Understanding Development: An Economics Perspective
Theory, Evidence & Policy
A comprehensive journey through poverty, growth, and economic transformation in developing nations—with deep focus on South Asia and rigorous academic foundations built on Debraj Ray, Amartya Sen, and Nobel Prize-winning research.
Data & Models
Case Studies
South Asia Focus
Interactive Lexicon
Why Study Development Economics?
Nearly 700 million people live in extreme poverty. Understanding why some nations prosper while others stagnate is one of the most important questions in social science—and the foundation for effective development practice.
Development economics differs from standard economics in crucial ways: markets often fail, information is asymmetric, institutions are weak, and history matters profoundly. The same policy that works in Sweden may backfire in Bangladesh.
Evidence-Based Practice
Move beyond intuition to rigorous evidence. Learn to evaluate what works, what doesn't, and why—using the same methods Nobel laureates use.
Theoretical Foundations
Understand the models that explain poverty traps, coordination failures, and structural transformation—essential for designing effective interventions.
South Asian Context
Deep focus on India, Bangladesh, Pakistan, and the region—where half the world's poor live and where your work will have maximum impact.
"Development is about transforming the lives of people, not just transforming economies." — Joseph Stiglitz, Nobel Laureate in Economics
Module 1: What is Development?
Development is more than just economic growth. It encompasses the expansion of human capabilities, structural transformation of economies, and the creation of institutions that enable human flourishing.
The Evolution of Development Thinking
How we define "development" has changed dramatically over the past 70 years, reflecting shifts in economic theory, political priorities, and our understanding of human wellbeing.
Amartya Sen's Capabilities Approach
Development is freedom. Sen argues that development should be measured by the expansion of human capabilities—what people are able to do and be—not just their income. A person with $1,000 who faces discrimination, lacks education, or cannot participate in public life is less "developed" than their income suggests.
This framework explains why GDP alone is misleading. Kerala, India has GDP per capita lower than many Indian states but life expectancy comparable to the United States—because it invested in health and education. Saudi Arabia has high GDP but women face severe capability restrictions.
Multiple Equilibria and Poverty Traps
A central insight of development economics is that the same fundamentals can produce very different outcomes. Unlike standard economics where markets reach a unique equilibrium, development economics recognizes multiple equilibria—some good, some bad.
Nutrition-Based Poverty Trap
Malnourished workers are less productive → earn less → eat less → remain malnourished. Breaking this trap requires a "big push" above the nutritional threshold.
Credit Trap
Poor lack collateral → cannot borrow → cannot invest → remain poor. Microfinance attempts to break this cycle but faces challenges at scale.
Education Trap
Parents who didn't attend school undervalue education → don't send children → next generation lacks skills → poverty persists across generations.
Policy implication: Small, marginal interventions may fail because they don't push economies past the threshold into a better equilibrium. This is the logic behind "Big Push" theories of development—simultaneous, coordinated investments across multiple sectors.
Why Are Some Countries Rich and Others Poor?
This is the central question of development economics. Several competing explanations exist:
- Claim: Inclusive political and economic institutions drive prosperity
- Evidence: North vs. South Korea; colonial origins (Acemoglu, Johnson, Robinson 2001)
- Challenge: How do bad institutions persist? Where do good institutions come from?
- Claim: Climate, disease burden, and location shape development
- Evidence: Tropics historically poorer; landlocked countries face trade barriers
- Challenge: Singapore and Hong Kong succeeded despite geography
- Claim: Values, trust, and social capital affect economic outcomes
- Evidence: "Protestant ethic"; high-trust societies grow faster
- Challenge: Often unfalsifiable; risks cultural determinism
- Claim: Colonial extraction, slavery, and initial conditions persist
- Evidence: Extractive colonies (Congo) vs. settler colonies (Australia) show lasting effects
- Challenge: Some colonies (Botswana, Singapore) overcame history
Essential Reading
Check Your Understanding
Test your comprehension of the key concepts from this module.
