Part II: Some General Development Issues.

Session 11: Population.

I. 85% of the world's pop lives in developing countries. Historically, these countries have had relatively high population growth rates.

A. Consider first, population density. This is defined as the number of people per square mile or square km. The most densely populated areas are South Asia (278/sq.km.) and East Asia/Pacific (115/sq.km.).

US is at 30/sq. km. and pop density in high income is about 29/ sq. km.

Most densely pop country (aside from Hong Kong and Singapore at 5000-6000) = Bangladesh (981). But note that parts of Western Europe are also very densely pop: Netherlands = 466, Belgium = 312.

Compare with China at 134.

Pop density really doesn't tell us very much and we won't worry about it in this course.

B. Population growth. This is a more important concept. Population growth is defined as increases minus decreases divided by initial pop. Populations increase through births and immigration. They decrease through deaths and emigration. For ex: Mali in 1995 had birth rate of 49.1/1000, death rate of 18.1/1000 for rogpop of 3.1%.

Normally, the birth rate is defined as no. of live births per thousand in the pop. In 1995, the crude birth rate was 26.1 in developing countries and 12.6 in industrial countries.

Crude dearth rate is deaths/1000. In developing it was 8.7 and in developed, 10.1. Why would the death rate be higher in wealthy countries?

we'll see this later, but the reason is that they have more old people.

Ignoring immigration/emigration, these rates imply (26.1 - 8.7 = 17.4/1000) or 1.74% for developing and (12.6 - 10.1 = 2.5/1000) or 0.25% for developed.

Migration is usually too small to radically change the growth rate numbers. In US, we have births = 14.2/1000, + net migration of 3.5/1000 = 17.7/1000 additions minus 8.7/1000 deaths = growth of 0.9%.

Without the migration, we would have 14.2 - 8.7 = 0.55%.

C. Demographic transition: high initial birth/mortality rates (40-35== 0.5% rog pop). Then mortality falls to say 10-15/1000 while initially birth rate stays at 40. Rog pop increases to 2.5-3%. Eventually, birth rates fall and we end up with low birth/mort rates (eg. 12 and 10) with rog pop at 0.2 or whatever.

From 1970-95, rog pop in low/middle income was 2.1%; for 1995-2015 it is projected to fall to 1.5% and continue declining thereafter.

So the demographic transition is underway. Most think world pop will stabilize at something between 8-10 billion sometime around 2050 or so.

II. We speak of rapid pop growth. What is that? Not clear but anything above about 1% is pretty rapid.

A. Here's one way to think about that: the law of 69.

Population grows in the same way as compound interest: formula for compound interest is: V = Ae^rt where V is final value, A is initial value, e is exponential, r is growth rate and t is time.

Suppose we ask how long will it take for a pop to double. The V is twice A or, V = 2A. If we substitute this on the left hand side the As cancel and we have 2 = e^rt. Take log of both sides and we get ln2 = rt.

Solve for t: t = ln2/r.

It turns out that ln2 is about 0.69. So if pop is growing at 3% (=.03), we have .69/.03 = 23. It takes 23 years for pop to double if it grows constantly at 3%.

On the other hand if pop grows at 1%, it takes 69 years for it to double. At 0.5%, it takes 138 years. Consider:

B. An important consequence of rapid pop growth is that we get a young pop. Consider the age pyramid:

(draw on board/handout). low pop growth vs. high pop growth.

Many African countries have about half the pop under 15. Recall earlier discussion of high dependency ratios. In one of the tables, we saw least developed countries with 43.2% under 15 in 1999 and 3.1% over 65. This gives a dependency ratio of (43.2 + 3.1)/(100- (43.2 + 3.1)) = 0.86. In high income OECD, we have in 1999: (18.5 +13.7)/(100- (18.5 + 13.7)) = 0.47. Consider Kenya and the US in 2000 (CIA factbook):

Kenya US

>15 43% 21%

15-64 54% 66%

<65 3% 13%

Dep ratio 0.85 0.52

C. Final note: pop growth is falling; food production has always grown faster than pop. This will be true in the future as well. Malthusian notion that food supplies will lag growing pop is wrong.

The main disadvantage to rapid pop growth is a high dependency ratio.

Session 12: Income distribution.

