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VISION

V/O

SYNC

00.31

Montage Irian Jaya huli tribe/ African chiefs etc

The world consists of almost 200 countries, a patchwork of different cultures, religions, legal systems and economies. Despite all these differences policymakers in most countries have a common objective - to improve the living standard of their citizens. This is the essence of development: improving the living standard in a country.

01.19

SYNC Dr. Anthony Venables, London School of Economics

I guess what we mean by economic development is a situation where people are really able to fulfil their true potential without having lives shortened by ill health or without living in severe poverty.

01.34

SYNC Dr. Timothy Leunig, London School of Economics

Economic development can also be defined as the standard of living. How rich are people, not just in monetary terms, but in all aspects of their lives?

01.46

In this film, we will look at the dynamics of economic development: what makes it happen and why do so many countries lag so far behind?

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How do we measure economic development?

02.18

African mother fans child

It's important to ask what we mean by a high living standard and how we measure a society's economic development. Most people agree that a high living standard includes long life expectancy, low child mortality, no poverty, access to clean drinking water, basic health care and education. It is useful to have a single indicator to help assess the degree of development in a country. Gross Domestic Product (GDP) is such a measure.

03.09

MAP GDP per capita at 2000 (PPP)

text: "purchasing price parity"

This map shows GDP per capita for the year 2000, measured at purchasing price parity (PPP), which takes into account differences in living costs in the different countries. For this reason few countries are shown with a per capita income of less than $1 a day.

03.39

SYNC Dr. Timothy Leunig, London School of Economics

A better measure might be the Human Development Index used by the United Nations and that includes not only income per head, but also measures of longevity and also of education.

03.51

There are huge variations in income across countries in the world today, and they reflect different levels of economic development.

04.02

SYNC Stephanie Prather

This is a 41-inch television, and by American standards, by many of my friends' standards, it'll be considered small. A lot of people I know have 50, 60, even greater than 60-inch televisions.

04.16

US home/ Ethipia feeding centre

The range of development is so huge that 80% of world income is generated by just 10% of its population, while the remaining 90% of the world's population currently generates only a fifth of world income. So the standard of living in America, with a per capita income of around $40,000, is world's apart from - say - Ethiopia, with a per capita income of $800.

04.45

SYNC Dr. Mesfin Hailemariam, aid feeding centre

You can see that he is wasted and on top of that I can feel that his bones are not that strong, right inside here which shows that he has a deficiency of vitamins or few very important minerals...

04.57

Indeed, some estimates suggest that almost half of the world's population lives on less than a dollar a day. What could possibly explain these differences and can these inequalities be reduced?

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Determinants of income and growth

05.22

MAP

When discussing economic development, it is important to distinguish between the level of per capita income today and the growth rate of per capita income over time. For example, in 2003, some of the countries with the highest income levels in the world were Norway, Canada, United States, and Switzerland. But the fastest growing countries mostly included low-income countries such as Angola, Chad, China and Mongolia. There is nothing that prevents poor countries from growing faster than rich countries. In fact, there are many reasons why we would expect this to take place.

06.02

Drug factory

text: "productivity"

Income levels and growth rates vary across time and across countries. To understand these patterns we need to know what determines income and growth levels. The answer is surprisingly simple: productivity, or the number of goods and services produced by each worker per hour. Since all goods and services generate income when they are sold, higher productivity translates into higher per capita income. If an American worker is more productive than a worker in Bangladesh, then the living standard, measured by income per capita, should be higher in America.

06.37

Factory workers

Likewise, high growth in productivity translates into a high growth rate of income. The productivity of a Taiwanese worker has increased much more than that of an American worker over the last few decades, and hence Taiwan has experienced higher growth than the US. But what then determines productivity?

06.58

SYNC Dr. Timothy Leunig, London School of Economics

In the short run the 3 main determinants of productivity are the skills of the people, the number of machines that they have and the quality of those machines, which is another way of saying technology.

07.09

Satellite building

text "Physical Capital"

Physical capital refers to structures and equipment used in production. The more equipment each worker has, the easier it is for him or her to produce more output per hour. One important characteristic of capital is that it is produced. So a country can, in effect, choose how much it wants to increase its capital stock each year. The increase in the capital stock during a specific time period is generally called investment. The level of investment is related to the savings rate of a country, which tells us how much of total income is allocated to consumption, and how much is saved and hence available to the production of capital. A higher savings rate increases productivity and thus income, but does not permanently raise the growth rate.

