Economic Growth may be defined as rate of expansion over a short period. Economic growth is a single dimensional quantitative concept which is concerned only with the rate of increase in national income.

1. RIR 405: INTERNATIONAL
ECONOMIC POLICY
ANALYSIS
Economic
development,
inequality and
foreign aid

2. Session Highlights
What are the drivers of economic development
(policy, history, location, luck?)?
Do natural resources help or is there a 'resources
curse'?
How important is foreign aid in the process and
what features maximise its effectiveness?

3. Development is..
“A process where nations
achieve higher standards of living,
happiness and fulfilment often
through economic growth.”

4. The economic
problem
“One generation plants a tree;
the next generation gets the shade.”
Chinese Proverb
You Tube

5. Poverty means lacking basic living
standards and
conditions.
Not being able to progress and
have the same opportunities as
other people.
Poverty means a relatively short
life, poor health and poor access to
health care.
It can also mean a low income and
poor education level (literacy
skills)
Poverty often involves large
families and often war and conflict.

6. Unequal distribution of income, resources
and opportunity? We are the fortunate few

7. Economic Growth
Economic Growth may be defined as rate of
expansion over a short period.
Economic growth is a single dimensional
quantitative concept which is concerned only with
the rate of increase in national income.
It is concerned with rate of increase in national
income.
It ignores distribution of income and it ignores
qualitative aspects of human life.

8. Measurement of Economic
Growth Economic growth is the rate of change at which an
economy is growing year after year or the percentage change in
the Gross Domestic Product (GDP) of a country year after
year.
The economic growth can be actual growth or potential
growth. Potential growth is also sometimes called as targeted
growth.
Economic development is a normative concept which takes
into account both qualitative and quantitative aspects.
Economic development is an increase in overall living standards
and quality of life of the people, on this basis, there are several
parameters for measurement of the economic development as
discussed below:

9. Economic Development
 Economic development is broader in nature. It not only includes the
quantitative change but also includes certain qualitative changes in the
economy.
 Economic development means not just increase in the real per capita
income but also reduction in economic-divide, poverty, illiteracy and
unemployment.
 Concept of economic development is both quantitative and qualitative in
nature. It is concerned with welfare of people (a qualitative aspect) along
with increase in per capita income (a quantitative concept).
 Thus, economic development includes both economic growth as well as
social welfare.
 Economic development should focus on inclusive growth –
 growth that includes all sectors of the economy and all sections of the
society.

10. Prof. Goulet:
Three Core Values of Development
Life Sustenance: The life-sustaining needs are food, shelter,
health and protection. When these are absent or in critically
short supply, a condition of absolute "underdevelopment"
exists.
Self-esteem: A second universal component of good life is
self- esteem- a sense of worth and self- respect- of not being
used as a tool by others for their own ends.
Freedom: Arthur Lewis stressed the relationship between
economic growth and freedom from servitude when he
concluded that "the advantage of economic growth is not that
wealth increases happiness, but that it increases the range of
human choice. Goulet, D. (1971) The Cruel Choice: A New
Concept in the Theory of Development, New York,
Athenaeum

11. Differences between economic
growth and economic development
Economic
Growth
Economic
Development
Improvement in
quality of life
Increase in GDP
Higher incomes
Human
Development
Index
Classic macro
economic variables
Unemployment
Inflation
Growth
Access to
education,
healthcare
Measured using
range of
variables
Investment,
capital, capacity
Labour, wages
Progress,
Improvement in
standard of living

12. How do we measure
Economic Development?
Quantitative Indicators – are based on
objective and truthful pieces of
information. Often collected in surveys or
by in a census. eg GDP
Qualitative Indicators – are based on
subjective feelings, impression and opinion.
These provide a good indication of the
social health of a country. Eg Happiness

13. Ways to evaluate
development?
Population Density
Gross National Income
per capita
Human
Freedom
Index Unemployment Rate
Infant Mortality Rate
Access to clean
water
Birth Rate
Happiness Index
Internet Users
per 1000
HIV Infection Rate
Average Wage (US$)
per day Cars per 1000 people
People per doctor
% employed in
agriculture
Income Equality
Human Development Index

14. In what ways can
development be measured?
Composite Indicators
 Human Development
Index (HDI) composite
of
 GNP per capita
 Adult literacy rate
 School enrolment rate
 Life expectancy
A HDI between 1 and 0.8 is
considered high, 0.8 and 0.6 is
considered medium and 0.6 to 0.4
is considered low
http://en.wikipedia.org/wiki/List_of_countries_by_Human_Development_Index

