Lecture notes: Economics of Development Introduction

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Measuring poverty, inequality and development

/by Sering/

Explanations of development and classical theory of how it is attained

Explanations of relative development

Time has come to make you acquainted with the evolution of scholarly theories about why development has not taken place and how it is brought about. However, in order to judge the appropriateness of the various theories we need a context that can explain why some countries are developed and other are poor.

Figure 2.11 is extremely informative but, nevertheless, the factors and their interrelationships included in the figure, is a selection made by the authors. However, they argue that the figure is based on the most influential recent research literature.

By placing physical geography and climate at the top, the authors emphasize the importance of a recent scholarly discussion about the importance of geography for differences in development between countries. There are scholars who reduce the role of arrow 1 and instead emphasize the role of institutions which they associate with type of colonial regime (see figure). By institutions, then, we mean formal rules like constitutions and laws, and with regard to laws, development economists have been concerned about property rights; private or public property. It should be mentioned that institutions also include customs associated with local cultures and social structures but these institutions are rather constraints on the colonial regime.

There is empirical evidence showing that after accounting for institutional differences, geographic variables such as distance from the equator and whether countries are landlocked (like Mali) have little influence on their incomes today. For instance, if geography is crucial, then those regions that were prosperous before colonialization should continue to be prosperous also today. Thus there is empirical evidence showing that past population density and past urbanization, which is positively correlated with income, is negatively correlated with high income today.

The explanation provided is that the European colonizers, in order to extract significant surplus from colonized peoples, set up extractive institutions in prosperous areas and these institutions have often persisted to the contemporary period. In Africa, I think extraction of minerals and oil in countries such as Congo and Nigeria are examples and, as we will find later on, after independence the post-colonial regimes have retained the same institutions and used export of primary commodities as a strategy for development.

However, geography has an indirect effect on contemporary per capita incomes as it influence the mortality rate of the settlers, which has an impact on type of colonial regime (arrow 2). In climate zones with high health-risks the colonizers established administrations using local people who were loyal to the colonizers, who did not have to be physically present. Moreover, there where climate was favorable for plantation agriculture, slavery and other types of mass-exploitation of indigenous labor were introduced (arrows 6 and 7).

According to the figure, investments in human capital is an important factor explaining a country’s relative development (arrow 14). But amount of human capital in its turn depends critically on the degree of inequality generated in the context of a particular colonial regime. The institutions tend to be more democratic, with more constraints on the elite, in countries with a higher level of education. But there are cases where dictators have implemented good education programs leading to growth in per capita incomes, which, in a second step has led to changes in the institutions.

It is interesting to note that there are no arrows that could indicate an influence by indigenous cultural institutions. With regard to Africa, for instance, customs, gender relationships between men and women as well as traditions of giving elderly a say with regard to use of land and other natural resources often replace laws that regulate the use of property and property rights.

Social and cultural institutions such as tribe, religious affiliations and family influence social learning that affects adaptations of new technology and the diffusion of innovations influencing per capita income. There is a growing amount of scholarly research on how social and cultural institutions influence development, but the reason for not including these factors in the figure is that in relation to economic factors, there are few established results.

You may also lack arrows indicating influence of international integration and trade that explains why some countries are developed and other are poor. However, in fact evidence shows that after it has been accounted for the impact of institutions on countries’ contemporary incomes, trade itself explains very little. This is not contrary to another fact that many post-colonial regimes have used trade policies successfully as an integrated part of their development strategy, which the new-industrialized countries in South East Asia such as South Korea and Taiwan are examples of.

With regard to lectures in the following that answer the question of how development is brought about , the first section of the lectures concerns theories that disregard international trade and foreign direct investments, while the second section concerns theories that links strategies for development to changes in the international economy.

It may be surprising that explanations of why some countries are poor based on trade are so meager as trade gives access to new technology. Technological change is one of those causes of development that will be emphasized in the following. The reason is that there is empirical evidence from developed countries showing that this factor should be considered as a production factor of importance like capital and labor.

The fact that international trade has not been a bridge for transferring technology from the rich countries to the developing countries maybe that the ability to absorb and adapt the new technology in the developing countries has been poor. There is empirical evidence showing that the absorptive capability depends on the amount of human capital, and as education depends on qualities of the indigenous institutions, also the transfer of technology depends on national institutions.

In an article about tropical underdevelopment, Sachs argues that geography has an influence on the adoption of new technology. He finds that there is empirical evidence showing that the tropical zone has lagged behind the temperate zone with regard to technology in the two critical areas of health and agriculture. Contrary to what we found before, he argues that geography has an influence on underdevelopment as the low diffusion rate for technology in the tropics has “opened a significant income gap between climate zones”.

Factors such as geography and trade can have a moderate power to explain differences in development between countries. Nevertheless, they can be important factors in a development strategy designed to bring about development, which will be discussed in the following that concerns theories of development. In emphasizing geography, we admit that almost all developing countries are situated in tropical or sub-tropical zones. Further, climate in combination with global warming and poverty create environmental degradation in the shape of deforestation and poor soil quality, which has a negative impact on productivity in agriculture and thus works back on per capita income and poverty. Two lectures will be devoted to a discussion about sustainable development that could bring this self-perpetuating process to an end.

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