I. We have noted that development is more than just income growth (growth in real per capita GDP). One aspect of this problem is how economic growth is distributed. We noted the case where average per cap income rises because the rich got a lot richer and even though the poor did not prosper or even fell behind. So while GDP growth is important, it is also necessary to consider the distribution of economic goods.

A. We also noted that in the early stages of growth, there is often a tendency for income to become less equally distributed. Some have been led to conclude that there is a trade-off or conflict between efficiency (growth) and equity. If we look only at real per capita GDP, we have info on only the first item (size of the economy/economic growth). What about equity?

B. Equity is related to fairness, equity and justice. The hard question is what is fair? What is Just? What is equitable? For our current purposes, we will leave these questions aside and focus on income distribution as an indicator of how fairly the economy distributes desirable things.

C. If we are to add income distribution to concept of devel it would be nice to be able to measure it. We can measure GNP and GNP/capita and track progress in that dimension over time. Can we do the same with income distribution?. There are two issues here:

- how to measure it

- how to include income distribution in an overall measure of well-being. (what weights to attach to the two criteria, GDP and income distribution).

II. How can we measure it? Lorenz curves and Gini coefficients.

A. Basic drill: we measure the amount of income received either by each individ, deciles, quintiles. We will stick with quintiles.

Here are the data for India in 1994: poorest 20 = 9.2

next 13.0

next 16.8

next 21.7

highest 20 = 39.3

Step 1 is to construct a Lorenz curve. Diagonal is perfect equality. For Lorenz we need to cumulate:

9.2 -- 22.2 -- 39.0 -- 60.7 -- 100 Draw it.

Step 2 is to compute a Gini coefficient. The Lorenz curve can be closer or further from the diagonal which measures perfect equality. We can translate this into a single number, the Gini Coefficient as

G = A/(A+B)

This can take values between 0 and 1. If income is distributed perfectly equallly, the area between the diagonal and the Lorenz curve is zero==> G = 0. If it is completely unequal, A=B and we have B/B = 1.

The result for India is 0.297.

Here are some examples of G for various countries:

smeeding berry et al. 1985 World Bank

US .33 .336 .408

Netherlands .30 .326

Germany .29 .304 .300

Norway .25 .312 .258

Japan .277 .249

Brazil .599 .600

Malaysia .495 .485

Indonesia .424 .365

Ivory Coast .567 .367

Turkey .495 .415

Note that most estimates show the US with a less equal distribution of income than Japan and the European countries reported although US income distribution is more equal than many middle income developing countries. Low-income developing countries such as India (.297 by the calculations above; .378 in the World Bank), Pakistan (.312), Bangladesh (.336), Ghana (.327), or Rwanda (.289) have more equal income distributions than the US.

B. Obviously, how much income equality is desirable is controversial. While a few philosophers (Singer) call for complete equalization of incomes, most feel this goal is not only impossible but that it would be a bad thing to attempt it.

NOTE: this is pretty closely related to welfare reform. Recall that much of the welfare reform debate centered on the effects of programs like food stamps and AFDC on individual incentives. The fear is that providing income security will lead to dependence and behaviors that prevent people from ever getting off welfare, etc. The new theory is to provide limited support and force people to work, etc.

In addition, if there is a trade-off between economic growth and equity, efforts to make the income distribution more equal could mean we are sharing a smaller pie than would have been possible if inequality were allowed.

III. Note that Lorenz curves and Gini coefficients are measures of relative poverty. It is also common to use absolute measures of poverty. An absolute poverty measure sets some sort of benchmark below which people are considered to be in poverty. For ex, In the US we define a minimum family income below which people are in poverty. For a family of 4, the poverty level is $13,003.

A. The basic drill is to compute the incidence of poverty, that is, the percentage of the population that is below the poverty level. In the US, about 13% of individuals (10% of households) are below poverty level. About 17% of individuals (14% of families) are below 125% of poverty level.

Consider: In 1998, the poverty level for a single individual under 65 was $8480/yr. That works out to about $700/month. This suggests that a poor person would be someone earning less than $700 a month. How comfortably do you think you could live on $700/month (with no other assistance from family and friends)?