15. What is the
Human Development Index?
The Human Development Index recognises that a
country’s economy alone is not enough to measure
its wellbeing – we have to look at its people and
their capabilities.
It looks at health, knowledge and standard of living,
The HDI is a summary of average achievement in
key dimensions of human development – a long and
happy life, being knowledgeable and having a decent
standard of living.
Access the 2015 HDI report here The HDI

16. Developed, Underdeveloped
and the Developing Economies
Underdeveloped, ‘Third World’, Poor, Low income &
developing countries are synonymous nomenclatures
used interchangeably.
But the used of the word developing countries is
preferred signifying that these countries are capable of
making reasonable economic progress. There is a
dynamism in this word.
A developing economy is essentially marching to
progress and prosperity. The word underdeveloped or
the poor or the low income countries is somewhat a
static term and gives an inferior feeling.

17. Meaning of developing countries
Developing Countries are those
countries which have low standard
of living and the level of industrial
production is well below their
capacity which may be achieved
with some financial and technical
assistance.

18. Characteristics or Salient Features
of Underdeveloped Countries
• Low Income:
 For the current 2017 fiscal year, low-income economies
are defined as those with a GNI per capita, calculated
using the World Bank Atlas Method of $1,025 or less in
2015;
 lower middle-income economies are those with a GNI per
capita between $1,026 and $4,035;
 upper middle-income economies are those with a GNI per
capita between $4,036 and $12,475;
 high-income economies are those with a GNI per capita
of $12,476 or more.

19. Characteristics or Salient Features
of Underdeveloped Countries
Low Levels of Living
Since, about 3/4th of world’s population lives in
underdeveloped countries which have less than
one-fifth share in world income.
It is obvious that a vast majority of people in
these countries that must be living under
conditions of poverty, malnutrition, disease,
illiteracy, etc. even basic necessities of life are not
available to them.

20. Characteristics or Salient Features
of Underdeveloped Countries cont.
Income inequalities-
Apart from wide gap between income
levels in advanced and underdeveloped
economies there also exists grave
income inequalities between the rich
and poor people within the
underdeveloped countries.

21. Characteristics or Salient Features
of Underdeveloped Countries cont.
Widespread Poverty
 Low Levels of
Productivity
 High Rates of Population
Growth
 Low Rates of Capital
Formation
 Technological
Backwardness
 Predominance of
Agriculture in the
Economy
 Export of Primary
Products
Widespread Poverty
 High levels of
Unemployment and
Underemployment
 Weak Infrastructure
 Low Social Indicators
of Development
 Dependence and
Vulnerability in
International Relations
 Poor Quality of Human
Capital

22. Causes of Underdevelopment
Scarcity of Natural Resources
Shortage of Capital
Technological Backwardness
Colonialism
Other Factors

23. Poor Despite
Natural Resource wealth
Nigeria: oil revenues per capita increased from $33 in 1965 to $325
in 2000 but income per capita stagnated at about $1100 since its
independence in 1960.
Between 1970 and 2000 those on less than $1/day increased from
26 to almost 70%.
Top 2% had as much as bottom 17 % in 1970 but staggering
bottom 55% in 2000.
Declining TFP growth: -1.2% per year. Only a third of capacity is
utilized.
Successive military dictatorships have plundered oil wealth.
Hopefully, the future will be brighter.

24. Disappointing Performance
Despite Natural Resources
17th century Spain despite gold/silver from New World.
Resource Holland did much better.
Negative growth rates during past decades: e.g., Venezuela,
Iran, Libya, Kuwait, Qatar.
Decline in OPEC GDP/ capita during last few decades while
other countries enjoyed growth.
Gold boom in 70’s did not help South Africa much (Stokke,
2005).
Dutch economy and the Slochteren natural gas reserves led to
unsustainable welfare state.

25. Resource abundance associated
with (Gylfason and Zoega, 2002):
Crowding out of non-resource exports and foreign
direct investment. Less openness.
Elicits corruption and extreme rent seeking.
Crowds out foreign capital, social capital, human capital
and financial capital.
Erodes legal system.
Bigger Gini index of inequality.
Less school enrolment and expected years of schooling
(Botwana exception).
Delays development of financial institutions.
Armed conflicts and civil wars.