07.59

SYNC Dr. Anthony Venables, London School of Economics

East Asian countries built up their manufacturing industries mainly on the basis of very high domestic savings rates, in China at the moment for example the savings rate is about 40% of GDP - so enormous domestic resources are going into investment.

08.23

CURVE diminishing returns to capital

It is still to some extent the consensus amongst policymakers that a country can achieve faster economic growth and increase its living standard more rapidly by increasing investment. But capital is likely to exhibit diminishing returns, meaning the first machine provided to a worker makes him or her much more productive, but with each additional machine provided, the worker's additional output declines. If the return to capital diminishes, the growth of income will at first increase but then subside as the increases in productivity level off.

09.58

Due to diminishing returns to capital, an increase in the capital stock leads to greater improvement in productivity when the initial capital stock is low, than when it is high. This suggests that poor countries should grow faster than rich countries and would explain why countries such as South Korea have grown faster than the United States, although the percentage of income going to investment has been approximately the same over the last 40 years.

 09.31

text "Human Capital"

Human capital refers to the stock of knowledge embodied in a person due to education, training and experience. Highly skilled workers produce more per hour than low-skilled ones. This is an important reason why developed countries exhibit higher productivity and a better living standard.

09.57

SYNC Dr. Wilhelmus Spanjers, Kingston University

Human capital makes people more productive than they would otherwise have been, they may be able to operate different machines because they can read and write.

10.04

Developing countries, on the other hand, have trouble providing education to all their citizens and so suffer from a low stock of human capital.

10.21

SYNC Mukhtar Mai, womens' rights activist,

There were no schools in this area, especially for girls. Other women were trying to stop me, saying, "We don't want it in our town." I think education is very important, especially for the poor.

10.45

Pakistan school

In addition, migration of skilled workers from developing countries to developed countries, the so-called brain drain, tends to further reduce human capital in poor countries.

10.57

However, just like physical capital, human capital is likely to exhibit diminishing returns. So increases in human capital are not likely to permanently raise the growth rate of income, but will definitely improve the overall income level and hence the standard of living.

11.16

Panel factory

text "Technology"

Finally, the most important engine of sustained growth is technology. Technology is broadly defined as the blue print of the production process. The better the technology, the more output is produced, so technological innovation leads to higher productivity. An explosion of technological advances occurred during the industrial revolution. Innovations such as the steam engine, electricity, and internal combustion machines all made workers more productive and spurred a high growth rate.

11.54

Unlike physical and human capital, technology does not exhibit diminishing returns. Economists today agree that the most important determinant of economic growth and development is technological innovation. But the diffusion of technology from rich to poor countries is slow. This lack of technology sharing could potentially explain some of the persistent growth differentials across countries.

12.21

SYNC Dr. Timothy Leunig, London School of Economics

The main way in which poor countries can succeed in manufacturing is to start with the right sectors. There's no point whatsoever in aiming for high tech goods - you need to start with the things that you can do best, which is almost always textiles. So we can see that China started off with textiles - it's now moved on to basic engineering such as microwaves.

12.41

Given what we know what about the factors that influence income and growth, why do some nations seem to be stuck at low levels of development?

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Causes of underdevelopment

13.01

No one argument can yet explain underdevelopment, but it is helpful to examine some differences between rich and poor countries.

13.09

text "Geography"

Some countries' geography helps their development. For many countries their physical environment provides natural resources, such as oil and minerals, or fertile land for agriculture. Other countries experience harsh seasons, repeated natural disasters or barren landscapes from which they must generate food and shelter, let alone income. An additional geographic characteristic considered key to development is proximity to a large economic center. Many of the fastest growing Asian countries rely on Japan for foreign direct investment and as a key market, whilst landlocked or isolated countries tend to experience less development.

13.52

SYNC Dr. Wilhelmus Spanjers, Kingston University

Developing countries may not be able to serve a big market and therefore they may have to focus on small scale production. In this case they may not be as efficient as industrialized countries and this may hamper their development 04.28

14.05

SYNC Dr. Timothy Leunig, London School of Economics

Africa suffers a unique disadvantage that more places in Africa are along way from the coast, and, unsurprisingly, Africa is less developed than anywhere else in the world.

14.17

Refugee camp

Geography also affects development because it influences the social and political framework within which governments try to develop. Some countries receive foreign development assistance because of their political or strategic importance to the major powers, while others cannot focus their resources on economic development because their physical location leaves them exposed to their neighbor's war or refugees.

