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Berkeley A,RESEC C253 - Concepts of Development - criteria and indicators

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1 8/31/04PP253/ARE 253, Fall 2004Alain de JanvryHandout #1Concepts of Development: criteria and indicatorsDevelopment is a controversial and multidimensional concept.I. The UN Millenium Development GoalsSet by the UN in 2000 for 2015. Indicators + goals =yardsticks to measure development rpogress.Goal 1: Eradicate extreme poverty and hunger: Halve between 1990 and 2015 the proportion of peoplewhose income is less than 1$/day.Goal 2: Achieve universal primary education.Goal 3: Promote gender equality and empowerment: Eliminate gender disparity in primary and secondaryeducation.Goal 4: Reduce child mortality: Reduce by 2/3 the under-five mortality rate in 1990-2015.Goal 5: Improve maternal health: Reduce by 3/4 the maternal mortality ratio in 1990-2015.Goal 6: Combat HIV/AIDS, malaria, and other diseases: Have halted by 2015 and begun to reverse thespread of HIV/AIDS.Goal 7: Ensure environmental sustainability: Integrate the principles of sustainable development intopolicies and programs; halve the proportion of people without sustainable access to safe drinking water;achieve by 2020 a significant improvement in the lives of at least 100 million slum dwellers.Goal 8 (mean): Develop a global partnership for development: Open trading and financial system;increase foreign aid; reduce debt.Progress toward the MDG by region: UNDP, Human Development Report 2003.II. The dimensions of developmentWhile there is no single definition, development can be characterized by the following sevencategories of indicators.1. Income and income growthGDP = Sum of value added by all firmsGNP = GDP + Net factor income from abroad. Better to measure income than GDP.GNI = GNP – depreciation – indirect business taxes. Best to measure income earned.1.1. Comparisons over time: need adjust for inflationReal GDP in prices of base year = (Nominal GDP)/(Price index = 1 in base year)Real GDP growth = Nominal GDP growth – Rate of inflation1.2. Change over time: compounded growth rate formulasIf an initial value X0 is compounded at the annual growth rate g for T years, the terminal value is:XT = X0(1+g)T. Alternatively, the growth rate that has transformed X0 into XT over T years of compoundedgrowth is: g = (XT/X0)1/T-1. Taking logarithms, a useful approximation to the growth formula is: lnXT =lnX0 + T ln(1+g) ~ ln X0 + T g. This allows to solve for T, the time needed to go from X0 to XT at a growthrate og g.Example 1: Time to get out of poverty, for a given initial level of income yo, a given poverty line z, and agiven growth rate in income:  T =ln z − ln yog.Example 2: Time to double X: T =ln 2 X − ln Xg=ln 2g. g = 10%, T = 7 years.1.3. Comparisons across countries: need bring to single currency (e.g., US$)1.3.1. At official exchange rate: GDP$=1eGDPPesos, e = Pesos / $ exchange rateHence, devaluation lowers GDP$ for a given GDPPesos. Overvaluation exaggerates GDP$.21.3.2. At Purchasing Power Parity adjusted exchange rate (PPPe):PPPGDP$=1PPPeGDPPesos,where PPPe is the number of Pesos required to buy the same amount of goods and services(quality adjusted) as 1 US$ in the U.S.In low income countries, PPPGDP$> GDP$ (e.g., India, 1999: $2149 vs. 450)In the US, PPPGDP$= GDP$, by construction ($30,600)In high income countries (Japan, Germany), PPPGDP$< GDP$ (Japan: $24,041 vs. $32,230)1.4. Genuine Progress Indicator (GPI): Green and social national accountingGPI = GDP + Value of unpaid work – Costs of crime and social breakdown – Cost of ecologicaldamage.U.S.: GPI < GDP.2. PovertyMeasured as percentage of people with income below a poverty line (headcount ratio) = P0 (wewill see other indicators later in the course).World poverty: 2.8 billion < 2$/day = 47% of humanityWorld destitution: 1.2 billion < 1$/day = 20% of humanityP0= f − y , +σy( ), y average income, σy inequality in distribution of income.With zero growth of average income, falling inequality reduces poverty; rising inequality increases poverty.Growth of average income with constant inequality reduces poverty.Growth of average income with falling inequality reduces poverty even more.Growth of average income with rising inequality reduces poverty less than at constant inequality.Growth of average income with sharply rising inequality may increase poverty (immiserizing growth).Hence, growth is only useful to reduce poverty if not accompanied by too much increase in inequality.The less increase in inequality, the higher the elasticity of poverty reduction with respect to average incomegrowth.Note: special focus on rural poverty as 75% of the world poor are rural.Note: special focus on employment as labor is the main asset of the poor.3. Inequality and inequityEquality (ex-post): e.g., share of income held by bottom X% relative to share of income held bytop X% (we will see other indicators later in the course); Gini coefficient (see later). E.g., Share of richest20%/Share of poorest 40% = India: 1.7; Senegal : 5.3; Brazil: 9.1; U.S.: 2.9; Japan: 2.4%Equity (ex-ante): equality of opportunities.Sen: equity = distribution of capabilities (assets) and freedoms (power).Note: different dimensions of inequality of opportunities: gender, age, ethnic, regional,rural/urban.Why is equality a potential determinant of growth?(-,+) Aggregate rate of saving may rise with greater inequality (Keynes). But poor can save if theyhave access to financial instruments for saving.(-,+) Incentives may rise with inequality (incentive wages, rewards for taking risks)but alsodecline with inequality (sense of fairness, sabotage).(+) Cost of social control may fall with equality.(+) Cost of welfare programs may fall with equality.(+) Solidarity and cooperation may rise with equality.3 8/31/04(+) Participatory development and democracy may rise with equality.(+) Greater share of the population with collateralizable assets.4. VulnerabilityVulnerability = Probability of falling in poverty.E.g., food insecurity: Probability(Consumption < Minimum consumption requirement).If poor have lower average consumption relative to minimum needed, they are more exposed to disaster,and will have a higher level of risk aversion in their behavior, limiting their options.Sources of risk:Natural disasters: drought, flooding, pests.Health: illness, accidents, epidemics.Social: crime, war.Economic: international prices, unemployment, inflation, recession.Political: policy change, discontinuation of social programs (short political


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