B. One international poverty benchmark that is frequently used is an income equivalent to $1 per day. People who live on $1 a day or less are considered to be in poverty. According to the World Bank:

When estimating poverty world-wide, the same reference poverty line has to be used, and expressed in a common unit across countries. Therefore, for the purpose of global aggregation and comparison, the World Bank uses reference lines set at $1 and $2 per day in 1993 Purchasing Power Parity (PPP) terms (where PPPs measure the relative purchasing power of currencies across countries). It has been

estimated that in 1998 1.2 billion people world-wide had consumption levels below $1 a day -- 24 percent of the population of the developing world and 2.8 billion lived on less than $2 a day.

Session 13: Entitlements.

IV. Another way to think about poverty and income distribution is Amartya Sen's notions of entitlements and entitlement collapse. Sen's analysis is designed for the issue of hunger but could apply to poverty as well. Sen defines entitlements using the following graph:

a = minimum adequate food for

survival.

area 0ab = starvation set.

Q is a HH entitlement.

food

In this graph, we measure a HH's food output along the horizontal axis and its output of non-food items (imagine carved bowls) on the vertical axis. At a there is a vertical line at the point that represents the minimum amount of food needed for survival. HHs to the right of this line are in no danger of starving.

Initially, we have a HH with an entitlement of Q. This means the HH has the resources to be able to produce f food and nf non-food. This HH is outside the starvation set (0ab). The line ab shows the rate at which non-food items can be exchanged for food.

The HH at Q produces f from its own resources. It now has f food available. In addition, it produces nf non-food which it exchanges for food at the rate shown by ab. Adding the food purchased with the HH non-food output to food produced by the HH itself will result in total HH food consumption greater than a.

There are two ways in which this HH can fall into the starvation set. The first is through a collapse of its entitlement. Suppose that the HH loses access to the raw materials (wood) it needs to be able to produce its non food product (bowls). Its output of non food falls from nf to nf'. With this amount of non-food, the HH is no longer able to purchase enough food to get beyond a.

The second way for the HH to fall into the starvation set is for there to be a change in the rate at which food and non-food are exchanged. Suppose that there is a shortage of food so that its price increases. It now takes more non-food to buy a unit of food than it did before. This is represented in the graph by rotating the price line (ab) up so that we now have the rate of exchange given by ac. The starvation set has now expanded to 0ac and assuming the HH entitlement still sits at Q, it will find itself in the starvation set; it cannot exchange its non-food good for enough food at the higher prices to be able to be fed at a.

1. A couple of further notes:

- individual entitlements are made up of what a HH can produce with its own resources as well as the conditions of exchange; the rate at which one can exchange goods for food is a part of a HH's entitlement. (it is entitled to exchange goods at rate x).

-location of a is culturally determined. It may also depend on age structure of HH.

-this model only has two things (food/non-food); in reality there are more elements in this picture. In the US, for ex, part of our entitlement includes food stamps which guarantee a minimum amount of food. In addition, we are entitled to sell our labor at no less than the minimum wage. There are other aspects of our entitlements in the US (state-assisted investments in our human K through education, income safety nets, etc.).

V. Finally consider the following problem: India realizes 3.2% real annual per cap GNP growth over a period when the Gini coefficient goes from 0.25 to 0.297.Per cap GNP grows but distribution worsens. Has India "developed?'What if per capita income and distribution improve but maternal mortality rates increase?

A. The UN Development Program has tried to come up with a measure of overall well-being or human development: the human development index (HDI). The HDI: based on life expectancy, education and per cap GDP. Measures of per cap GDP, life expectancy and education are translated into indexes which are then averaged to obtain the overall index. For 1999 (most recent year), Norway ranked first followed by Australia, Canada, Sweden, Belgium and the US (6th). US was sixth despite having the 2nd largest per cap income; US falls behind on life expectancy.

1. Rationale: per cap GDP is a measure of wealth and ability to control resources; life expectancy is a convenient measure of a set of things that we all value: good health, long life etc.; and education can be seen as a proxy for our ability to participate in econ, social and political life.

2. The HDI doesn't include y dist. Two separate poverty indexes are computed. The first Human Poverty Index (HPI-1) is for developing countries and is based on literacy, probability of not surviving to age 40, access to sanitary water, underweight children and % of pop below poverty line.

HPI-2 is for wealthy countries and is based on probability of not surviving to 60, functional illiteracy, long-term unemployment and population below poverty line. For HPI-2, Sweden is first while the US is 17th behind Canada, Japan and 13 of the 15 countries in the EU (Portugal and Austria seem to lack data). These countries generally do better at all of the indicators than the US.