14.45

text "History"

1920s archive of Solomon Islands' colonial experience

The past influences the present and it clear that many of the less developed countries of the world were once colonies. So some scholars have argued that the history of colonialism scarred countries or entire regions in ways that continue to prevent healthy economic development. They point to the negative consequences of colonial practices, such as the extraction of precious resources, including labor as slaves, the reorganization of agricultural production, the forced creation of new countries and the imposition of political structures incongruous with the local culture.

15.23

In some cases this institutional underdevelopment can be traced back to a colonial experience; in many others, however, it is better explained by more recent political or economic dislocations, such as leaders pursing war or self-enrichment at the expense of the general population's welfare.

15.50

Angola market

Angola is a key example of a nation still trying to overcome its colonial past. It was in the grip of both an anti-colonial war and civil war when its colonial master, Portugal, hastily granted it independence in 1975. Rather than supervising elections, Portugal abandoned the country without formally handing over control to any succeeding government.

16.16

Unprepared for nationhood and beset by violent factions and extreme poverty, Angola became a battleground for international Cold War rivalries. The country rarely experienced peace until the death of UNITA rebel leader Jonas Savimbi in 2002. But as in many former colonies, it is open to debate what is to blame for Angolan poverty today - is it history, or bad government since independence which has squandered its vast mineral wealth?

16.50

SYNC Natalia Rasasanya

Life was better before, in colonial times, we didn't have much money, but everyone had their own little business. Whoever had work could rely on the fact that the whites would pay them for it. Everyone who worked got something for it even if it wasn't much.

17.18

Some scholars conclude that the capitalist system today creates a neo-colonial system of Northern "core" and Southern "periphery" countries. They hold that because economic benefits accrue to the most productive, the states predominantly in the Northern hemisphere tend to get richer, while those primarily in the Southern hemisphere do not.

17.42

SYNC Dr. Colin Lewis, London School of Economics

Others of course would argue that foreign capital investment is itself part of a new colonial legacy of imperialism of British investment in the 19th century, the imperialism of corporate US investment in the 20th century, which crowds out opportunities for local investors.

18.05

While this broad argument makes some sense, there are far too many exceptions: many high growth countries were once colonies, including Korea, Taiwan and India - as were many high income countries.

18.19

SYNC Dr. Timothy Leunig, London School of Economics

Some countries that were once colonies have done remarkably well, the United States is an obvious example, Canada and Australia are other examples. It isn't the case that having been a colony necessarily means you cannot make the transition.

18.34

Solomon Islands archive

Conversely, not every poor country was once a colony. As a result, while colonialism unquestionably influenced the development path of many countries, like geography, it offers only a partial explanation of the persistence of underdevelopment. What scholars recognize from history is that in many less developed countries both state and market institutions, such as a fair judiciary, well-recognized property rights, and legal credit institutions, are not yet functioning well.

19.08

SYNC Dr. Ali Shamsavari, Kingston University

But then you look at a country like China with the fastest growing economy in the world, that doesn't have proper democracy, not yet.

19.17

Haiti instability

For some violence, political instability or shear corruption has prevented the establishment of the legal and institutional infrastructure that must be in place before real economic progress can occur. This has been the case with Haiti, one of the least-developed countries in the Western Hemisphere and one of the poorest in the world. Haiti's economic stagnation is largely the result of political instability - it continues to suffer the consequences of a coup in 1991 and domestic and foreign investment has been slow to return.

19.52

Ethiopia feeding centre

text "population growth"

TEXT: Cameroon growth rate: 2.04%

Sweden growth rate: 0.16%

While there are concerns about the earth's ability to provide for an ever- growing population, the more pressing issue regarding economic development is the distribution of population increases. Poor countries tend to have much higher population growth rates than rich countries. So one of the solutions to high population growth rates is increased development in poorer countries. Today, in much of the advanced industrialized world, populations are growing only through immigration; their birth rates are at or below replacement rates.  As a result, approximately 90% of population growth is taking place in poorer developing countries.

20.34

SYNC Nelia Sancho, Women's Rights Activist

In the North they have zero population growth, because their living standards have been raised, women have been educated, and women know when to choose and are given more options in terms of education and health and other services.

