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Universitas Pembangunan Nasional “Veteran” Yogyakarta, Indonesia PROBLEMS AND POLICIES IN DEVELOPMENT ECONOMICS by Ardito Bhinadi www.arditobhinadi.com e-mail: [email protected] Universiti Utara Malaysia, September 23, 2014 1 Outline • • • • Overview Development Economics The Challenge of Development The Evolution of Development Thought The Quality of Growth 2 1 OVERVIEW DEVELOPMENT ECONOMICS 3 The Nature of Development Economics • The nature of development economics – Tradidional economics: efficiency of scarcity resource allocation. – Politics: social and institutional processes that affect resources allocation. – Development economics: efficiency of allocation, sustainability, and economic, social, politic, and institutional mechanism. • The role values ind development economics – Economics is not value-free the validity of the economic analysis is based on the assumption that underlying values. 4 Economics as a Social Systems • Social system: inter-related relationship between economic and non-economic variable. • Economics is important. – Microeconomic: individual behavior. – Macroeconomic: Y C + I + G + X - M • Non-economic variables are also important. – Social, demography, cultural, etc. • Values, attitudes, and institutions must be understood in development process. ARDITO BHINADI 5 What Do We Mean By Development? • Development: capacity of the national economy that the economic condition in the initial period is static in long periode to create and maintain GNP at a certain level. ARDITO BHINADI 6 What Do We Mean By Development? • Traditional economic measures: GDP Country Brunei Darussalam Total land area Total population km 2 thousand 2013 2013 1/ Population density 1/ Annual population 1/ Gross domestic product grow th at current prices persons per km 2 percent US$ million 2013 2013 2013 5.769 406,2 70 1,6 16.117,5 Cambodia 181.035 14.962,6 83 1,5 15.659,0 Indonesia 1.860.360 248.818,1 134 1,4 862.567,9 Lao PDR 236.800 6.644,0 28 2,0 10.002,0 Malaysia 330.290 29.948,0 91 1,5 312.071,6 Myanmar 676.577 61.573,8 91 1,0 56.408,0 Philippines 300.000 99.384,5 331 1,8 269.024,6 Singapore 715 5.399,2 7.550 1,6 297.945,8 Thailand 513.120 68.251,0 133 0,5 387.534,1 Viet Nam 330.951 89.708,9 271 1,1 171.219,3 4.435.617 625.096,3 139 1,3 2.398.549,6 ASEAN Source: ASEAN Statistics 2014 7 Selected Key ASEAN Macroeconomic Indicator Grow th rate of gross domestic product Country Brunei Darussalam at constant prices Inflation rate (y ear-on-y ear growth of CPI at end of period ) Exchange rate at end of period percent percent national currency per US$ 2013 2013 2013 -1,8 0,2 1,25 Cambodia 7,0 4,6 3.995 Indonesia 5,8 8,4 10.567 Lao PDR 8,2 6,9 8.224 Malaysia 4,7 3,2 Myanmar 7,5 Philippines Unemploymen 1/ t rate2 Currency / percent 2012 Dollar (B $) 1,7 Riel 0,6 Rupiah (Rp) 6,1 Kip 1,9 3,16 Ringgit (RM) 3,0 4,9 965 Kyat 4,0 7,2 4,1 42,89 Peso (PhP) 6,8 Singapore 3,9 1,5 1,25 Dollar (S $) 2,8 Thailand 2,9 1,7 30,73 Baht 0,5 Viet Nam 5,4 6,0 20.934 Dong 3,2 5,1 n.a. n.a. ASEAN n.a. n.a. Source: ASEAN Statistics 2014 8 What Do We Mean By Development? • The new economic view of development – development is more than just statistics – development is a multidimensional process 9 GDP per Capita ASEAN Disparity in US$; at current market prices Country Brunei Darussalam 2009 2010 2011 2012 2013 28.454,0 32.062,9 42.431,5 42.445,5 39.678,7 Cambodia 735,1 785,1 881,7 976,9 1.046,5 Indonesia 2.362,1 2.988,0 3.497,3 3.578,4 3.466,7 Lao PDR 913,0 1.095,3 1.262,4 1.394,3 1.505,4 Malaysia 7.215,6 8.514,8 9.962,1 10.345,9 10.420,5 Myanmar 538,3 706,4 868,9 846,2 916,1 Philippines 1.828,6 2.127,1 2.339,7 2.567,8 2.706,9 Singapore 37.960,9 45.713,8 51.247,5 54.026,9 55.183,3 Thailand 3.946,6 4.743,2 5.116,0 5.391,3 5.678,1 Viet Nam 1.128,5 1.225,5 1.404,2 1.595,9 1.908,6 2.590,9 3.138,6 3.586,6 3.760,9 3.837,1 3.237,2 3.940,6 4.484,3 4.682,7 4.712,6 939,2 1.069,1 1.258,6 1.363,6 1.554,6 ASEAN 1/ ASEAN 5 BCLMV 2/ Source: ASEAN Statistics, 2014. 10 What Do We Mean By Development? • Three core values of development – Sustenance ability to provide basic needs. – self-esteem become fully human – freedom from servitude ability to choice What is the difference of the poor and the rich? 11 New Development Paradigm (Sen) • Capability to have function: the most determining factor wheter someone is poor or not. • Economic growth is not the final goal. • Development should pay more attention to improve the quality of life. • Poverty rate: not measured by the level of income but what to do with the goods. • Welfare: benefit from the goods, freedom of choice, management of life. ARDITO BHINADI 12 The three objectives of development • Increases in availability and improvements in the distribution of food, shelter, health, protection, etc. • Improvements in ‘levels of living,’ including higher incomes, more jobs, better education, etc. • Expansions in the range of economic and social choices available to individuals and nations 13 Comprehensive Development Framework • Structural elements: – Honesty, government’s commitment to attacking corruption, protection for the poor, property right, financial system, social safety net. • Human resources development: – Education, health, etc. • Phisycal development: – Extent of access to electricity, road, transportation, telecomunication, environment, comitment to protect the cultural and historical sites. • Sectoral elements: – Strategy of integrated rural, urban, and enviromental management respectively. ARDITO BHINADI 14 2 THE CHALLENGES OF DEVELOPMENT 15 The Challenges of Development • Fallacies in development theory • The world economy in transition • Development Issues 16 Fallacies in Development Theory • Fallacy 1: Underdevelopment has but a single cause. • Fallacy 2: A single criterion suffices for evaluating development performance. • Fallacy 3: Development is a log-linear process. 