3. Finally UNDP computes a gender empowerment measure based on seats in parliament held by women, females in positions of power (gov, private sector), female and technical workers and the ratio of female income to male income. Data on these variables are often lacking so only 64 countries are included. Norway is first with the US tenth behind most of Europe, Canada and Australia but ahead of several EU countries (UK, Spain) and many developing countries.

B. These indexes are interesting and may give a broad picture of how well countries are doing in terms of economic well being, poverty and gender empowerment. These are all important measures of development as we have defined it. Is there anything else?

- political freedoms (ability to participate in political life, civil rights)

- sustainability - (continuity of the society over time)

Green national accounts

- social respect, justice, non-discrimination, human rights, etc.

Session 13: Trade

I. Intro: We have already seen that there has been a long debate about the role of external relations, and most notably, trade in the development of the low-income countries. There has always been a substantial opposition to trade by those who believe that relations between rich and poor countries are based on exploitation.

A. This was a major theme with the neo-Marxists who see trade as one element in the strategy of capitalist exploitation. One way in which capitalists exploit developing countries is through deteriorating terms of trade- about which, more in a moment.

B. We have also noted that this theme is fundamental for the anti-globalization crew. These are people who call for "fair trade" for example as opposed to free trade. There is an effort in Berkeley to pass an ordinance mandating that all coffee served in restaurants/ coffee houses, etc. have a 'fair trade' or 'organic' certification.

What do they mean? Fair trade is vague but part is about how the stuff was produced- were small coffee growers exploited (whatever that means) in the process of marketing their coffee, etc. There is an organization that certifies goods produced according to fair trade standards. Like organic certification.

C. Some terminology. Generally, those who feel that trade is bad for development end up favoring what is known as 'protectionism.' Protectionism is a government policy that taxes or otherwise limits imports into the country. It is called protectionism because it is aimed at protecting domestic industries from foreign competition.

On the other side are those who favor free trade, that is the free movement of goods without trade barriers such as import taxes (tariffs) or other restrictions. Because the world is characterized by extensive protectionism, free traders call for 'trade liberalization,' that is, the gradual elimination of barriers to trade.

The WTO is an international organization with a mandate for trade liberalization.

D. We will briefly consider the two opposing sides in this debate. What is the case against trade ands what is the case for free trade?

II. Start with the case against trade.

A. The terms of trade (TOT) argument. The TOT argument grew out of the neo-marxist/dependency school. They saw deterioration of terms of trade as further evidence that industrialized countries were ripping off LDCs.

1. The argument is like parity in ag. (prices received by farmers for ag products compared to prices paid for inputs and family living). Prices received by LDCs for their exports grow less rapidly than prices paid by LDCs for imports.

2. Because there are many prices for both agriculture and for developing country trade, the only way to make these comparisons is to express the prices (import prices, export prices, prices paid, prices received) is to put them in an index. The consumer price index is the most frequently cited price index but any typ of prices can be indexed. Explain the procedure.

3. So the TOT argument says that the ratio of an index of prices received divided by an index of prices paid tends to decline over time. This is supposed to be bad. In fact, there are several measures of the TOT. Consider:

Commodity terms of trade (N): N = Px/Pm (ratio of index of export prices to import prices).

This is the one pointed to by Prebisch, and the other dependency people.

Income TOT: I = N*Qx where Qx is an index of export volume.

This is a measure of capacity to import. Even if N declines, if Qx rises enough the net effect will be sufficient revenue from exports to increase imports.

Single factoral TOT: S = N*Zx where Zx is an index of productivity in the country's export industries.

This brings in productivity. If S increases, country can import more for each unit of inputs used in producing exports. Suppose labor is our input: a rise in S means that an hour of labor procures more imports. This could happen because either both N and Zx increase or the increase in one of these variables is enough to offset a decrease in the other.

Double factoral: D = N*(Zx/Zm) where Zm is index of productivity for imported goods.

This reflects the exchange of factors of production. How many units of foreign labor can be bought with one unit of domestic labor as embodied in imports and exports.

3. The basic argument is that if the TOT decline, the country is somehow being impoverished by trade. A ton of coffee exported by a developing country will buy fewer and fewer manufactured goods from the wealthy countries. But suppose this is true. What is the solution? For the dependency theorists, one way out of this would be to isolate internal markets from imports and work toward self-sufficiency. This is pretty silly as no country is entirely self-sufficient in anything.

