Okay, so we're gonna begin with Topic 1.
Growth and How Did We Get Here?
Looking back at the history of how
economists have looked at growth,
we begin with Malthusian's Model of
GDP per capita over our history.
There is an equilibrium level
of population sustainable by
access to resources.
When too many people are born above the
equilibrium level, then famine and disease
kills them off, if too few are born, the
population is below the equilibrium level,
then birth rates rise as a result of
the abundant resources per capita.
We call the period from 1800 onward,
the period of modern economic growth.
It is a new kind of growth that
breaks free of the Malthusian Model
that guided GDP growth before.
We had been limited by resources
before but if you can see 1800 onward.
It grew and grew and grew, and has been
consistently growing overall in general.
But not everyone has participated in
these rapid, sustained levels of growth.
Now, economists have looked
back at this and said,
we need to model this new type of growth.
What does it look like?
What causes it?
And how can we spread this to those folks
that haven't seen these
modern economic growth rates?
When we want to model this
new type of economic growth,
we start with the Harrold-Domar Model.
This model sees growth as being
directly related to investment.
Rapid capital accumulation is
the key to economic growth.
There is this link between investment and
growth such that is you have a target for
growth, there exists a required investment
rate to achieve that growth rate.
For example,
you can achieve 1 percentage point growth
in GDP when the investment to GDP
ratio increases 4 percentage points.
If you want then,
a 2% increase in GDP growth,
then increase the investment
to GDP ratio by 8%.
When this model was first
applied to developing countries,
folks tried to give them
a goal of economic growth,
GDP growth, and set the required
investment at a target level.
So, if a country is currently investing
4% of GDP and 16% was needed for
them to achieve their goal growth rate,
then they have this financing
gap of 16%- 4%, or 12%.
They need to borrow, then,
12% of GDP from outside of their country,
in order to achieve
the desired growth rate.
The problem with this model is
that there is no clear link
between investment and growth.
When the Harrod-Domar Model was designed
it was designed to describe what
was happening in the United States
in the 20th century.
It was never intended to dictate
how developing countries should be
targeting investment and growth.
And we were left with quite a few
countries in the 1960's who
had enormous debt as a result of all
of this borrowing to reach those
investment requirements and they didn't
have the desired GDP growth rate.
That leads us to the Solow Model.
And the Solow Model focuses
on technological change as
the key to long-run growth.
Simply adding more capital cannot provide
stable growth as there are diminishing
returns to capital.
Adding the 10,000th unit of capital will
not assist the growth rate as much as
adding the 10th unit of capital.
The rate of technological
progress will determine
the long run growth rate
of income per capita.
So when we apply this now
to developing countries,
increases in investment will only
payoff with increased growth,
if they are running shy of their
rate of technological progress.
We can use investment in machinery to
catch up in the short run to the long-run
technological change growth rate,
but we cannot use capital itself to
determine that long-run growth rate.
It is only achieved using
long-run technological growth.
So the problem we then
have with the Solow Model
is technology is extremely
easy to transfer.
So if it is so easy to transfer, why then
are developing countries having so
much trouble catching up?
If you take this technological advance and
transfer it and
the developing country gets on
this path to technological growth.
Maybe it's a shortage of machinery, well
economists have looked back on that and
they say no, machinery isn't short enough
to give us the slow growth rates that
we see in these developing countries.
It must be something more.
So the new Solow Growth Models
are what's happening now.
These are the growth models that have
taken us from Harrod-Domar where we
don’t see this direct link as a result
of diminishing returns to scale.
We don't see Solow Growth purely
by throwing technology into
a country we get these growth rates.
So maybe there's something
else that's missing.
These new Solow Models attempt to develop
a model that better fits the data.
And they start to include
a variety of different variables.
That could make us understand why
technological change isn't sticking
in some of these developing countries.
There could be differences in human
capital, education levels, in rich and
poor countries.
Differences in the health status
in rich and poor countries.
Differences in institutional quality or
the design of the governmental
institutions.
Maybe that's why the technological
progress isn't sticking.
And these new Solow Growth Models
are trying to get better and
better at replicating the data we see on
economic growth rates in
these developing countries.
Some economists have also put
technology inside the model.
Instead of saying that technology
is the unexplained factor.
If we can't explain it by labor and
if we can't explain it by capital,
maybe it's this leftover technology.
Instead they're now putting technology
into the actual model itself.
And that is impacting how
we understand growth.
But to be honest we are still working on
how best to model growth so that we can
get these developing countries to catch
up to the rich countries of the world.
Now that we finished the section
looking at what models
we're using as the tools to
understand economic growth.
How do we measure economic development,
right?
There is this catch up
of the poorer countries
to the richer countries of the world,
and how should we measure this?
The traditional approach that we've used
has been looking at
Gross National Income or GNI.
If we achieve GNI growth
rates of 5% to 7%,
we have achieved economic development,
right?
And this has been looked at now since the
1960s, is this push to measure economic
growth as looking at GNI or Gross National
Income growth rates between 5 to 7%.
And they have fallen short.
We have looked then at GNI per capita.
How is the Gross National Income
keeping up with population growth?
How much is each individual seeing
an increase of income on average?
So if you have a country with a rapidly
growing population, you would need to
sustain much higher levels of growth for
the country to be better off overall.
