Econ 111 Midterm

territorial states insulate African leaders from state building and public accountability

Artificial borders + international order (borders are inviolable -->de jure but not de facto control of territory --> a)fragmentation, conflict prone b)no incentives to provide accountability and services --> All leads to current economic performance

rapid decolonization

Had not permitted or enabled the development of enough human capital to man bureaucracies Only close to the end of the colonial period did they begin to staff the bureaucracies with locals Colonial powers made only limited public investments Few national traditions, symbols, or consciousness Parliamentary systems had little history or popular legitimacy

Example of Korea and importance of institutions

Korea: one nation - single culture and geography Annexed by japan in 1910. Japan defeated in WWII South Korea was occupied by the US; market economy, private property rights, GDP growth huge North Korea was occupied by the US; centrally planned economy, no private property, no free markets. GDP increased and is now in a downtrend

combinations that lead to good economic outcomes

- good institutions --> rule of law, contracts, stable politics, efficient, meritocracy bureaucracy, prudent economic and fiscal policies -heavy investment in infrastructure, education, and health

What are institutions?

-"shared rules that structure social interactions" -rules, compliance procedures, moral and ethical behavioral norms -includes formal rules --> embodied in constitutions, laws, market regulations -Also have norms of behavior and conduct --> Values, customs, generally accepted ways of doing things -Determine people's incentives -Constrain people's choices regarding a particular set of action

How the World Bank classifies countries economically

-213 economies with a population of at least 30k ranked by their levels of gross national income (GNI) per capita -Low-income countries (LICs): countries with a GNI per capita of less than $1,025 in 2011 -Lower-middle: 1025-4035 -Upper-middle: 4036-12475 -Middle-income countries: countries with a GNI per capita between $1,025 and $12,475 in 2011 -->LMCs and UMCs informally grouped at middle-income countries -High: above 12476 (includes OECD countries)

arbitrary, artificial states

-80% of non-coastal African borders follow latitudinal and longitudinal lines -Splitting of ethnic groups -Territorial-states not nation-states? De jure not de facto statehood -->Drawing lines on maps cheaper than war, defense, and control of the periphery -->Political borders do not coincide with the division of nationalities desired by the people on the ground Gave territories to one group ignoring the claims of other groups Drew boundary lines splitting "nations" (ethnic/linguistic groups) into different countries, frustrating national ambitiions of some groups Combined into a single country groups that wanted independence -->Colonial powers only tried to rule in "core" areas Beyond the core, weak systems of formal rule Make have explicitly or implicitly place "core" group -Some arbitrary borders are worse than others -->Large, dense, but non-contiguous populations Difficult to consolidate power Different groups and ethnicities consolidate around different symbols and systems

Developed and Developing World

-Developing world: sub-Saharan Africa, N. Africa and the Middle East, Asia (except for Japan and now S. Korea), Latin America and the Caribbean, and the "transition" countries of E. Europe and Central Asia, including former Soviet Union -Developed world: W. Europe, N. America, Japan, Australia, New Zealand

Colonialism and despotism

-Examples: Mobutu in DRC, Houphouet-Boigny in Cote d'Ivoire -Traditional rule in Africa was not necessarily hereditary, despotic, or male -Tribal governance was often much more participatory and open -Nonetheless, colonial authorities found it convenient to organize peoples into ethnic/tribal groups and empower the nearest thing to a leader -One argument: this was an enlightened and deferential recognition of native culture and self rule; a single consistent rule of authoritarian rule was simpler, cheaper, effective -Colonial powers repeated the process that states do in every society, whether at home or in the colonies: they reordered societies to make them more legible and easier to control -Pre-colonial social relations across Africa were diverse -Rule not necessarily lineage based or authoritarian • Eg checks and balances, often by elders and heads of kin groups -Solution: if chieftains do not exist, create them

