Chapter 23 - Development Flashcards
What is development?
A process by which real per capita incomes are increased and the inhabitants of a country are able to benefit from improved living conditions, i.e. lower poverty and enhanced standards of education, health, nutrition and other essentials of life
What is the primary sector?
The sector in which production uses natural resources, including the extraction of raw materials and the growing of crops
What is the secondary sector?
The sector involving the production of manufactured goods
What is the tertiary sector?
The sector involving production of services - may include the quaternary sector, which is production based on information technology and information products
How is GNI per capita an indicator of development?
The first step is to be able to measure ‘development’. A first step is to compare average income levels across countries, by using GDP per capita (or GNI per capita). GNI per capita is the standard measure used by the World Bank to compare income levels across countries.
How are exchange rate problems an indicator of development?
It is important to compare average income levels in order to evaluate the standard of living, and compare standards across countries. In other words, the aim is to assess people’s command over resources in different societies, and to be able to compare the purchasing power of income in different countries.
GNI is calculated initially in terms of local currencies, and subsequently converted into US dollars using official exchange rates. Will this provide information about the relative local purchasing power of incomes? Not necessarily.
One reason for this is that official exchange rates are sometimes affected by government intervention. Indeed, in many of the LDCs, exchange rates are pegged to an international currency - usually the US dollar. In these circumstances, exchange rates are more likely to reflect the government’s policy and actions than the relative purchasing power of incomes in the country under scrutiny. For example, a government may choose to maintain an overvalued currency in order to try to maximise the earnings from its exports. In the case of China, the government has been tempted into the opposite situation, maintaining an undervalued currency in order to maximise export volume.
Where exchange rates are free to find their own equilibrium level, they are likely to be influenced strongly by the price of internationally traded goods, which is likely to be a very different combination of goods than that typically consumed by residents in these countries. Again, it can be argued that official exchange rates may not be a good reflection of the relative purchasing power of incomes across countries.
The UN International Comparison Project has been working on this problem for many years. It now produces an alternative set of international estimates of GNI based on purchasing power parity (PPP) exchange rates, which are designed to reflect the relative purchasing power of incomes in different societies more accurately.
You may notice that the gap between the low-income and high-income countries seems a bit less marked when PPP dollars (PPPS) are used as the unit of measurement. In other words, the estimates based on US dollars exaggerate the gap in living standards between rich and poor countries. This is a general feature of these measurements - that measurements in US dollars tend to understate real incomes for low-income countries and overstate them for high-income countries compared with PPP$ data.
Put another way, people in the lower-income countries have a stronger command over goods and services than is suggested by US-dollar comparisons of GNI per capita. You will also see that in some cases, using PPP$ alters the rankings of the countries.
How is the informal sector and the accuracy of data an indicator of development?
Even when measured in PPP$, GNI (or GDP) has limitations as a measure of living standards. One limitation that is especially important when considering low-income countries is that in many LDCs there is considerable informal economic activity, which may not be captured by a measure like GNI, based on monetary transactions. Such activity includes subsistence agriculture, which remains important in many countries, especially in sub-Saharan Africa. In other words, GNI may not capture production that is directly used for consumption. Remember that GNI is measured by adding up the total transactions that take place in an economy. In the case of barter or production for consumption, there are no transactions to be measured, so they will not be captured in GNI.
How are social indicators an indicator of development?
A further question that arises is whether GNI or GDP can be regarded as a reasonable indicator of a country’s standard of living. GNI (or GDP) provides an indicator of the total resources available within an economy in a given period, calculated from data about total output, total incomes or total expenditure. This focus on summing the transactions that take place in an economy over a period can be seen as a rather narrow view of what constitutes a country’s standard of living. After all, it may be argued that the quality of people’s lives depends on more things than simply the material resources that are available.
For one thing, people need to have knowledge if they are to make good use of the resources that are available. Two societies with similar income levels may nonetheless provide very different quality of life for their inhabitants, depending on the education levels of the population. Furthermore, if people are to benefit from consuming or using the available resources, they need a reasonable lifespan coupled with good health. So, good standards of health are also crucial to a good quality of life.
It is important to remember that different societies tend to set different priorities for the pursuit of growth and the promotion of education and health. Some countries have higher levels of health and education than other countries with similar levels of GNI per capita. This needs to be taken into account when judging relative living standards by comparing GNI per capita. For a given level of real GNI per capita, there may be substantial differences in living standards between a country that places a high priority on providing education and healthcare, and one that devotes resources to military expenditure. In the longer term, there may also be significant differences between a society that spends its resources on present consumption, and one that engages in investment in order to increase consumption in the future.
A reasonable environment in which to live may be seen as another important factor in one’s quality of life. There are some environmental issues that can distort the GDP measure of resources. Suppose there is an environmental disaster - perhaps an oil tanker breaks up close to a beautiful beach. This reduces the overall quality of life by degrading the landscape and preventing enjoyment of the beach. However, it does not have a negative effect on GNI - on the contrary, the money spent on clearing up the damage actually adds to GNI, so that the net effect of an environmental disaster may be to increase the measured level of GNI.
What is the Human Development Index (HDI)?
A composite indicator of the level of a country’s development, varying between 0 and 1
How does HDI work?
The basis for the HDI is that there are three key aspects of human development: resources, knowledge of how to make good use of those resources, and a reasonable life span in which to make use of those resources. The three components are measured by, respectively, GNI per capita in PPP$, indicators of education (mean years of schooling and expected years of schooling) and life expectancy. The measurements are then combined to produce a composite index ranging between 0 and 1, with higher values reflecting higher human development.
