Voices of Poor

When one is poor, she has no say in public, she feels inferior. She has no

food, so there is famine in her house; no clothing, and no progress in her

family. --- A poor woman in Uganda

For a poor person everything is terrible – illness, humiliation, shame. No

one needs us. We are like garbage that everyone wants to get rid of.

--- A blind woman in Moldova

We have to line up for hours before it is our turn to draw water.

--- A woman in Malawi

Poverty is …. low salaries and lack of jobs. And it’s also not having

medicine, food, and clothes. --- A poor man in Brazil

Introduction

• Over 40 percent of the world’s population lives

in poverty on less than $2 per day

• People in developing countries live in poor

conditions and lack access to reliable and good

health and education facilities

• A significant section of the society are even

deprived of basic necessities of life such as

food, good shelter, and safe drinking water.

Basic Questions

• Why do so many people have low standards of living and what are their characteristics?

• What are the major impediments to the development process?

• What policies can be adopted to increase the standards of living?

• What is the role of globalization and foreign aid in the process of development?

• What is the role of public policies?

Definition of Economic

Development

• Low Human Capital

• Low Income

• Rural

• Traditional

• Informal Institutions/Markets

• High Human Capital

• High Income

• Urban

• Modern

• Formal Institutions/Markets

Development is the process of structural transformation

Main Goals

• Measure, analyze, and document the trends in

the process of structural transformation

• Analyze factors constraining and inhibiting the

process of structural transformation

• Study policies and strategies which can

facilitate such transformation

Measurement Issues

• The issue of measuring development has been controversial and our thinking has evolved over time.

• The most common and widely used measure of development is per-capita income of a country.

• Per-capita income is an indicator of purchasing power of inhabitants of a country.

GDP and GNI

• GDP (Gross Domestic Product) is the total

value of the final output of goods and services

produced in a country.

• GNI (Gross National Income) is simply GDP

plus net flows of foreign factor income.

• Per-capita income is usually proxied by either

GNI per capita or GDP per capita.

Identification of Developing

Countries

• According to this definition, developing countries are countries with low per-capita income.

• The problem of economic development is simply to increase the per-capita income of developing countries.

• The World Bank uses this definition to distinguish between developing and developed countries.

Income Per-Capita of Selected

Countries

Purchasing Power Parity (PPP)

• Per-capita income comparison exaggerates the

differentials in standards of living between developing

and developed countries.

• The amount of goods and services one can purchase

depends on two things: income and the price level.

• Same amount of income buys fewer goods and services if

prices are high compared to the case when prices are low.

Purchasing Power Parity (PPP)

• PPP takes into account price differences across

countries.

• It is calculated using a common set of international

prices for all goods and services produced, valuing

goods in all countries at U.S. prices.

• PPP is defined as the number of units of a foreign

country’s currency required to purchase the identical

quantity of goods and services in the local markets as

$1 would buy in the United States.

A Comparison of Per Capita GNI, 2005

World Bank Definition

• Low Income Countries (LIC) – Countries having a PPP per-capita gross income of $976 or less in 2008

• Middle Income Countries (MIC) - Countries having a PPP per-capita gross income of more than $976 but less than $11,906 in 2008

• High Income Countries (HIC) - Countries having a PPP per-capita gross income of more than $11,906 in 2008

World Income Distribution in 2009

0

10

20

30

40

50

0 10000 20000 30000 40000 50000 60000

Series: SERIES02Sample 1 156Observations 156

Mean 11734.04Median 7155.000Maximum 57640.00Minimum 290.0000Std. Dev. 12621.41Skewness 1.537721Kurtosis 4.765206

Jarque-Bera 81.73294Probability 0.000000

Per-capita Income ($)

No. of

Countries

Limitations of Per-Capita Income

1. This definition is quite narrow and can be misleading.

Changes in per-capita income does not reflect structural

change.

2. It ignores the issue of inequality. High growth rate may not

``trickle down”.

3. In 50’ and 60’s many developing countries did reach their

economic growth targets but the standard of living of the

masses of people remained for the most part unchanged.

4. Higher per-capita income does not necessarily mean people

are happy and satisfied.