colonial legacy

-Extraction of wealth rather than creation -Lacked institutions and formal organizations of the type that have benefitted the developed world 1. Property rights: the acknowledged right to use and benefit from a tangible (e.g. Land) or intangible (EG intellectual) entity that may include owning, using, deriving income from selling, and disposing --> less secure 2. Constraints on elites have been weak 3. A smaller segment of society has been able to gain access to and take advantage of economic opportunities 4. Problems with governance and public administration, as well as poor performing markets -Colonial powers also determined whether the legal and other institutions in their countries would encourage investments by and in the broad population or would instead facilitate exploitation of human and other resources --> they tend to have a low lifespan -When settlers came in large numbers income was high but indigenous populations were largely annihilated by disease or conflict --> descendants of those who survived were exploited and blocked from advancement -Often created or reinforced differing degrees of inequality often correlated with ethnicity which have also proved remarkably stable over the centuries --> postcolonial elites took the exploitative role formerly played by the colonial powers -High inequality emerged as a result of slavery in regions; also emerged where a large settled indigenous population could coerced into labor --> Less movement towards democracy, less investment in public goods, and less widespread investment in human capital (education, skills, health) -Introduced ideas of private property, personal taxation, and the requirement that taxes be paid in money rather than in kind

Development and Happiness

-Happiness is part of human well-being and greater happiness may expand an individual's capability to function -average level of happiness increases with increases in average country income --> only works until $10k-$20k average per capita, but once incomes grow to this point, most citizens have escaped poverty -exceptions --> low income but high happiness: Indonesia, Nigeria, Vietnam; high income but low happiness: Japan, Germany, South Korea -Subjective well-being encompasses different aspects (cognitive evaluations of one's life, happiness, satisfaction, positive emotions such as joy and pride, and negative emotions such as pain and worry): each of them should be measured separately to derive a more comprehensive appreciation of people's lives

examples of constraining institutions

-Hold political power accountable o Rule of law, constitutions, electoral rules, divisions of power o Could be formal (written) or informal (reputation, norms) o Ex. British Magna Carta 1215 -Restrict ability to expropriate o Property rights o Systems of contract enforcement, rule of law o Could be formal (written laws) or informal (kin networks, customs) -Rule of Law

Lower levels of human capital

-Human capital (health, education, skills) vital to economic growth and human development -Much of the developing world has lagged in its average levels of nutrition, health (measured in life expectancy or undernourishment) and education (measured by literacy) -Strong synergies between progress in health and education Ex. Under 5 mortality rates improve as mother's education levels rise -The well-performing developing countries are much closer to the developed world in health and education standards than they are to low income countries Ex. East Asia is doing relatively fine healthwise, but sub-Saharan Africa is plagued by malnourishment, tuberculosis, malaria, AIDS, parasitic infections

lower levels of industrialization and manufactured exports

-Industrialization associated with high productivity -Incomes: hallmark of modernization and national economic power -Many developing country govts make industrialization a high national priority --> number of prominent successes in Asia, including S. Korea and Singapore -Developing countries have a higher share of agriculture than developed countries but have relatively low productivity in agriculture in comparison, despite having a lot of people in agriculture -The proportion of women in agriculture varies --> Latin America: more men; Africa and Asia: more women -Share of people in industry in developing countries is lower than in developed countries, especially among women, -many developed country industrial jobs require high skills and pay high pages -Higher dependence on primary exports; many have diversified away from agricultural and mineral exports

Fundamental causes of differences in prosperity

-Institutions (humanly-devised rules shaping incentives) -Geography (exogenous differences of environment) -Culture (differences in beliefs, attitudes, and preferences)

Adverse geography

-Landlocked economies, common in Africa, often have lower incomes than coastal economy -Developing countries are primarily tropical or subtropical --> more tropical pests, parasites, endemic diseases such as malaria, water resource constraints, extremes of heat -Resource endowment: a nation's supply of useable factors of production, including mineral deposits, raw materials, and labor -->Ex of favorable physical resource endowment: oil rich Persian gulf States -->Other extreme: Chad, Yemen, Haiti, Bangladesh; no raw materials, minerals, fertile land -->High endowments doesn't mean success: DRC, cobalt reserves

new view on economic development

-New focus on underdeveloped areas -Economic development: reduction or elimination of poverty, inequality, unemployment -multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as acceleration of econ growth, the reduction of inequality, and the eradication of poverty