The other policy favored by dependency theorists was to call for a New International Economic Order (NIEO) that would stop the deterioration of the TOT (presumably through some sort of international price stabilization scheme or a cartel to raise export prices in developing countries).

4. There are numerous problems with these arguments. First, most TOT discussions are of N. But N may not be the most important thing. Historical discussion of N based on fairly bad statistics and when we make more accurate measures, there is no clear trend. Original TOT computed by assuming that developing countries export only primary commodities (ag/mining) and that wealthy country export only manufactured goods. So TOT was taken as an index of world prices for primary commodities (coffee, wheat, tin, bauxite, etc) divided by an index of world prices for manufactured goods. Problem is that rich countries export primary commodities and poor countries may do some manufacturing.

5. Other problems with the argument have to do with the general problems of indices:

- changes over time; while prices change, other things may also change (productivity, etc.). Some of these other changes could be introduced (viz. double factoral TOT) but it is clear that N will capture only price movements not these other changes. There is no reason why a tone of coffee should allow a country to purchase the same amount of manufactured goods over time.

- sensitivity to choice of base year. If you choose a year of unusually high export prices as the base year, you can make it look like TOT is declining dramatically. But if the base year is an aberration, what does it mean? In the case of ag parity, farmers in US chose 1910-13 as base (period of extraordinarily high prices), then called for policies to support ag prices at levels that would return the relationship to parity. Unctad used the 1950s as the base because primary commodity prices were extremely high then due to the Korean war.

- changes in nature of goods traded. Suppose a ton of coffee in 1955 would get enough foreign exchange to purchase 10 radios. Now in 2000, a ton of coffee only 'buys' 7 radios. So what? The coffee is the same stuff but the radios now are significantly different and better. Why should relative prices for goods be frozen over time? In fact., markets work because they generate prices that act as signals about what is valuable. Relative prices always changes as scarcities develop and technologies change.

B. Terms of trade not a very convincing argument. What other args? Infant industry, price instability (risk), food security, and all the other protectionist things we have heard.

C. These args led to a devel strategy known as import substitution which was popular in 60s and 70s. The idea is to replace imports with local production. To do this, domestic industries will have to be protected. So M sub is a strategy based on protectionism.

1. There are several problems with the M sub strategy. First, as in any infant industry case, the infants may never grow up.

2. Second, backward linkage. Initially we M sub final consumer goods but have to continue importing capital goods and other inputs. Experience suggests that M sub grinds to a halt after consumer goods are replaced:

- can't M sub heavy industry because internal mkt is too small to support it (econs of scale).

- since heavy ind can't get started, country has to continue importing capital goods. But capital goods may be costly. If resources used to produce the M sub goods are taken from export industries, the country may encounter BOP probs. Fewer exports, less foreign exchange, capacity to import is lower but you still need to import K goods.

III. The case for trade.

A. It seems that the TOT argument is wrong and M sub does not appear to be a great strategy. What should LDCs do?

B. In recent years, much has been made of the case of Japan, Korea, Taiwan and so on. These countries pursued strategies referred to as export promotion.

1. The idea here is that a country promotes industries that sell into the export market. X pro overcomes the backward linkage problem because countries produce for large world market. They can do heavy industry because there is no limit to the size of the market.

2. Japan does seem to have done this: first we bought cheap little consumer goods, then cameras, then steel, then electronics, etc.

C. So X promotion seems a more promising strategy but there are many ways to think about this: does X pro imply an industrial policy where the government selects industries to push? Or should we just leave it to the market?

1. This is a controversial question. The one thing that seems true is that countries that have had relatively open trading relations seem to have experienced more growth than those that have been closed.

2. This perception has bolstered moves by LDCs to enter world markets and so on. Of course, at this point, we re-join SAPs which actually have forced some countries to do these policy reforms.

- There is empirical evidence that trade liberalization of LDC ag mkts is beneficial even to countries that are food importers.

3. Most economists today believe that trade is one of the best ways for low-income countries to promote economic growth and development. Recently we have seen a great deal of criticism of wealthy countries such as the US where we protect agriculture and other industries thereby cutting off access to an important market for developing country goods.