating a self-
perpetuating lobby of aid agencies.
* The poor do not need handouts, just well-functioning
free markets, that enable them to find their own
solutions.
* Dambisa Moyo, the author of Dead Aid presented
similar views.
- This view is more in political consensus at the moment around the world, with US redrawn all their aid and Denmark which started to do the same with the new Afrika Plan.
Describe how development economics entered a paradigm shift?
While the debate on the effectiveness of aid was raging,
some development economists moved from the big
questions to the assessment of practical solutions to
more contained problems.
Much of this course will follow the new paradigm:
- We will not discuss whether aid is a good or a bad idea in
general, but rather whether particular instances of aid
had tangible effects.
- In doing so, we will also learn about the mechanics of
human behaviour (and the constraints people face), which
is ultimately what economics is about.
An example to outline the new paradigm
Should mosquito nets be distributed for free or should they be paid
by the poor?
Sachs : For free
Easterly: For a price (or incentives will be distorted, markets ruined, etc.)
The dispute cannot be resolved on general principles. It requires
empirical evidence on the impacts of providing nets at different prices
(i.e. we need to calculate the elasticity of demand for bed nets).
This is the kind of question development economists are concerned
with nowadays.
Very often, such questions are tackled by means of randomized
controlled trials (e.g. Cohen and Dupas 2010)