The African Slave Trade

-One of the most profound sources of upheaval -The scale and depravity of the Atlantic Slave Trade would dwarf the Arab trade after 1500 Arab/eastern slave trade: est. 7 million shipped Atlantic slave trade: est. 9-12 million shipped, roughly half by Portugal; number killed in raids or before shipment unknown -The primary destination was South America and Caribbean, 90% to work on sugar plantations -Regions (ie. Ethnic groups) most affected by slave trades -->Atlantic: mostly west coast, Madagascar -->Arab: more east side, also Madagascar -Dire demographic consequences: by 1850's, Africa's population believed to be half of what it would have been had the slave trades not taken place -->The greater the slave trade in an area, the lower income is today and the less developed the 19th century state -->The greater the slave trade, the lower modern levels of trust are: many forms of being sold into slave trade was kidnapping, seizing, taken in war, sold/tricked by someone they knew, through a judicial process -The slave trade undermined African institutions -->International demand for slaves -->Internal warfare, raiding, kidnapping--> a) Political instability --> Ease of conquest and institutional quality b) Ethnic fragmentation -->Low levels of trust and cooperation today --> All leads to current economic performance

Sen: sources of disparity between (measured) real incomes and actual advantages

-Personal heterogeneities --> disability, illness, age, gender -Environmental diversities --> heating and clothing requirements in cold, infectious diseases in tropics, impact of pollution -Variations in social climate --> prevalence of crime and violence, "social capital" -Distribution within the family --> economic statistics measure incomes received in a family as it's the basic unit of shared consumption, but they may be uneven as girls receive less medical attention and education than boys -Differences in relational perspectives -->some goods are essential because of local customs and conventions have to frame consumption of commodities in a social and personal context

larger rural population but rapid rural-to-urban migration

-Rural areas are poorer and tend to suffer from missing markets, limited information, and social stratification -Rapid urbanization has its own problems --> 2009: the world was 50% urban

how the cold war shaped the international system

-Small transgressions threatened fragile peace -US and USSR want a system that contains conflicts in the periphery --> Fear is that small wars escalate to nuclear war -Developed rules, norms, institutions that would preserve peace • Non-interference -->Populations were the victims of their leader's cruelty and incompetence • Territorial integrity -->Frees states from need to control periphery -Western powers more interested in winning Cold War than sustainable state building

other factors for classifying developing countries

-Sometimes countries grouped as other high-income economies are considered to be developing, especially when this is the position of their govts -High-income but low health or education are also considered developing -Places with ongoing crises are considering developing -degree of international indebtedness --> severely, moderately, less -UNDP classifies based on human development (including health and education attainments --> low, medium, high, very high -landlocked and small island developing states -emerging markets

Lower levels of living and productivity

-The low and middle income developing nations, despite having 5/6 of the world's population, only have 46% of the world's income in 2011 -Poverty trap/circular and cumulative causation: vicious cycle where low income leads to low investment in education and health and plant and equipment and infrastructure which leads to low productivity and economic stagnation -Ways to escape this exist -Common misconception: low incomes result from a country being too small to be self-sufficient or too large to overcome economic inertia -->No correlation between country size in population or area and economic development

Higher Levels of inequality and absolute poverty

-The poorest 20% of people receive 1.5% of world income -Gaps between countries is huge, but so are gaps within countries -Inequality is substantially higher than in developed countries -Extreme poverty due in part to low human capital but also to social and political exclusion and other deprivations -Absolute poverty represents a specific minimum level of income to satisfy basic physical needs -Varies form country to country --> different physiological, social, economic requirements

Three Objectives of Development

-To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health, and protection -To raise levels of living, including higher incomes, more jobs, better education, greater attention to cultural and human values -To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence, in relation to other people, nation-states, ignorance, and human misery

higher population growth rates

-Very high birth rates -More than 5/6 of the world lives in developing countries -97% of net population growth (births minus deaths) in 2012 was in developing countries -Variance is really large -Crude birth rate: the number of children born alive each year per 1000 population • 45+: Chad, DRC, Niger, Uganda • <10: Austria, Italy, Japan, Taiwan -High birth rates --> active labor force has to support proportionally almost twice as many children as it does in richer countries -Proportion of people over the age of 65 greater in developed nations -Dependency burden: The proportion of the total population aged 0 to 15 and 65+, which is considered economically unproductive and therefore not counted in the labor force --> Must be supported by country's labor force (between 15 and 64 -Total dependency ratio is 72 per 100 (low) and 49 per 100(high) -In rich countries, old people supported by pension and savings -Low income countries have to deal with high birth rates and high dependency