17 Fallacy 1: Underdevelopment has but a single cause Underdevelopment is due to constraint X; loosen X, and development will be the inevitable result. • X equals physical capital (1940-70) • X equals entrepreneurship (1958-65) • X equals incorrect relative prices (1970-80) • X equals international trade (1980-) • X equals hyperactive government (1980-96) • X equals human capital (1988-) • X equals ineffective government (1997-) 18 Fallacy 2: A single criterion suffices for evaluating development performance • Sen (1988): GNP only indicates national potential for improving the welfare of the majority of the population – not the extent to which the society delivers on this potential. • Multidimensional criterion such as Human Development Index. 19 Fallacy 3: Development is a log-linear process • Proposition 1: The development process is highly nonlinear. • Proposition 2: Development paths are not unique. • Proposition 3: Initial conditions shape subsequent development. • Proposition 4: The development trajectory of countries is not only nonunique but also malleable. 20 • Economic development is a highly multifaceted, nonlinear, path-dependent, dynamic process that involves systematically shifting interaction patterns among different aspects of development and therefore requires predictable changes in policies over time. 21 The World Economy in Transition • The setting for development - Global integration - Suceeding in an integrated world - The global effect of shocks - Recent development • Prospect for world development - World trade - International capital flows and finance - An uncertain world • Toward region community 22 The Changing World • • • • • • • • International trade International financial flows International migration Global environmental challenges New political tendencies in developing countries Emerging subnational dynamics Urban imperatives Implications for development policy ARDITO BHINADI 23 The Changing World • The World Bank noted that since the 2004-2008 global growth pole has shifted from the region of North America and Europe into Asia and South America. • Studies conducted by McKinsey stated that the center of economic growth shifted to the East at a speed of 140 km / year. 24 International Migration Development Issues • The State in a Changing Word (WDR 1997). – What the state should do, how it should do it, and howi t can doi t better – An effective state was needed to enable markets todevelop andto address social issues. • Knowledge for Development (WDR 1998/1999). – the global explosion of knowledge had the potential of lifting hundreds of millions out of poverty, or creating awidening knowledge gap, in which poor countries would lag further and further behind. – Knowledge base to improve competitiveness. • Entering the 21th Century (WDR 1999/2000). ARDITO BHINADI 26 Development Issues • Attacking Poverty (WDR 2000/2001) • Building Institutions for Markets (WDR 2002). • Sustainable Development in a Dynamic World (WDR 2003). • Making Services Work for Poor People (WDR 2004). • A Better Investment Climate for Everyone (WDR 2005) • Equity and Development (WDR 2006). • Development and the Next generation (WDR 2007). • Etc. ARDITO BHINADI 27 Elements of a Market-Friendly Approach • Investing in people Welfare and growth; challenges in human development; public policy • The climate for enterprise Entrepreneurs unleashed; enterprise in agriculture; empowering the manufacturer; evidence on the productivity of investment projects 28 Elements of a Market-Friendly Approach • Integration with the global economy Channels of technology transfer; labor flows and direct foreign investment; trade policy and economic growth; conditions for success in trade reform; the global climate for trade • The macroeconomic foundation Policies to promote stability and growth; booms and busts; from stabilization to growth; the art of reform; investment and saving; global economic conditions 29 Priorities for Action • Task for global action Global trade; capital flows and finance; economic policies; technology; the global environment • Specific actions that work Investing in people; making markets work; opening up to trade and technology; fostering macroeconomic stability; environmental policies; implications of good policies • A global challenge 30 New Directions in Development Thinking • Sustainable development has many objectives. • Development policies are independent. • Government play a vital role in development, but there is no simple set of rules that tells them what to do. • Processes are just as important as policies. 31 New Directions in Development Thinking • Sustainable development has many objectives. • Development policies are independent. • Government play a vital role in development, but there is no simple set of rules that tells them what to do. • Processes are just as important as policies. 