GNI per capita (in PPP$) represents resources in this set-up, and is intended to reflect the extent to which people have command over resources. The education indicators pick up two rather different aspects of this important component of human development. Mean years of education can be seen as a way of reflecting educational attainment, as it measures the average number of years of schooling that were received by people aged 25 and above in their lifetime. It therefore tells us something about the extent to which there has been past investment in education. Expected years of schooling, on the other hand, reveals something about the current state of education in an economy. That is, it identifies the number of years of schooling that a child of school entrance age can expect to receive, given current patterns of enrolment and access to education. Life expectancy is the natural indicator of expected lifespan, and is also closely related to the general level of health of people in the country.
In part, this diversity reflects differing priorities that governments have given to different aspects of development. Countries such as Brazil have aimed primarily at achieving economic growth, while those such as Sri Lanka have given greater priority to promoting education and healthcare. There is a view that growth should be the prime objective for development, since by expanding the resources available the benefits can begin to trickle down through the population. An opposing view claims that by providing first for basic needs, more rapid economic growth can be facilitated. The problem in some cases is that growth has not resulted in the trickle-down effect, and inequality remains. It may be significant that countries such as Brazil and South Africa, where the GNI per capita ranking is high relative to the HDI ranking, are countries in which there remain high levels of inequality in the distribution of income.
The HDI may be preferred to GNI per capita as a measure of development on the grounds that it reflects the key dimensions of development as opposed to growth. However, it will always be difficult to reduce a complex concept such as development to a single statistic. The diverse characteristics of LDCs demand the use of a range of alternative measures in order to identify the configuration of circumstances and problems facing a particular country.
How is the Inequality-adjusted HDI (IHDI) an indicator of development?
Data relating to inequality in the three components of the HDI (health, education and income) are used to adjust the HDI to try to estimate the extent to which potential human development is lower because of inequalities. For example, it was noted that there was relatively high inequality in South Africa. In terms of the IHDI, the conclusion drawn is that the loss in potential human development due to inequality in South Africa amounts to 34.7%.
How is gender inequality an indicator of development?
The situation of women in many countries has been a major concern. Women tend to receive less education, are exposed to greater health risks, and receive lower incomes. The UNDP has produced two ways of exploring gender inequality across countries. One approach is simply to calculate the HDI separately for females and males. In more developed countries, female life expectancy is often significantly higher than for males, so the difference in HDI levels between females and males is not great, even where females face lower GNI per capita. Indeed, there are some countries (e.g. Estonia) where females have a higher HDI than males. Elsewhere the picture is very different: for example, in Pakistan, female HDI is more than 25% lower than for males. A second measure focuses on the key gender issues of health, empowerment and the labour force.
How is the characteristics of LDCs an indicator of development?
There are many other indicators that can be used to capture the varied characteristics of LDCs that may contribute to their progress in achieving development. For example, the pattern of economic activity may be important, as heavy dependence on low productivity agriculture may hinder economic growth. Access to good infrastructure can be captured by data on access to electricity, sanitation or clean water. Transport and communications are also vital for development, so access to the internet or mobile phones, or the quality of roads, are all important indicators that can provide clues to the problems faced by particular countries.
What is sustainable development?
‘Development that meets the needs of the present without compromising the ability of future generations to meet their own needs’
How are resources a function of the environment?
One important function of the environment is to supply resources that are required in the production process. Firms need energy as an input to production, in the form of oil, natural gas, electricity, etc. Notice that electricity can be generated by a range of processes, using either renewable methods from wind farms or non-renewable methods based on coal or oil.
How are amenities a function of the environment?
The environment also supplies amenities to households. People get utility from visiting a pleasant clean beach, walking in the woods or playing in the park. Enjoying clean air and living in a pleasant location contributes to people’s quality of life. The provision of amenities is therefore an important function that the environment fulfils.
How is absorber of waste a function of the environment?
Firms and households generate waste, which somehow has to be absorbed. The environment is crucial in the process of waste disposal.
How is sustainability a function of the environment?
The environment provides inputs for firms in the form of natural resources and inputs for households in the form of amenities. Both firms and households generate waste.
A key issue to be explored is whether this process is sustainable in the long run. In other words, does the environment have the capacity to support the three functions indefinitely? To what extent can the environment continue to supply the natural resources that firms need as inputs? To what extent can the amenities provided by the environment be conserved for the future? Does the absorption of waste cause damage to the environment that will affect its capacity to continue to provide resources and amenities in the future? These questions are some of the most important facing the global economy.
Another way of viewing sustainable development is to say that the stock of environmental capital should not decline over time. In other words, generations in the future should inherit a stock of resources that enables them to enjoy at least as high a quality of life as that enjoyed by today’s generation.
How is sustainable growth linked to economic growth?
The link between economic growth and environmental degradation is a clear one. In the case of China, there are several aspects to notice. During the process of industrialisation, it is crucial to ensure that energy supplies keep pace with demand, as factories cannot operate effectively without reliable electricity and other energy sources. China has become the world’s second biggest oil importer (behind the USA), and is the world’s largest producer of coal, which is not the cleanest of energy technologies. China has recognised the problem, and has been making attempts to reduce its dependence on coal.
China is not a unique example, but it is the world’s largest country in population terms, and has experienced economic growth at an unprecedented rate in recent decades. The underlying point here is that it is all very well finding ways of pushing the long-run aggregate supply curve to the right, but this is not necessarily the best strategy for long- run sustainable development.
For economic growth to be sustainable, these environmental effects must be taken into account, or there is a real danger the improved standard of living that flows from the growth process will be obtained only at the expense of the quality of life of future generations. This may require growth to be slowed in the short run in order to devote resources to the development of renewable and cleaner energy sources. However, it is politically and morally difficult to impose this on newly emerging societies in which there is widespread poverty, especially when the richer nations of the world continue to enjoy high standards of living while causing pollution of their own.