freedom: core value of development

-a situation in which a society has at its disposal a variety of alternatives from which to satisfy its wants and individuals enjoys real choice according to their preferences -emancipation from alienating material conditions of life and from social servitude to nature, other people, misery, oppressive institutions, dogmatic beliefs, especially that poverty is predestination -wealth --> greater control over nature and physical environment (food, clothing, shelter), greater freedom to have leisure, consume more goods and services, deny importance of material wants -includes political freedom --> personal security, the rule of law, freedom of expression, political participation, and equality of opportunity

abrupt departures

-colonies were commonly viewed as a burden in Europe -Rather than repress domestic independence movements, the British and French made a hasty exit --> installed parliamentary systems but didn't even put in local people until late --> advantages of leaving: avoided development of nationalist movements and allowed them to maintain good relations and avoid disorder

self-esteem: core value of development

-feeling of worthiness that a society enjoys when its social, political, and economic systems and institutions promote human values such as respect, dignity, integrity, and self-determination -sense of worth and self-respect, of not being used as a tool by others for their own ends -nature/form varies -national prosperity almost universal measure of self-worth

Amartya Sen's Capability Approach

-income and wealth not ends but tools for other purposes -things that matters: what a person is, can be, can do; what use can the consumer make and does make of commodities

external dependence

-less organized and influential in international relations -Weaker bargaining positions than developed nations in international economic relations -Voice greater concern over various forms of cultural dependence, like news, entertainment, business practices, lifestyles, social values -Dependent for environmental preservations, on which hopes for sustainable development depend --> environmental dependence --> needs developed world for solutions

Defining Developing World

-per capita income -Organization for Economic Cooperation and Development (OECD), UN, World Bank all have different styles of classification

role of virtues

-policymaking needs agreement on subjective values before objective analyses can be developed -economic development and modernization -key concepts and issues: social equality, universal education, right of individuals to accumulate unlimited wealth; population growth, rural stagnation, environmental decay

three facets of development

-real income per capita adjusted for purchasing power -health as measured by life expectancy, undernourishment, and child mortality -educational attainments as measured by literacy and schooling

institutions throughout history

-small number of societies have developed strong states alongside constraints on power (institutions) --> formed highly attractive and powerful form of political organization that favored extraction of taxes and capitalist growth -most states have been elite groups forming a coalition or oligarchy and extracting rents --> institutions not meant to max good but to preserve power; entrench elite privileges -institutions difficult to change because costly once developed and generally recognized --> elites want to be included in control -critical junctures: moments in history where new bargains can be struck -more open institutions when ruling coalitions get larger by accident or design --> because more groups acquire and demand power, because of chance decisions and events, rarely because someone wanted more inclusive, open institutions for their own sake

The Central Role of Women in Economic development

-women tend to be poorer, more deprived in health, education, freedom in all forms -primary responsibility in child rearing --> resources that they are able to bring to this task determines whether the cycle of transmission of poverty from generation to generation will be broken -transmit values to the next generation

Undeveloped markets

1. Lack legal system that enforces contracts and validates property rights 2. Lack of stable and trustworthy currency 3. Lack of infrastructure of roads and utilities high transport and communication costs can't facilitate interregional change • Infrastructure: facilities that enable economic activity and markets, such as transportation, communication and distribution networks, utilities, water, sewer, and energy supply systems 4. No well-developed and efficiently regulated system of banking and insurance with broad access and with formal credit markets that give loans and enforce rules of payment 5. No market information for consumers and producers about prices, quantities, qualities of products and resources, creditworthiness of potential borrowers 6. Social norms that facilitate successful long-term business relationship Imperfect market: a market in which the theoretical assumptions of perfect competition are violated by the existence of, for example, a small number of buyers and sellers, barriers to entry, and incomplete information Incomplete information: the absence of information that producers and consumers need to make efficient decisions resulting in underperforming markets legal and institutional foundations are extremely weak Existence of economies of scale, thin markets for many products due to limited demand and few sellers, widespread externalities (costs or benefits that accrue to companies or individuals not doing the consuming or producing) in production and consumption, and poorly regulated common property resources