Income and Happiness

New Approach to Development

``Economic growth cannot be sensibly treated as an end in itself. Development has to be more concerned with enhancing the lives we lead and the freedoms we enjoy.” Dr. A. K. Sen

• Development is a multidimensional process involving major changes in social structures, attitudes, institutions as well growth and redistribution.

• Problems of poverty, inequality, and institutional changes require direct attack and policy interventions.

• Development is more concerned with enhancing the lives people lead and the freedoms they enjoy.

• Income and wealth are not in ends in themselves but instruments for other purposes.

Capabilities Approach

• Development process has to be people-centric

• Development involves three things:

1. Increasing the availability of commodities

2. Expanding the capabilities of individuals to use these goods

3. Enhancing the freedom of choice of people

Development is the process of increasing capabilities of

human beings.

Core Values of Development

1. Sustenance: Sustenance is the ability to meet basic

needs of people.

2. Self-Esteem: Sense of worth and self-respect and

feeling of not being marginalized are extremely

important for individual’s well being.

3. Freedom from Servitude: Human freedom, the

ability to choose, is essential for the well being of

individuals.

Human Development

• Human development has three components:

1. Well being: expanding people’s real freedoms or

opportunities freedom.

2. Empowerment and agency: enabling people and groups to act

– to drive valuable outcomes. This requires process freedom.

3. Justice: expanding equity, sustaining outcomes over time and

respecting human rights and other goals of society.

Components of Human Capital

1. Opportunities Freedom: People should have capabilities and access to

goods and services.

2. Process Freedom: People should have means and opportunities to shape

their own destiny. They should be empowered to bring about change in

their own lives, in their communities, or on a wider scale. Political

freedom – civil rights and democracy are vital to achieve this goal. The

governments must be accountable to the people.

3. Justice: Equity is fundamental to human development. A highly unequal

distribution of income, resources, and opportunities: political, social, and

economic undercuts opportunities and process freedoms.

Human Development

Human Development Index

• Human development index (HDI) is an attempt to

capture the broader view of development.

• Started in 1990 by the United Nations Development

Program (UNDP)

• HDI includes measure of per-capita income, health

and education

• Countries with higher HDI score are considered to be

more developed.

Original HDI

• The methodology of calculating HDI has changed over time. Till 2009, HDI for a country was calculated as follows:

HDI = 1/3(Life Expectancy)+1/3(Education)+1/3(Per-Capita Income)

• Education included adult literacy rate and school enrollments.

• The value of HDI varies between 0 and 1. Till 2009, UNDP classified different countries on the basis HDI values of as follows:

Low HD Countries < 0.5 .5 < Medium HD Countries < .8

.8 < High HD Countries < .9 Very High HD Countries >.9

Human Development Index Variations for

Similar Incomes (2004 Data)

Criticisms of Original HDI

• Ignoring Inequalities: HDI does not take into account inequalities in human

development attainments across gender and socio-economic groups.

• Ignoring Quality Differences: There are enormous differences in quality of

education and health status. Life expectancy only captures mortality rate. It does

not capture the quality of health.

• Perfect Substitutability Across the Three Components: In the original HDI one

unit of income is treated as equivalent to one unit of health or education. There is

no justification for such an assumption.

In light of these criticisms, starting 2010 the UNDP has changed the

methodology to calculate HDI. We will study the new methodology in the next

lecture.

Millennium Development Goals

• In September 2000, the 189 member countries of the United Nations adopted eight

Millennium Development Goals (MDGs) committing themselves to eradicate

extreme forms of deprivation by 2015.

Criticisms of MDGs

• Firstly, many critics argue that the goals and targets

are not ambitious enough. It merely represents the

past rates of improvement witnessed in the 80’s and

90’s.

• Secondly, goals are not prioritized.

• Thirdly, classifying people living on less than $ 1 a

day as extremely poor is quite arbitrary.

Achievements

The progress in achieving MDGs has been uneven. The

main problems are:

1. Lack of political will

2. Lack of resources such as hospitals, trained staff

3. Corruption

4. Lack of information

5. Shortfall in foreign aid