Development economics Study Guide

📖 Core Concepts Development economics – study of how low‑ and middle‑income countries can raise living standards, reduce poverty/inequality, and build human capital. Productive capacity – the economy’s ability to produce goods/services; growth comes from expanding this capacity. Human development – health, education, and standard of living (captured by the Human Development Index, not just income). Structural change – shift of labor and resources from low‑productivity (often agricultural) sectors to higher‑productivity (industrial/services) sectors. Institutions – formal rules (property rights, courts) and informal norms that shape incentives for investment and growth. Poverty measurement – the Foster–Greer–Thorbecke (FGT) index blends incidence, depth, and severity of poverty. --- 📌 Must Remember Rostow’s 5 stages: traditional → pre‑conditions → take‑off → drive to maturity → high mass‑consumption. Lewis dual‑sector model: surplus labor moves from agriculture to industry; industrial marginal product of labor > agricultural wage → growth. FGT poverty index: FGT‑0 = head‑count ratio (incidence) FGT‑1 = poverty gap (depth) FGT‑2 = squared poverty gap (severity). Geography advantage: coastal, navigable, temperate locations → >50 % of world GNP from 8 % of land. Ethnic fractionalization → higher corruption & lower growth; both very homogeneous & very heterogeneous societies see less civil war than moderate division. Dependency theory (1970s) → external capitalist world‑system creates underdevelopment. Neoclassical view → free markets allocate resources efficiently; public‑choice theory warns any gov’t action harms outcomes. Inclusive growth – growth must be equitable; otherwise gains erode living standards. --- 🔄 Key Processes | Process | Step‑by‑step outline | |---------|----------------------| | Structural transformation (Lewis) | 1. Identify surplus agricultural labor (wage = subsistence). 2. Attract industrial capital → higher marginal product of labor. 3. Labor migrates to industry, raising output. 4. When surplus exhausted, wages rise → “take‑off”. | | Rural‑urban migration (Todaro/Harris‑Todaro) | 1. Compute expected urban income = urban wage × probability of employment. 2. Compare with rural income. 3. If expected urban > rural, migration occurs. 4. Harris‑Todaro adds urban unemployment into the probability term. | | Big‑push coordination (Rosenstein‑Rodan) | 1. Identify multiple complementary investments needed (e.g., roads, electricity, factories). 2. Estimate threshold level of total investment that yields increasing returns. 3. Mobilize simultaneous funding (public + private). 4. Once threshold crossed, self‑sustaining growth follows. | | Post‑conflict recovery | 1. Secure peace (reduce conflict‑related “opportunity cost”). 2. Re‑establish property rights & legal institutions. 3. Attract capital (domestic + foreign) for reconstruction. 4. Leverage “peace dividend” to accelerate capital accumulation. | --- 🔍 Key Comparisons Mercantilism vs. Physiocracy Mercantilism: wealth = gold/silver & trade surplus; uses tariffs & subsidies. Physiocracy: wealth = agricultural surplus; advocates “laissez‑faire” on land productivity. Neoclassical vs. Dependency Neoclassical: markets self‑correct; minimal state role. Dependency: underdevelopment caused mainly by external exploitation & unequal trade relations. Rostow’s linear model vs. Lewis’s dual‑sector model Rostow: universal 5‑stage path, emphasizes capital accumulation. Lewis: focuses on labor reallocation; growth starts when surplus labor is absorbed. Homogeneous vs. Heterogeneous societies (civil war risk) Both extremes → lower civil‑war probability. Moderate fractionalization → highest risk. GDP per capita vs. HDI GDP: measures market output only; ignores health/education. HDI: combines income, life expectancy, education → broader welfare view. --- ⚠️ Common Misunderstandings “GDP = welfare” – ignores informal activity, environmental damage, and distribution. “Free markets always improve outcomes” – fails where institutions are weak (poor property rights, corruption). “Protectionism is always bad” – List’s historical argument: temporary protection can foster industrial take‑off. “Rostow’s stages apply everywhere” – model built on post‑WWII Europe; cultural, institutional, and geographic differences break the pattern. “Ethnic diversity automatically harms growth” – only extreme fractionalization correlates with higher corruption; very high or very low diversity can be stable. --- 🧠 Mental Models / Intuition Threshold / Big‑Push – Think of a “critical mass” of infrastructure and investment; below it, returns are low; once crossed, the system “takes off”. Labor surplus as a “free labor pool” – In Lewis, think of a reservoir of workers that can be tapped without raising wages until the reservoir empties. Geography as a “natural advantage multiplier” – Coastal & temperate locations act like a multiplier on productivity, not a deterministic rule. Conflict trap = “negative feedback loop” – Violence destroys capital → lower output → less revenue for security → more conflict. --- 🚩 Exceptions & Edge Cases Rostow – Not suitable for economies with weak institutions or conflict (e.g., many Sub‑Saharan states). Neoclassical policies – May fail where legal enforcement is absent; markets need a “minimum institutional floor”. Geographic determinism – Landlocked or tropical countries can succeed with strong institutions and good trade policies (e.g., Rwanda). FGT poverty index – Sensitive to poverty line choice; different thresholds change incidence/depth numbers. --- 📍 When to Use Which | Situation | Preferred Model / Indicator | |-----------|------------------------------| | Assess overall welfare beyond income | Human Development Index (HDI) | | Quantify poverty depth & severity | FGT poverty measures (FGT‑0,‑1,‑2) | | Explain early‑stage growth in agrarian economies | Lewis dual‑sector model | | Diagnose migration flows in developing countries | Todaro / Harris‑Todaro model | | Design coordinated infrastructure projects | Big‑Push theory | | Evaluate policy impact in a post‑conflict setting | Peace‑dividend & institutional quality framework | | Analyze role of external constraints | Dependency theory | | Decide on trade‑off between protection and openness | Economic nationalism (List) vs. Neoclassical free‑market | --- 👀 Patterns to Recognize Coastal‑advantage pattern – Questions mentioning ports, rivers, or temperate climate often link to higher GDP per capita. Ethnic‑fractionalization → corruption/growth – Look for correlation statements; moderate division signals higher conflict risk. “Surplus labor” wording – Signals application of Lewis model. “Threshold investment” – Indicates Big‑Push scenario. “Peace dividend” after conflict – Expect rapid capital re‑accumulation if institutions improve. --- 🗂️ Exam Traps Distractor: “Higher tariffs always increase growth.” → Wrong; tariffs help only under List‑type temporary protection, not as a permanent policy. Distractor: “GDP per capita fully captures development.” → Incorrect; ignores health, education, inequality. Distractor: “All developing countries follow Rostow’s five stages.” → False; model’s assumptions (stable institutions, capital availability) often absent. Distractor: “Neoclassical theory says government is never beneficial.” → Over‑statement; market‑friendly approaches accept limited correction for failures. Distractor: “Ethnic homogeneity always leads to higher growth.” → Misleading; both extremes can be stable, but other factors (institutions, policies) matter. Distractor: “FGT‑0 alone tells you how poor a country is.” → Incomplete; need FGT‑1 and FGT‑2 for depth/severity. ---