Characteristics of the Developing World

1. Lower Levels of Living and Productivity 2. Lower Levels of Human Capital 3. Higher Levels of Inequality and Absolute Poverty 4. Higher Population Growth Rates 5. Greater Social Fractionalization 6. Larger Rural Populations but Rapid Rural-to-Urban Migration 7. Lower Levels of Industrialization and Manufactured Exports 8. Adverse Geography 9. Underdeveloped Markets 10. Lingering Colonial Impacts and Unequal International Relations

Least Developed Countries

A UN designation of countries with low income, low human capital, and high economic vulnerability -2012: 49 countries, 34 in Africa, 9 in Asia, 5 in Pacific Islands, Haiti

absolute poverty

A situation of being unable to meet the minimum levels of income, food, clothing, health care, shelter, and other essentials. -about 2/5th of the population

subsistence economy

An economy in which production is mainly for personal consumption and the standard of living yields little more than basic necessities of life - food, shelter, and clothing - little money income because most goods made and consumed by people themselves

GNI per capita

Calculated as total domestic and foreign value added claimed by a country's residents without making deductions for depreciation (or wearing out) of the domestic capital stock

newly industrialized countries (NICs)

Countries at a relatively advanced level of economic development with a substantial and dynamic industrial sector and with close links to the international trade, finance, and investment system -part of a distinction made between upper-middle-income or newly high-income countries, distinguishing those who have achieved relatively advanced manufacturing sectors

developing countries

Countries of Asia, Africa, the Middle East, Latin America, eastern Europe, and the former Soviet Union that are presently characterized by low levels of living and other development deficits

Traditional African institutions

Economic institutions: Currency, Free markets, competition, the profit motive, regulation among trades and crafts, The use of standard units of measurement, Market tolls and taxes Political institutions: Constraints on power, Diverse across the continent

politicial institutions

Extractive political institutions - in the limit "absolutism" --> concentrate power in the hands of a few without constraints, checks and balance, or "rule of law" Inclusive political institutions --> allow broad participation -pluralism- and place constraints and checks on politicians; rule of law (closely related to pluralism) Strong synergy between economic and political institutions -->Extractive pol and econ institutions tend to reinforce each other; extractive econ institutions provide resources for continued repression by elites; Newcomers who take over the system then have the incentive to retain the structure -->Inclusive political and economic institutions tend to reinforce each other; Broadly shared political power makes it difficult to establish extractive economic institutions; More equitable distribution of resources facilitate the persistence of inclusive political institutions

Greater Social Fractionalization

Fractionalization: significant ethnic, linguistic, and other social divisions within a country --> Generally higher in low-income countries, associated with civil strife and violent conflict; more diversity = more likely internal strife and political instability -More than 40% of the world's nations have more than 5 significant ethnic groups --> In most cases, at least one group faces discrimination, social exclusion, systematic disadvantages Ex. Rwanda, Afghanistan -Conflict can derail positive development progress -->Trend since 1990 towards more successful resolution of conflict and fewer new conflicts -Indigenous groups lag the most --> being indigenous makes it much more likely that an individual will be less educated, in poorer health, and in a lower socioeconomic status than other people, especially true for women -Examples of exceptions: Malaysia, Mauritius, USA -->Diversity had lead to primarily cooperation here and therefore economic development could progress

mixed effects of colonialism

Increased state organization and public investment but promoted highly centralized power over frequently arbitrary and hard-to-govern territories and departed abruptly

Reversal of fortunes

Latin America -Aztecs and Incas were relatively rich and prosperous in 1500s before European conquest -now they're relatively poor due to the institutions put into place by conquerers -took land, extracted all income, forced them to work for low wages, imposed high taxes, charged high prices for voluntarily bought goods

Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs)