32 The many Goals of Development The DAC of the OECD has produced indicators that set global targets for the wider goals of development to be reached by 2015 or earlier. • Reduce extreme poverty by one-half. • Ensure universal primary education and eliminate gender disparity in education. • Reduce infant and child mortality by two-thirds and maternal mortality by three-quarters, while providing universal access to reproductive health services. • Implement worldwide national strategies for sustainable development and reserve trends in the loss of environmental resources. 33 3 THE EVOLLUTION OF DEVELOPMENT THOUGHT The Evolution of Development Thought • • • • • • Goals of Development Macroeconomic Growth Theory Capital Accumulation State and Market Government Intervention Policy Reform 35 Goals of Development GDP Freedom Real per capita GDP Nonmonetary indicators (Human Development Index) Entitlements and capabilities Mitigation of poverty Sustainable development 36 Macroeconomic Growth Theory HarrodDomar analysis Solow sources of growth New growth theory 37 Capital Accumulation Physical capital Human capital Knowledge capital Social capital 38 State and Market Market failures Nonmarket failures New market failures Institutional failures 39 Government Intervention Programming and planning Minimalist government Clompementary of government and market 40 Policy Reform Poor because poor Poor because poor policies get prices right Get all policies right Get instituion right 41 Principles of Development • Focus on all assets: physical, human, and natural capital. • Attend to the distributive aspects over time. • Emphasize the institutional framework for good governance. 42 Framework H Addressing misgovernance and corruption (Human capital) Reducing distortions favoring K K Correcting market failures hurting H, R Strengthening regulation TFP Growth (Physical capital) Welfare R (Natural capital) TFP 43 Asset accumulation and use • By reducing policy distorcions For example: Those favoring or subsidizing physical capital, while complementing markets in valuing natural resources and investing adequately in human resources. The implication is to ensure broadly based, sustainable growth, not to slow growth. 44 Regulatory frameworks • By building regulatory frameworks for competition and efficiency to accompany liberalization and privatization and giving legal and judicial reforms greater attention, while ensuring macroeconomic stability. • The implication is to take supportive regulatory actions along with liberalization, not to slow liberalization. 45 Good governance • By nurturing civil liberties, participatory processes, and accountability in public institutions; promoting anticorruption efforts; and actively involving the private sector to reduce the influence of vested interests, while building capacity for policy changes. • The implication is to increase the attention to coalition building in civil society, not to detract from government policy and capacity building. 46 A Mixed Development Record • “Economics is not only concerned with generating income, but also making good use of that income to enhance our living and our freedoms”. 47 Measure of Development • Human Development • Income Growth • Environmental Sustainability 48 Human Development • • • • • Decrease in poverty Increase in literacy Decrease in infant mortality Increase in life expetancy Decrease in income inequality 49 Environmental Sustainability • Decrease in carbon dioxide emission • Increase in forest cover • Decrease in water pollution 50 Actions for Quality • Policies for Undistorted Growth of Physical, Human, and Natural Capital. • Attend to the Stability and Distributive Aspects of Growth. • Building the Governance Framework for Development. 51 Policies for Undistorted Growth of Physical, Human, and Natural Capital • Avoid direct or indirect subsidies to capital, such as tax breaks, allocation of monopoly powers and subsidies, special privileges that feed corruption, and implicit guarantees on rates of return. • Invest efficiently in human capital and ensure access for the poor through incentives and allocation of public investments in education. • Sustain natural capital by clarifying property rights, avoiding unrealistically low levels of royalties for natural resources, and enforcing environmental taxes. 52 Attend to the Stability and Distributive Aspects of Growth • Ensure that the poor can access education, technology, and health services, as well as land, credit, skills training, and job opportunities in open markets. • Ensure effective regulatory frameworks and anticorruption measures to accompany financial openness and privatization. • Align reforms and restructuring to mechanisms for mitigating the costs of crises, which will likely be borne disproportionately by the poor. 53 Build the Governance Framework for Development • Involve all stakeholders – the private sector, including transnational firms and the domestic private sector, NGOs, civil society, and the government – in implementing a commonly shared development agenda. • Empower people throught voice, participation, and greater civil and political liberties. • Support economic liberalization by promoting institutional development and better governance. 54 ASEAN’s Competitiveness Landscape 55 Rank HDI, Rank GTCI, and Rank GCI ASEAN Countries No. 1 2 3 4 5 6 7 8 9 10 Country Singapore Brunei Malaysia Thailand Indonesia Phillipines Vietnam Lao PDR Cambodia Myanmar Rank HDI 18 30 64 103 121 114 127 138 138 149 Rank GTCI 2 37 72 84 73 82 87 - Rank GCI 2 24 26 37 38 59 70 81 88 139 56