20.53

child workers

While the African continent has the highest growth rate, Asia has seen the greatest absolute increase in recent decades. How does this impact development? First, it means that an increasing proportion of the world's children are being born into environments in which their families and their governments have fewer resources with which to provide for their needs. In economic terms, a large proportion of young individuals coupled with the low quality of the education system is detrimental to the stock of human capital and child labor is likely to become commonplace.

21.27

SYNC Dr. Colin Lewis, London School of Economics

The negative Malthusian view would see rapid population growth as pressing upon resources, leading to environmental degradation, generating political instability and in the main being an inhibitor to growth.

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Income inequality within countries

21.56

Guatemala rubbish dump

One of the most striking differences between developed and less developed countries is domestic inequality. Poor countries tend to exhibit greater income inequality than rich countries. For instance, in Guatemala, the richest fifth of the population receives over 60% of the country's income while the poorest fifth receives less than 4%. Evelyn grew up by Guatemala's main rubbish dump.

22.35

SYNC Evelyn

I had to work - feeding pigs, looking for things. Sometimes we would eat in the dump - food the trucks would bring from restaurants. We played there too. We would find our dolls in the dump.

22.59

India wahing in rivers

What causes income inequality? The Nobel Prize winning economist Simon Kuznets was the first to analyze the relationship between income and inequality, finding that poor countries display greater income inequality than richer countries. But he also found evidence that extremely poor countries actually had a more equal income distribution than less poor countries.

23.23

GRAPHIC Kuznets curve

So he concluded that inequality increases at the early stages of development but falls at later stages of development. This curve, known as the Kuznets curve, showing an "upside-down" U-shaped relationship between inequality and income is probably due to the fact that an economy does not grow equally across sectors.

23.47

Haiti agriculture workers

The manufacturing sector might grow faster than the agricultural sector. The benefits of this growth primarily go to the workers in the manufacturing sector and hence income inequality in the country increases. But since manufacturing workers consume all goods in the economy the demand for agricultural products eventually rises and farmers' income increases. As a result income inequality falls in the later stages of development.

24.17

SYNC Dr. Colin Lewis, London School of Economics

Some of the most unequal societies in the world are to be found in Latin America, in this sense Brazil is the most unequal country in the world. To be poor in Brazil is too be as poor as the poor in India, to be rich in Brazil is to be richer than the rich in north America.

24.47

Aerials Sao Paulo slums

Brazil's favelas or slums are rife with drug and gang related violence, whilst the wealthy are in retreat, cocooned in fortress-like suburbs. New York has ten helipads. Sao Paulo has two hundred and forty. Skyscrapers provide aerial parking, so the wealthy can hop between buildings and avoid the favelas altogether.

25.15

SYNC Hamilton Alves Rocha, pilot

The government should secure people's lives but because it doesn't, we have to have private security.

25.26

Inequality also can influence future economic development if it reduces the average savings rate and if it leads to demands for more equitable distribution. If a country displays a great deal of wealth and income inequality, policymakers may be pressured to redistribute wealth and income through taxation or other measures, or through a one off redistribution of wealth, such as a land reform. The problem with taxation is that it distorts the incentives to save and thus has a detrimental effect on growth; the problem with land reform is that it requires great political determination.

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Production structure and the "dual economy"

26.15

Urban/rural pie charts

Another striking difference between poor and rich countries is the size of the rural sector. In poor countries most of the population lives in the countryside while in rich countries most people live in the cities. According to the World Bank, more than 30% of the output in low-income countries comes from agriculture (that figure is just 1-7% in rich countries) while 72% of the labor force in poor countries lives in a rural setting (just 20% in rich countries).

26.48

Ethipoia farmer

The physical and human capital stock (machinery, fertilizers and crop management) in the agriculture sector in developing countries is typically very low and results in low productivity. And because of large variability in conditions and in world prices of staple food, agriculture is inherently risky. Since farmers in poor countries do not have other income sources and are living close to the subsistence level, income shocks can be devastating.

27.21

Dependent on a few vulnerable crops and reliant on imported oil, Ethiopia lacks sufficient foreign exchange earnings. Agriculture makes up more than 80% of its exports, and employs 85% of the population. The country has to diversify its economy, if it is to ever escape reliance on foreign aid.

27.42

SYNC Dr Berehanu Nega, Economist

We have to have a development strategy that's forward looking. It should not be based on what we have now. Just because the majority of the population is in agriculture it doesn't mean that the majority of the population has to continue to be in agriculture.