MDGs --> developed in consultation with the developing countries to ensure they addressed their most pressing problems; criticism: not ambitious enough; not prioritized; goals are complements rather than substitutes SDGs --> successor to MDGs; now 17 goals; designed with poorer countries at the table; driven by 5 universal shifts -Leave no one behind: end extreme poverty in all forms and design goals that focus on reaching excluded groups -Put sustainable dev at the core: soc, econ, env dimensions of sustainability -Transform economies for jobs and inclusive growth while moving to sustainable patterns of work and life -Build peace and effective, open, accountable institutions for all: encourage the rule of law, property rights, freedom of speech and the media, open political choice, access to justice, and accountable govt and public institutions -Forge a new global partnership so that each priority should involve govts and also others, including poor, civil society, and indigenous and local communities, multilateral institutions, business, academia and philanthropy

Effects of Forced Labor

Mita forced labor system in Peru and Bolivia - communities within a certain boundary forced to send 1/7 of their adult male population to work in silver and mercury mines between 1573 and 1812 Findings: mita effect lowers household consumption by around 25% and increases child stunting by around 6 percentage points - 2 centruies later Mechanism: impact on land tenure and public goods (roads) As distance to the boundary of mita increases, there is more consumption As distance to the boundary of mita increases, there is less childhood stunting

How to Calculate NHDI

NHDI=H^1/3*E^1/3*I^1/3 (Health, education, income) 1) calculate the three dimensions Dimension index= (actual value-min value)/(max value-min value) What percent above the minimum to max levels has a country attained? -Health--> life expectancy --> 20 min, 85 max, actual value (actual value-20)/(85-20) -Education split into two different measures a)expected years of schooling --> schooling levels have increased over time, so different ages means different amount of schooling -min = 0; max = 18 (master's degree) b)mean years of schooling --> min= 0 (societies can exist without schooling; not necessary for survival); max = 15 (actually projected mean for 2025) so for education, calculate the dimension index for both measures and take the arithmetic mean to have the actual education index -Income --> min= 100(lowest value attained by any country in recent history (Zimbabwe in 2008), max=75000(virtually no gain in human development and well-being from income per capita above 75000; only 4 countries exceed this ceiling currently: Kuwait, Liechtenstein, Qatar, Singapore) -->log income --> each additional dollar of income has a small effect on expanding capabilities so (ln(actual value)-ln(100))/(ln(75000)-ln(100))

ethnic rule reinforced ethnic institutions of control

Need for a cheap and politically correct means to colonize -->ethnic rule • Creation of a "native authority" • Appointed • Invented chiefs where they did not exist -->"decentralized despotism" • Ability to tax, force labor • Fortified from external threats • Accountable only to colonial authorities above -->centralized despotism • New national govts took on colonial role • Appointed local leaders • Command state -->Current economic performance

institutions

Norms, rules of conduct, and generally accepted ways of doing things. Economic institutions are humanly devised constraints that shape human interactions, including both informal and formal "rules of the game" of economic life in the widely used framework of Douglass North.

political economy

The attempt to merge economic analysis with practical politics - to view economic activity in its political context

Development economics

The study of how economies are transformed from stagnation to growth and from low-income to high-income status, and overcome problems of absolute poverty, and levels of living for people -econ, pol, soc, institutional mechanisms, both private and public, necessary to bring about rapid and large-scale improvements -no overriding paradigm because of differences between countries and complexity in process -larger govt role and some degree of coordinated economic decision making directed towards transforming the economy

Depreciation (of the capital stock)

The wearing out of equipment, buildings, infrastructure, and other forms of capital, reflected in write-offs to the value of the capital stock.

income per capita

Total gross national income of a country divided by its total population.

Inclusive economic institutions

allow and encourage participation by the great mass of people in economic activities that make the best use of their talents and skills and enable individuals to make the choices they wish o Secure private property rights o An unbiased system of law o Markets and state-support for markets o A provision of public services that provides a level playing field in which people can exchange or contract o Entry of new business is permitted o People are free to choose their careers

traditional economics

an approach to economics that emphasizes utility, profit maximization, market efficiency and determination of equilibrium