26. Four Explanations of Resource Curse
1. Old Dutch disease stories
2. Volatility
3. Bad policies
4. Rent seeking, corruption and
conflict

27. Old Explanations of Resource Curse
Windfall gain in demand for resources from abroad induces an
appreciation of the real exchange rate.
The non-resource export sectors go in decline.
The sheltered sector gets a boost as labour and other factors
move from traded to sheltered sectors.
Easy to extend to Heckser-Ohlin and factor use in resource
sector (Corden and Neary, EJ, 1982; Corden, OEP, 1984)
Or to nominal wage rigidity in Dornbusch-style models of the
open economy (Eastwood and Venables, EJ, 1982; Buiter and
Purvis, 1983)

28. Is there a Dutch Disease?
‘It seems ungrateful to talk of a disease’ (The
Economist). Dutch Disease?
Decline of exposed sectors may just be the efficient
response to the resource boom.
However, if there is learning by doing in the non-
resource export sectors, there may well be a loss in
output and welfare (van Wijnbergen, EJ, 1984;
Krugman, JDE, 1987).
A lower growth rate may well result (Sachs and Warner,
1997).

29. Worsening of competitiveness
P G(LN) = H F(1  LN) with H  HT /HN is LM
locus, which slopes upwards in P-LN space
Higher natural resource exports Q E boosts P and
induces more than proportionate income in
national income Y
Boost to output and consumption of NT-sector
Consumption of T-goods rises despite contraction
of T-sector (supplied through imports paid for by
resource revenues)

30. Dynamic effects of a resource boom: AAAB
On impact resource boom leads to real
appreciation (higher P), decline of exposed
sector and boom of sheltered sector
As relative productivity of labour in T-sector
gradually falls, the real exchange rate
depreciates (falling P) so labour shifts back
from sheltered to exposed sectors
In the long run there must be real depreciation

31. Homework:
Difference between Developing Nations
Using one page, compare two nations on their level of
Development using appropriate statistics.
Use wikipedia – HDI to find countries to compare.
Use websites to collect the data for comparison. Useful
websites include
 www.gapminder.org
 www.nationmaster.org
 www.oecd.org
 www.cia.org
Summary should be no more than one page, use Pg 320 of
your text book as a guide on how to compare.

32. Foreign Aid, improving
human wellbeing
What is AID?
Aid means assistance and it
takes different forms.
Sometimes it is monetary
assistance which means that
money is paid to the
government or an organisation
working in the other country.
Sometimes it is expertise,
workers, equipment or
machinery.
Aid is the transfer of
goods and services from
developed to developing
nations.

33. What is AID?
Aid means assistance and it takes different forms.
Sometimes it is monetary assistance which means
that money is paid to the government or an
organisation working in the other country.
Sometimes it is expertise, workers, equipment or
machinery. Aid is the transfer of goods and
services from developed to developing nations.
Foreign Aid, improving human wellbeing

34. Outline the concerns for
human wellbeing in Source
C.
What time of day was this
photograph taken?

35. Types of AID
Aid can be given or received in a variety of forms depending on the country who
is giving or receiving the aid, and whether it is a long term or short term solution.
TERM DEFINITION
Bilateral Monetary or other assistance given from one country to another. E.g.
Australia giving aid to East Timor Multi-lateral Provided by a number of countries,
often through an international organisation, or through a number of countries
agreeing to help out. E.g. Australia, NZ, USA and China giving aid to Japan after
the tsunami.
Tied Aid
Aid provided where a country ensures that the money is spent on what they are
giving the aid for. Sometimes it is given with an agreement that the receiving
country will now trade goods and services with them. Untied Aid Assistance given,
free of conditions (very rare in the 21st century due to corruption and poor
governance).

36. What other types of aid are
there?
Food aid Assistance in the food of fruit, vegetables,
drinking water, seeds, etc.
Technical Aid Assistance thorough the provision of
experts.
 This could include teachers, doctors, builders etc.
Monetary Aid Assistance in the form of funds
Emergency Aid
 Urgent assistance provided after an incident such as an
earthquake, brushfire, Tsunami or flood

37. Economic
Growth
Economic
Development
Differences and Similarities

38. Gross National Product
and Gross Domestic Product
For some developing countries
GDP will be overestimated due
to the number of foreign
owned companies producing in
the country. GNP will be more
accurate. GNP < GDP
For some nations with foreign
interests in other parts of the
world GNP will tend to be a
more accurate measure. GNP
> GDP

39. Macro Economics & Opportunity Costs
Production Possibility Frontier (PPF)
Apples
Oranges

40. Economic growth caused
by reductions in
unemployment and
productive inefficieny
Education
Military Spending
Economic growth caused by increases in production possibilties
(discovery of new resources, investment in new technology)
A
B
A
B

41. Economic growth which
does not lead to
economic development
(more military spending,
but no more education)
Education
Military Spending
A B
No improvement
in standard of living

42. Economic growth, which leads to
more economic development
Education
Military Spending
A
B
improvement
in standard of living