27.57

SYNC Meles Zenawi, Ethiopian Prime Minister

Now what would happen if we drive, say, 4 million people off the land? Would they get employment in the urban areas? Could we create say 4 million jobs in 3 to 5 years? That's simply out of the question.

28.12

Urban/ rural gvs

As a country makes the transition from agriculture to an industrialized economy, the so-called "dual economy" phenomenon may arise. Since industrialization typically occurs in the urban areas, two economies emerge within the country. The rural economy remains at the old level of development while the urban economy exhibits the modernizations found in more developed countries. Higher wages and better labor conditions encourage workers to move into urban areas, away from impoverished conditions in the rural sector. This migration has to occur as a country industrializes.

28.50

SYNC Dr. Timothy Leunig, London School of Economics

No country is rich based on agriculture. But in the short run it can have terrible effects when people leave the farms and they move to the towns there may not be jobs to accommodate them.

29.01

South Korea streets/ factories

Many poor countries experience excessive labor flows into the cities causing high unemployment and urban poverty. Higher urban wages and greater job security are not only due to greater productivity in manufacturing, but also arise because of labor unions, and because employers are willing to pay higher wages in order to attract good quality workers. Because of these high wages, labor supply exceeds the demand for labor. So many workers flowing into the cities find themselves either unemployed or working in the service sector where wages are more flexible. Indeed, two of the most striking characteristics of large cities in developing countries are high unemployment and a large service sector featuring domestic help, shoe-shining, and street vendors.

29.51

SYNC Dr. Colin Lewis, London School of Economics

Rapid urbanization also results in the growth of the informal sector, meaning insecure jobs, or jobs where people are badly paid, jobs where people have few social rights.

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Credit markets

30.15

Grameen bank borrowers

text: "asymmetric information"

A final obvious difference between rich and poor countries is that less developed countries usually lack a well-functioning financial system and domestic credit market. The purpose of the financial system is to channel funds from savers to borrowers with productive investment opportunities. The problem facing credit markets in both rich and poor countries, is that of asymmetric information, where the borrower has more information about the use of the funds than the lender. Since the lender cannot distinguish between good and bad credit risk, they may not provide any funds at all.

30.52

SYNC Dr. Wilhelmus Spanjers, Kingston University

You would typically want to make sure you have either very good knowledge about what they are doing with your money - the money you lend them- or you want to make sure that if they mess up you've got some other way of getting your money back.

31.06

Water pump

Solutions include establishing property rights and implementing a legal system forcing borrowers to repay debts. But the legal systems of poor countries tend not to protect property rights or reinforce repayments of debts very well. So formal credit markets in less developed countries are often almost non-existent.

31.26

looms

Recently, there have been some successful attempts by non-profit organizations to provide credit to the very poor in developing countries, so called micro-credit institutions. Obviously, very poor borrowers can't provide collateral, so the bank lends very small amounts to groups of borrowers, on the condition that if anyone in the group defaults on the debt, none of the group can seek loans again. The most famous example of such a bank is the Grameen Bank in Bangladesh, which lends mostly to women and claims a 98% repayment rate. By 2004 it had 3.7 million borrowers.

32.10

Poribanu signs for loan

Poribanu is a widow. Her land and cows have all been sold in order to clothe and feed her three children. Today she writes her name in pen for the very first time, signing for a $100 loan which she wants to use to start a business buying and selling fabric.

32.31

SYNC Muhammad Yunus,  Founder Grameen Bank

Grameen is now described as the bank of the poor. And it hurts me to keep on hearing this for the last 20 years. My dream is to keep hearing a new kind of description - that Grameen is a bank of the former poor.

32.52

SYNC Poribanu

Up to now, I haven't approached the Grameen Bank for money - but now I want to try to improve myself because I've seen my neighbours build houses and buy land. So I'm trying to do the same.

Fade to black

33.10

TEXT: float factors on & off screen

As we have seen, a number of factors influence economic development. Under ideal circumstances, investments in physical capital, human capital and technology combine to produce growing incomes. Yet circumstances are not always ideal. Geography, history, underdeveloped state and market institutions, population growth, inequality, dual economies and inadequate credit markets contribute to the persistence of widespread poverty in the world. Government policies can significantly change a country's prospects for development, as successes in East Asia have shown.

33.53

SYNC Muhammad Yunus

We can create a poverty free world, where nobody will become a poor person.

34.07

But there is still much that we do not know about the forces that make countries fail or succeed. Although we are much more knowledgeable than fifty years ago, there is much work left to do.

ENDS