New Human Development Index (NHDI)

an index measuring national socioeconomic development, based on combining measures of education, health, and adjusted real income per capita ranks each country on a scale of 0 (lowest human development) to 1 (highest human development) based on 3 goals or end products of development: -a long and healthy life as measured by life expectancy at birth -knowledge as measured by a combination of average schooling attained by adults and expected years of schooling for school-age children -decent standard of living as measured by real per capita GDP adjusted for differing PPP of each country's currency to reflect cost of living and for assumption of diminishing marginal utility

World Bank

an organization known as an "international financial institution" that provides development funds to developing countries in the form of interest-bearing loans, grants, and technical assistance

Purchasing Power Parity (PPP)

calculation of GNI using a common set of international prices for all goods and services, to provide more accurate comparison of living standards -The number of units for a foreign country's currency required to purchase the identify quantity of goods and services in the local developing economy as $1 would buy in the US -used as a conversion factor to account for relative purchasing power -avg real (PPP) income per capita in high-income countries more 28 times that of low income countries

Lesser Developed Countries (LDCs)

commodity and resource markets typically highly imperfect, consumers and producers have limited information, major structural changes taking place, potential for multiple equilibria, generally tends to be disequilibria

undernourished

consuming too little food to maintain normal levels of activity; often caused the problem of hunger

Resource Curse (Paradox of Plenty)

countries with an abundance of natural resources (such as fossil fuels and certain minerals) tend to have less econ growth, less democracy, and worse development outcomes than countries with fewer natural resources

extractive economic institutions

designed to extract incomes and wealth from one subset of society to benefit a different subset o The many forms of forced labor ex. Slavery, mita system in Peru o Exploitative colonial structures

traditional economic measures

development meant achieving sustained rates of growth in income per capita to enable a nation to expand its output at a rate faster than the growth rate of its population includes income per capita and real per capita gross national income (monetary growth of GNI per capita minus rate of inflation) -how much real goods and services is available to the average citizen for consumption and investment

Lingering Colonial Impacts and Unequal International Relations

divides into colonial legacy and external dependence

Colonialism administration formalized bureaucratic structures and tax capacity

ex. In French West Africa, France established a broad system of local taxation to deliver local services and public goods -60% of revenues from head tax, 40% from trade and property tax -Local budgets cover all non-military expenses, including public works and health/education expenses -Central govt only used 30% of the colony's budget and district govts disbursed the other 70% -Distrct spending on infrastructure, health and education in districts was 25% of colonies' budgets Like most states, this one was coercive and extractive -After independence, the French handed these coervice bureaucratic and tax structures down to largely despotic regimes Nonetheless, this brought a previously unknown level of state development and integration While access to public services varied, the colonial state increased health and education provision

7 factors of happiness

family relationships, financial situation, work, community and friends, health, personal freedom, and personal values

literacy

fraction of adult males and females reported or estimated to have basic abilities to read and write functional literacy generally lower than reported in developing countries

1970s view on economic development

general improvements in per capita GNI growth would either trickle down to the masses or create society wide benefits however, didn't solve problems of poverty, discrimination, unemployment, and income distribution emphasis on increased output, measured by GDP

growth v. governance

generally more governance means more average growth per capita o Exceptions: Zimbabwe (high gov, no growth), India (less gov, more growth), Bangladesh (more gov, less growth) As protection of property rights grows, more GDP per capita PPP As corruption decreases, GDP per capita PPP grows

institutional transformation

o 1949: people's republic of china established --> Dictatorship of the chinest communist party under mao zedong o 1950: great leap forward --> Led to famine resulting in deaths of 20 to 40 million people o 1978- first tentative markets reforms introduced

How do institutions change?

o China: Gradual shift in econ institutions from a planned economy to a capitalist economy --> Implemented to ensure stability and gradual opening up of markets o Russia and former USSR: "big bang" approach

Why do institutions change?

o Elite driven v. conflict driven -->Elite drive: when the politically powerful elite wishes to change institutions in order to increase its rent/utility -->Conflict driven: institutional changed forced in by nonelites o Internal v external -->Internal: because of internal shocks or dynamics -->External: because of external imposition, shocks or incentives

Growth under inclusive economic institutions

o Pave the way for two important engines of sustained growth: tech and education o Secure private property rights are key provide incentives for investment and innovation o Growth under inclusive institutions is often accompanied by creative destruction

