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Rao 3a foundations of economic development
1. FOOD SECURITY
Concepts, Basic Facts,
and Measurement Issues
June 26 to July 7, 2006
Dhaka, Bangladesh
2. Rao 3a:
Foundations of Economic
Development
• Learning: Trainees are expected to
develop knowledge of the basic
determinants of economic growth and
the dualities that arise. The focus will be
on basic concepts and relations rather
than on any technical presentation.
3. Brief Contents
• growth: role of investment, imports and
structural change
• determinants of investment, import capacity and
structural change
• trickle-down growth versus pro-poor growth
• growth and distribution interactions and sources
of their complementarity
• aggregate demand, inequality and growth
• exogenous versus endogenous growth
4. Three Fundamental “Dualities”
of Economic Development.
• 1. Growth & Structural Change: no ED without
structural change.
– No rise in quantities (e.g., growth of income) without
changing relationships among parts (changes in structure
e.g., rise in industry, etc.)
• 2. Distribution & Growth: growth and distribution
are NOT separable (i.e., ARE causally related)
– Economic reasons: incentives, capabilities
– Political reasons: governance, politics, distribution of
decision-making power
5. Three Fundamental “Dualities”
of Economic Development.
• 3. Demand- & Supply-Side Causes:
– Not just definitional sense: ex post facto, growth
must be growth both of demand and supply.
– But also causal sense: ex ante growth can and does
have causes on both sides.
6. Long-Term Growth
and Structural Change
• Growth in developing countries depends on 3
primary factors:
– Investment in physical and human capital
– Imports of capital goods and modern intermediates:
vehicles of higher-productivity technologies and
technical knowledge;
– Structural change involving shifts of both capital and
labour from less productive to more productive
sectors.
7. On Capital Accumulation
or Investment
• There is a systematic positive relationship between the
national investment rate and the national per capital
income level.
• Moreover, investment rates and income growth are
positively related.
• As for human capital, per capita income as well as
income growth are positively associated with literacy at
all levels (primary, secondary and tertiary).
• THUS, investment is important for economic
growth but low initial income levels tend to keep
investment down.
8. On Import Capacity
• Import capacity Depends on competitiveness of exports.
Also, stability of imports depends on stability of export earnings.
– The ratio of trade (exports plus imports) to GDP rises with per
capita income levels.
– Primary exports (including agricultural exports) are half or
more of total in low-income countries.
– Growth in trade ratios during last 25 years has been more
rapid in the high-income group than in the middle- or low-
income groups.
– The ratio of trade taxes (import tariffs and export taxes) to
trade is considerably higher in low-income than in high-income
countries.
– Capital flows (both FDI and financial flows of loans and
portfolio capital) are greater for middle-income group than for
the low-income group.
– The barter terms of trade for developing countries as a
group, and primary exporters in particular, have suffered
significant declines and persistent instability.
9. On Import Capacity
• Thus, import capacity is important for
growth but low initial income levels tend to
keep export competitiveness and hence
import capacity down; low income levels
also tend to produce instability in import
capacity.
10. On Structural Change
• Structural change involves:
– shift from primary production (agriculture etc.) to
secondary (industry)
– within industry and within services
(banking, transport, insurance, etc.) from traditional
to more modern forms of organisation and
technology
11. On Structural Change
• IN SUM:
– Increased investment requires both increased savings and
greater import capacity. But both are limited by low per
capita income. In short, savings and import capacity are
related to income levels through economic structure.
– A lot of labor tends to be under-employed. This can decline
only with the growth of investment and national income.
– Deliberate policies are needed to transform economic
structure in order to accelerate growth rather than wait for
growth to transform the economic structure.
• Trade diversification, import substitution, reduced vulnerability
12. Growth & Distribution:
Independent or Connected?