That also has fallen short.
Of trying to capture whether or
not life in these countries
is better than it was before.
So they've tried even more measures,
a corrected GDP,
computing a corrected GDP, or
gross domestic product, which accounts for
spending preferences in a country.
It's another way that economists
can measure economic growth.
This GDP is corrected using
a formula where income is added or
subtracted depending on people's
willingness to pay for an alternative.
This is meant to test whether people in
the country are happy with the changes
made to their economy as
a result of the economic growth.
Can they get things that they consider
better than what they had before or
do they just have more stuff.
And the stuff wasn't what they
wanted to begin with, right.
So this corrected GDP is one way
the economists have looked at it.
Next there's the subjective well being
measures of economic development.
These subjective measures of
well being are used more and
more in our attempt to
measure economic growth.
These have been coined happiness studies,
and
you will see a lot of them in a variety of
disciplines and a variety of literature.
In Bhutan, the country's measure of growth
is a measure of increase in
gross national happiness.
Right?
That is how they measure their growth,
in gross national happiness.
These are surveys that measure how
people feel today about their life
relative to a year ago.
The problem with these studies is that
they can be difficult to compare across
countries and across individuals.
Each of which has a different personality.
Some people would never describe
themselves as feeling great,
even though we would describe ourselves
in their shoes as feeling great.
Others no matter how miserable they
are would consider themselves fine, right.
It's how we each see what
happiness should look like.
And so it's very difficult to compare
these studies across countries.
Another measure that's used to
look at economic development
is the Capability Approach.
The Capability Approach looks at how many
choices a person has offered to them.
Can they choose different doctors,
different careers,
different cereals on the shelf?
Are they open to more options
now than they were a year ago?
With the final measure that we have really
looked at, lately more and more, and
what you see in the development literature
taking over is these synthetic indicators.
The one we used the most is called
the Human Development Index.
HDI or Human Development Index.
Is a measure of the variety of
indicators that give you a picture
of the level of development.
This is the measure of economic growth
that is used in the community today.
It uses a basket of
indicators of varying weights
in order to get an overall broad
understanding of the development process.
So life expectancy at birth, mean years of
schooling, expected years of schooling.
Gross National Income and
inequality are some of the measures
included in the Human Development Index.
When you look specifically at
the Human Development Index,
there are each of these factors entering
into the bottom line where you of
where you line up relative to peer
countries in different weights.
So sometimes they'll weight Gross National
Income more, sometimes inequality more to
get a really broad picture of how
economic development is going.
Are people better off?
Are they happier?
Are they thriving as a result
of the economic development?
When we look now,
at the overall goals of the development
community, there has been a transition.
This variety of ways that we
measure economic development,
gives us an indication of how these
folks have struggled to understand
how best to get these poorer countries
to catch up to these richer countries.
This new approach in global politics
at the turn of the century takes
the spotlight off of the countries
overall situation, and
focuses on the lower end
of the income distribution.
At the turn of the century,
the UN put together a set of goals called
the UN Millennium Development Goals.
This started the development community
along the path to focus more on improving
the lives of those at the lowest
40% of the income distribution,
instead of this focus on overall
income per capita growth.
The new goals were intended to
unify the development community
to pull these people out of poverty.
It is not enough to say that we have
made the country overall richer.
We want to make sure that
the poorer folks in these
countries are better off as
a result of economic development.
The goals that have been put forth have.
Well guided us and
they have also set us up to look bad in
a variety of areas over the last 15 years.
So we have seen some ways in which these
goals have been reached just because
China has become a richer country and
they have such a large population.
India has become a richer country and
they have such a large population.
But overall we are much closer
to these development goals.
There are a lot of areas where folks
have felt that we have fallen short.
And these goals give us a better way
of measuring economic development of,
are we getting these folks from
poverty into a better life?
So our path in Economics 115B,
when we look at the study
of these poor countries
catching up to these rapid rates of modern
economic growth of the rich countries.
Well, we'll begin with,
how did we get here?
Jared Diamond will help us understand
why some countries are rich,
some countries are poor, and then we're
going to look at international trade.
There are problems unique
to the developing world
that make international trade
more difficult to understand.
All of our simple models that
make trade look advantageous
struggle to describe the situation
in the developing countries.
We're then going to talk
about balance of payments in
debt on the road to economic development.
Countries face hurdles that require
large sums of money to surmount.
Who will pay for
the start up costs of economic growth?
When they borrow it has implications.
And that's where we will be lead into the
benefits and dangers of foreign capital.
There are various types
of capital injections,
called foreign direct investments,
foreign portfolio investments,
there are remittances in foreign aid,
any of these flows from outside
sources into these developing
countries can have
a lasting effect on that
countries' economic development.
So we'll talk through these various
types of capital injections and
how they will serve the countries well.
And they can truly be
a disservice to those countries.
We'll then go on to talk about
the superpowers of the developing world,
China, India and Brazil.
The development of these large players
has affected the development
of the entire world.
Not only are they examples
to the developing world,
but they are also massive countries
with huge populations that impact
the growth of the global economy.
The last topic we will discuss
is the future of development.
These are the latest buzz words.
What people are talking about now.
New theories and
techniques that are presented each decade,
designed to help those poor countries
catch up with rapid rates of growth.
What are they and are they working?
