Development Economics
Core Concepts
Development economics goes beyond income growth to include poverty, inequality, human capital, institutions, and structural transformation. Key concepts: Lewis dual-sector model, Rostow's stages, dependency theory, human development index (HDI), poverty traps, microfinance, foreign aid effectiveness, and sustainable development. You must understand measures of inequality (Gini coefficient, Lorenz curve), poverty headcount and gap, and the role of institutions and governance.
Common Traps
- Equating development with GDP growth; HDI includes health and education.
- Assuming all growth reduces poverty equally; distribution matters.
- Forgetting that the Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality).
- Misunderstanding the Lewis model: it assumes surplus labor in agriculture transfers to industry at a constant wage.
- Overlooking the role of institutions (property rights, corruption) in development.
Worked Example / Rule of Thumb
Rule of thumb: The Gini coefficient can be approximated from the Lorenz curve as the ratio of the area between the line of perfect equality and the Lorenz curve to the total area under the line of equality. A common formula for discrete data: G = 1 - Σ (X_i - X_{i-1})(Y_i + Y_{i-1}) where X is cumulative population share and Y is cumulative income share.
Example: Suppose a country has income distribution: poorest 20% get 5%, next 20% get 10%, next 20% get 15%, next 20% get 25%, richest 20% get 45%. Compute Gini. Cumulative population: 0.2,0.4,0.6,0.8,1.0. Cumulative income: 0.05,0.15,0.30,0.55,1.00. Using the formula: G = 1 - Σ (X_i - X_{i-1})(Y_i + Y_{i-1}) = 1 - [0.2*(0+0.05) + 0.2*(0.05+0.15) + 0.2*(0.15+0.30) + 0.2*(0.30+0.55) + 0.2*(0.55+1.00)] = 1 - [0.01+0.04+0.09+0.17+0.31] = 1 - 0.62 = 0.38. This indicates moderate inequality.