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Chapter 1

Economics, Institutions, and Development: A Global Perspective



How the Other Three-Quarters Live

Economics and Development Studies

The Nature of Development Economics

Why Study Development Economics?  Some Critical Questions

The Important Role of Values in Development Economics

Economies as Social Systems: The Need to Go Beyond Simple Economics

What Do We Mean by Development?

Traditional Economic Measures

The New Economic View of Development

Sen’s “Capabilities” Approach

Three Core Values of Development

Sustenance: The Ability to Meet Basic Needs

Self-Esteem: To Be a Person

Freedom from Servitude: To Be Able to Choose

The Three Objectives of Development




Attitudes, 14

Glossary: A state of mind or feeling of an individual, group, or society regarding issues such as material gain, hard work, saving for the future, sharing wealth, etc.  See also values.


Capabilities, 20

Glossary: The freedoms that a person has to be or to do, given their personal features and their command over commodities.  See the discussion of Amartya Sen’s approach to defining development in Chapter 1.


Development Economics, 9

Glossary: The study of how economies are transformed from stagnation to growth and from low-income to high-income status.  See development.

Development The process of improving the quality of all human lives.  Three equally important aspects of development are (1) raising people’s living levels - their incomes and consumption levels of food, medical services, education etc., through relevant economic growth processes; (2) creating conditions conducive to the growth of people’s self-esteem through the establishment of social, political, and economic systems and institutions that promote human dignity and respect; and (3) increasing people’s freedom by enlarging the range of their choice variables, as by increasing varieties of consumer goods and services.


Developing Nations, 6

Glossary: The present countries of Asia, Africa, the Middle East, Latin America and East Europe and the Former Soviet Union, mainly characterized by low levels of living, high rates of population growth, low income per capita, and general economic and technological dependence on developed economies.


Freedom, 21

Glossary: A situation in which a society has at its disposal a variety of alternatives from which to satisfy its wants.  See also development.


Functionings, 18

Glossary: What people do or can do with the commodities of given characteristics that they come to possess or control (see Chapter 1).


Globalization, 11

Glossary: The increasing integration of national economies into expanding international markets.


Gross National Product (GNP), 15

Glossary: The total domestic and foreign output claimed by residents of a country.  It comprises gross domestic product (GDP) plus factor incomes accruing to residents from abroad, less the income earned in the domestic economy accruing to persons abroad.  See also national income.


Income Per Capita, 15

Glossary: Total gross national product of a country divided by total population.  Per capita income is often used as an economic indicator of level of living and development.  It can, however, be a biased index because it takes no account of income distribution and the ownership of the assets that are employed to generate part of that income.


Institutions, 14

Glossary: Norms, rules of conduct, and generally accepted ways of doing things.  Social institutions are well-defined, formal organizations of society that govern the way that society operates - for example, the class system, private versus communal ownership, or the educational system.  Political institutions are the systems that govern the operations of the government of a particular society - formal power structures, political parties, and mechanisms for obtaining power.

Commentary: In Institutional Economics, an institution is a routinized pattern of collective human behaviour.  Such patterns develop because of their decision-making efficiency, i.e., you don't have to think about it just follow the path.  At one extreme such patterns may be formalized as physical organizations like schools, hospitals, armies, etc.  At the other extreme, they are informal customs and traditions that are simply 'normal'.  One contemporary economist, Eckhardt Schlicht, has examined the economic efficiency of custom and tradition.  Please see:

Schlicht, E., On Custom in the Economy, Introduction, Oxford Clarendon Press, 1998, 1-8.

Schlicht, E., On Custom in the Economy, Chapter 14: The Division of Labour , Oxford Clarendon Press, 1998, 242-265.

Schlicht, E., Aestheticism in the Theory of Custom, Journal des Economistes et des Etudes Humaines, Volume 70, numéro 1, Mars 2000, pp 33-51.


Less Developed Countries (LDCs), 9

Glossary: See developing countries


More Developed Countries (MDCs), 9

Glossary: See developed world

Developed World The now economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand, and Japan.  These were the first countries to experience sustained long-term economic growth.


Non-economic Variables, 14

Glossary: Elements of interest to economists in their work but not given a monetary value or expressed numerically because of their intangible nature.  Sometimes non-economic variables such as educational, health, cultural, political, and institutional factors are more important than the quantifiable economic variables in promoting development.

Commentary:  Arguably some of what the authors treat as non-economic are in fact economic, e.g., property rights. 

Extract: The Competitiveness of Nations in a Global Knowledge-Based Economy

10.84    The nature of Physiocratic public intervention was also radically different from Marxian ‘ownership of the means of production’ and Keynesian management of aggregate demand.  Accepting that private property and self-interest were the drivers of economic growth and development, the Physiocrats reached beneath the surface of the laissez faire, laissez passer marketplace.  They reached down to the legal foundations of capitalism (Commons 1924) to manipulate the nature of property rights themselves.  For the Physiocrats, “the public interest is manifest in the continuing modification or reconstitution of the bundle of rights that comprise private property at any given time (Samuels 1962, 161).