China: transition institutions

o Special economic zones o Two-track reform; the household responsibility system; township and village enterprises o Dual-track pricing -->The govt allowed products to be sold at mkt prices after planned targets had been met -->State-controlled prices remained low and market prices were higher

indicators of health and education

prevalence of malnutrition, primary completion rate, under-5 mortality rate, life expectancy

values

principles, standards, or qualities that a society or groups within it considers worthwhile or desirable

human capital

productive investment in people, such as skills, values, and health, resulting from expenditures on education, on-the-job training programs, and medical care

Comparison between standard neoclassical assumptions and developing country reality

standard assumptions: -perfect information -utility maximizing consumers and producers -perfectly competitive markets -prices function to achieve equilibrium (demand = supply) -unique equilibrium -transaction and transportation costs can be ignored -private property rights, rule of law, well-functioning govt and public sector developing country reality: -limited information -other factors play a large role (i.e. risk aversion) -imperfect markets -disequilibrium in various markets and price controls -multiple equilibria -substantial transaction and transportation costs -importance of institutional rules and norms

three core values of development

sustenance, self-esteem, freedom

sustenance: core value of development

the ability to meet basic needs (food, clothing, shelter) that necessary to keep an avg human being at the bare minimum level of living basic function of all economy activity: provide as many people with means to sustain themselves -econ dev necessary condition for improvement of quality of life --> Rising per capita incomes, the elimination of absolute poverty, greater employment opportunities, and lessening income inequalities

fertility

the average number of live-born children produced by women of childbearing age in a particular society high fertility is both a cause and consequence of underdevelopment

life expectancy

the average number of years newborn children would live if subjected to the mortality risk prevailing for their cohort at the time of their birth

Sen: Capabilities

the freedoms that people have, given their personal features (conversion of characteristics into functionings) and their command over commodities -->to convert the characteristics of commodities into functionings, you need health, education along with income -The capacity to maintain valued social relationships and network leads to external capabilities (abilities to function that are conferred by direct connection or relationship with another person) -A person's own valuation of what kind of life would be worthwhile is not necessarily the same as what gives pleasure to that person -->Utility can be really high even if they're super poor -Subjective well-being is a kind of psychological state of being - a functioning- that could be pursued alongside other functionings like health and dignity

More Developed Country (MDC)

the now economically advanced capitalist countries of W. Eur, N. Am, Australia, New Zealand, Japan

social systems

the organizational and institutional structure of a society, including its values, attitudes, power structure, and traditions interdependent relationships between economic and non-economic factors such as values and attitudes keep in mind values, attitudes, institutions

value added

the portion of a product's final value that is added at teach stage of production

Development

the process of improving the quality of all human lives and capabilities by raising people's levels of living, self-esteem, and freedom

Rule of Law

the restriction of arbitrary exercise of power by subordinating it to well-defined and established laws --> framework of laws and institutions that embodies four universal principles The Four Universal Principles 1. Accountability: govt and private actors are accountable under the law 2. Just Laws: laws are clear, publicized, stable, and just; applied evenly; protect fundamental rights, including security of persons, contract and property rights, and certain core human rights 3. Open Govt: processes by which laws are enacted, administered, and enforced are accessible, fair, efficient 4. Accessible & Impartial Dispute Revolution: justice is delivered timely by competent, ethical, and independent representatives and neutrals who are accessible, have adequate resources, and reflect the makeup of the communities they serve

attitudes

the states of mind or feelings of an individual, group, or society regarding issues such as material gain, hard work, saving for the future, sharing wealth

capital stock

the total amount of physical goods existing at a particular time that have been produced for use in the production of other goods and services

Gross National Income (GNI)

the total domestic and foreign output claimed by residents of a country GDP+factor incomes accruing to residents from abroad - income earned in domestic economy accruing to persons abroad

Gross Domestic Product (GDP)

the total final output of goods and services produced by the country's economy, within the country's territory, by residents and nonresidents, regardless of its allocation between domestic and foreign claims

Sen: Functionings

what people do or can do with the commodities of given characteristics that they come to possess or control -examples of functionings: being healthy, well-nourished, well-clothed, mobile, having self-esteem, taking part in the life of the community