This document provides an introduction to economic development. It defines economic development as improving human freedoms and reducing poverty, inequality, and unemployment. The key goals of economic development are outlined in the Millennium Development Goals and are measured by indicators such as the Human Development Index which considers education, life expectancy, and income. However, the HDI has limitations as it does not account for other important factors like political freedoms, income distribution, or qualitative changes over time. Common characteristics of lower income countries are also presented such as lower productivity and incomes as well as higher inequality, which can lead to social and economic costs if left unaddressed.

1. AS Macro Revision
Introduction to Economic Development
Spring 2014

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3. Introduction to
Economic
Development

4. “Development is the expansion of people’s freedom to live
long, healthy and creative lives; to advance other goals they
have reason to value; and to engage actively in shaping
development equitably and sustainably on a shared planet.”
(Source: United Nations)
The Meaning of Economic Development
1. Dudley Sears has defined development as “the
reduction and elimination of poverty, inequality and
unemployment within a growing economy”
2. Nobel Economist Amartya Sen writing in
“Development as Freedom”, sees economic
development as being concerned with improving the
freedoms and capabilities of the disadvantaged,
thereby enhancing the overall quality of life

5. Millennium Development Goals (MDG)
Eradicate extreme poverty and hunger
Achieve universal primary education
Promote gender equality and empower women
Reduce child mortality
Improve maternal health
Combat HIV / AIDS, malaria and other diseases
Ensure environmental sustainability
Develop a global partnership for development

6. The Human Development Index (HDI)
• HDI focuses on longevity, basic education and minimal income
1. Knowledge: First an educational component made up of two
statistics – mean years of schooling and expected years of
schooling
2. Long and healthy life: Second a life expectancy component is
calculated using a minimum value for life expectancy of 25
years and maximum value of 85 years
3. A decent standard of living: The final element is gross
national income (GNI) per capita adjusted to purchasing
power parity standard (PPP)
• GNI is now used because of growing size of remittances
• Log of income is used in the HDI calculation because income is
instrumental to human development but higher incomes are
assumed to have a declining extra contribution to human
development

7. Limitations of the Human Development Index (HDI)
1. HDI fails to take account of qualitative factors, such as
cultural identity and political freedoms (human security,
gender opportunities and human rights for example)
2. The GNI per capita figure – and consequently the HDI figure
– takes no account of income distribution. If income is
unevenly distributed, then GNI per capita will be an
inaccurate measure of the monetary well-being of the
people. Inequitable development is not human development
3. Purchasing power parity (PPP) values used to adjust GNI
data change quickly and can be inaccurate or misleading
4. 2010 saw launch of a new Inequality-adjusted HDI, a
Gender Inequality Index and a Multidimensional Poverty
Index. Average loss in the HDI due to inequality is about 23%

8. Common Characteristics of Lower Income Countries
• Relatively low incomes per capita and a low level of absolute savings
• High levels of income and wealth inequality (high Gini coefficient)
• Lower absolute levels of productivity (labour and capital)
• Often have natural resources but many countries remain poor
• Higher dependency on export incomes from primary commodities
• Large % of population living in rural areas and employed in agriculture
• Limited scope and support provided by a welfare system
• Higher informal sector for example in partial subsistence farming
• Relatively fast growth of population and a younger average age
• Rapid urbanisation and large-scale rural-urban migration
• Weaknesses in institutions such as stable government, civil service
• Relatively higher tariffs and other import controls
• Tendency to have capital controls / relatively closed capital markets
• Lower access to advanced (high-income) country markets

9. Economic & Social Costs of High Inequality in LICs
Social unrest and civil disobedience
• Strikes and demonstrations over poor pay and
conditions at Foxconn in China which produces
iPhones and iPads
Self-perpetuating poverty cycle
• Limited access to health care and education
• Volatile incomes, high debts
• Low savings
Misallocation of scarce resources
Investment skewed towards preferences of the rich
Low collateral – limits entrepreneurship

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