• Trickle-down growth vs. Pro-Poor Growth
• Trickle-down: Growth is the best instrument for
poverty reduction
– Galbraith on horses and birds on highways
• PPG:
– BOTH growth rapid enough to improve the “absolute”
condition of the poor AND pro-poor enough to improve the
“relative” position of the poor
– BOTH equalize at start of process (initial conditions) AND
equalize during growth process (growth with distribution)
13. Growth & Distribution: Interactions?
• TRENDS & Explanations:
– Norm of rising inequality in rich and poor countries
during the last 15-20 years
– Why? technical change; trade liberalization, capital
mobility and bargaining power, weakened fiscs and
reduced state role
– Kuznets Hypothesis?
– Initial inequality tends to strongly reduce subsequent
growth
15. Growth & Distribution: Interactions?
• Two areas of inspiration for PPG policies:
– 1. Policies to correct market failures in the
utilization and allocation of capital (between
physical and human capital, formal and informal
sectors, capital-intensive and labor-intensive
techniques, public and private capital)
– 2. Policies to reduce initial inequalities
16. Some Sources of
Growth-Equality Complementarity
• CONCEPT: Inequality-reducing or pro-poor or
trickle-up growth
• Key is redistribution weakens structural
constraints on the utilization of labor, on raising
workers’ capacities and skills, and on efficient
allocation of capital.
– In the long run, the incomes of both the poor and
non-poor are likely to rise i.e., a process of trickle-up
growth.
17. Some Aspects of
Equality-Complementary Growth (ECG)
• Unequal Access to Productive Capital
• Land Inequality
• Natural Resource Depletion
• Credit Constraints on Human Capital
Accumulation
18. Macro Economics:
Orthodox VS Heterodox Views
• Standard macro policies aim for one and one thing
only: macro stability but PPG macro policies must also
recognize distribution and growth effects
• Standard approach neatly divides stabilization from
long-term growth (with distribution just after-thought)
but PPG approach sees growth effects of stabilization
and recognizes role for distribution
• Demand VS Supply Sides: investment drives growth
("S-side") but growth drives investment (D-side)!
19. Aggregate Demand, Inequality
& Growth
• QUESTION In any capitalist economy, savers and
investors tend to be separated. So how does macro
equilibrium (D=S) come about?
• S-side ANSWER: by the interest rate. Saving given by
HH plans. Investment must adjust to saving supply.
So saving supply determines investment demand.
• D-side ANSWER: by income and employment (in SR)
and growth and distribution (in LR). Saving mainly
from profits. Investment itself determined by
(expected) profit rate. If investment rises, savings
follows as income distribution shifts to profits. So
investment demand determines saving supply.
20. Aggregate Demand, Inequality
& Growth
• So change (policy or not) that reduces inequality
stimulates effective demand. So both growth
increases and inequality decreases.
21. Endogenous vs. Exogenous Growth
• "Exogenous" means "determined outside the system".
Most growth theories have been of the exogenous kind
in that the key sources of growth such as the labor
force, the appetite for investment and technical
progress are all given outside the system.
– e.g., "gravitational force" for Newton, velocity of light for
Einstein
• "Endogenous" means "determined inside the system".
Yet, paradoxically, for Adam Smith himself, the key
growth source was endogenous - due, in fact, to the
sheer movement of the system itself.
22. Endogenous vs. Exogenous Growth
• Arguments
– Productivity growth depends on Specialization
– Specialization depends on Size of Market
– Size of Market Depends on Productivity
• The entire argument, as in the figure, is a closed
“circle.” Can lead to self-sustained virtuous
cycle OR low-level vicious traps.
23. Figure 3.1: Increasing Returns &
Endogenous Growth
A.Smith--A.Young Thesis of Increasing Returns A.Smith--A.Young Thesis of Increasing Returns
With Exogenous Population (N0) With Endogenous Population (N=f(y))
Division of Labor Division of Labor
Size of Market = y.N 0 Productivity Size of Market = y.N Productivity
Per Cap Income (y) N Per Cap Income (y)