10.85    In effect, the Physiocrats wanted to ‘load the dice’ to raise the ‘commanding heights’ of the national economy.  They wanted to use the conscious manipulation of capitalist self-interest – accumulation of marketable property – to foster and promote the economic growth and development of the nationThe Physiocrats thus viewed property rights as instruments of economic policy.  They also saw them as providing the foundation of the economy itself defining what is bought and sold, how and where.  Accordingly, the Physiocrats:

implicitly recognize that the basic economic institutions (the organization of economy) are legal in character; that law is an instrument for the attainment of economic objectives and that economy is an object of legal control (Samuels 1962, 162).

Per Capita GNP, 15

Glossary: See income per capita


Political Economy, 9

Glossary: The attempt to merge economic analysis with practical politics - to view economic activity in its political context.  Much of classical economics was political economy, and today political economy is increasingly being recognized as necessary for any realistic examination of development problems.

Commentary: On the positive side of the equation, recognition of the critical role of government in the developmental process is necessary.   Thus while the ‘developed’ economy is supposedly self-regulating, the State actually plays an inevitable role in the control of the money supply as well as managing education, unemployment, training and a host of other policies that effectively, even if unnoticed, regulate the marketplace.  On the negative side, Adam Smith was concerned with economic profit being converted into political power and political power being converted into economic profit.  It was to break this connection that Adam Smith argued against State monopolies.

Self-Esteem, 21

Glossary: The feeling of worthiness that a society enjoys when its social, political, and economic systems and institutions promote human respect, dignity, integrity, self-determination, etc.  See development.

Commentary:  Can a society enjoy feelings of worthiness or only the individual?  It is here that  the author slips from the Standard Model in economics in which the individual is the unit of analysis and slides into a traditionally more Marxian view of the collective or group as the unit.  This catches the duplex nature of humanity as what Bronowski in The Ascent of Man called 'a social solitaire'.

Social Indicators, 15

Glossary: Non-economic measures of development, such as life expectancy at birth, infant mortality rate, literacy rate, and physicians per 100,000 population.

Commentary: Social indicators are not just used in developmental economics.  For example in welfare economics there have overtime been several attempts to compensate for the problems inherent in the concept and computation of GDP and GNP in so-called developed economies, e.g., the problem of displacement.  In sociology, the rough equivalent of GDP is Time Use where the time spent by an individual, community or nation at different task during the day (and night).

Social System, 14

Glossary: The organizational and institutional structure of a society, including its value premises, attitudes, power structure, and traditions.  Major social systems include political processes, religions, and ethnic divisions.


Subsistence Economy, 5

Glossary: An economy in which production is mainly for personal consumption and the standard of living yields no more than the basic necessities of life - food, shelter, and clothing.  See also subsistence farming.


Sustenance, 21

Glossary: The basic goods and services, such as food, clothing, and shelter, that are necessary to sustain an average human being at the bare minimum level of living.

Commentary:  The question arises as to whether ‘sustenance’ is an absolute, e.g., calories of food per day, or relative, i.e., what is a luxury to people in an under-developed country is a necessity for sustenance in a developed country, e.g., access to a telephone, television or even the internet.

Traditional Economics, 8

Glossary: The economics of capitalist market economies characterized by consumer sovereignty, profit maximization, private enterprise, and perfect competition.  The major focus is on the efficient allocation of scarce resources (see economic efficiency) through the price system and the forces of supply and demand.  See also microeconomics, macroeconomics, laissez-faire, invisible hand, and market economy.


Value Premises, 13

Glossary: See values


Values, 14, 21

Glossary: Principles, standards, or qualities considered worthwhile or desirable.  A value judgment reflects personal or class beliefs.  See also normative economics.

Commentary:  The authors do not discuss equity which together with efficiency and effectiveness is one of the 3 ‘Es’ of economics.  Behind the motivation for international development is a sense of ‘inequity’.  Equity is a concept that emerged out of the Anglo-American Common law.  When England was taken by William the Conqueror in 1066 there was a patchwork of legal systems reflecting the different peoples settled in various parts of the country – Angles, Celts, Danes, Jutes, Saxons, etc.    The same crime or offense often had dramatically different penalties.  Over time the King established ‘courts of equity’ to mitigate such differences as well as to provide a venue for appeal by the poor and weak to the Crown against the strong and powerful, e.g., the nobles..  The rationale was that even though the law may have been properly applied, its outcome was unfair, unequal or not equitable.   Out of this legal concept that of economic equity developed especially with respect to taxation.  In economics there are two primary dimensions to equity.  Horizontal equity requires ‘like treatment of like’.  Vertical equity requires ‘unlike treatment of unlike’. 

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