Consider two countries with similar GDP per capita but vastly different outcomes in education, health, and political freedom. Using Sen's capabilities framework, explain why GDP alone is insufficient to capture development.
Module 2: Measuring Development
"What gets measured gets managed." Development indicators shape policy priorities, aid allocation, and public discourse. But no single number captures the complexity of human wellbeing.
Beyond GDP: The Human Development Index
The Human Development Index (HDI), created by Pakistani economist Mahbub ul Haq and Amartya Sen in 1990, combines three dimensions of human wellbeing:
Health
Measured by life expectancy at birth. Captures overall health environment, nutrition, and access to healthcare. Minimum: 20 years. Maximum: 85 years.
Education
Measured by mean years of schooling (adults 25+) and expected years of schooling (children). Captures both stock and flow of human capital.
Standard of Living
Measured by GNI per capita (PPP). Uses purchasing power parity to compare real living standards across countries. Log transformation reduces weight of extreme values.
South Asia HDI Rankings (2023-24)
| Country | HDI Score | Global Rank | Life Expectancy | Mean Schooling | GNI per capita |
|---|---|---|---|---|---|
| Sri Lanka | 0.782 | 78 | 76.4 years | 10.8 years | $12,578 |
| Maldives | 0.762 | 87 | 79.9 years | 7.0 years | $17,417 |
| Bangladesh | 0.670 | 129 | 72.4 years | 7.4 years | $6,301 |
| India | 0.644 | 134 | 67.7 years | 6.6 years | $6,951 |
| Bhutan | 0.654 | 130 | 71.8 years | 5.2 years | $10,421 |
| Nepal | 0.601 | 146 | 70.8 years | 5.1 years | $4,060 |
| Pakistan | 0.540 | 164 | 66.1 years | 4.5 years | $5,005 |
| Afghanistan | 0.462 | 182 | 62.0 years | 3.8 years | $1,824 |
The Bangladesh Paradox: Bangladesh now outranks India on HDI despite lower per capita income. This reflects Bangladesh's superior performance on health (higher life expectancy, lower child mortality) and education (higher enrollment, especially for girls). The lesson: development isn't just about GDP.
The Multidimensional Poverty Index (MPI)
The MPI, developed by OPHI at Oxford, measures acute poverty through 10 indicators across three dimensions. A person is "MPI poor" if deprived in at least one-third of weighted indicators.
Health (1/3)
- Nutrition: Any household member undernourished (1/6)
- Child mortality: Any child died in the family (1/6)
Education (1/3)
- Years of schooling: No one has completed 6 years (1/6)
- School attendance: Any child not attending school (1/6)
Living Standards (1/3)
- Cooking fuel: Solid fuel (wood, dung, coal) (1/18)
- Sanitation: No improved toilet (1/18)
- Drinking water: No safe water within 30 min (1/18)
- Electricity: No electricity (1/18)
- Housing: Inadequate floor/roof/walls (1/18)
- Assets: Owns fewer than 2 of: radio, TV, phone, bike, motorbike; and no car (1/18)
India's MPI Progress (2005-2021)
International Poverty Lines
The World Bank defines extreme poverty using international purchasing power parity (PPP) thresholds:
| Poverty Line | 2017 PPP | Applicable To | Global Poor (2019) |
|---|---|---|---|
| Extreme Poverty | $2.15/day | Low-income countries | 689 million (8.5%) |
| Lower-Middle | $3.65/day | Lower-middle income | 2.0 billion (25%) |
| Upper-Middle | $6.85/day | Upper-middle income | 3.5 billion (44%) |
Critique of $2.15 line: Many economists argue this threshold is too low to capture meaningful deprivation. At $2.15/day, you cannot afford adequate nutrition, let alone healthcare or education. The "societal poverty line" of ~$25/day better captures who is poor relative to their society.
Data Sources Every Development Practitioner Should Know
Essential Reading
Related Resources
Check Your Understanding
Test your comprehension of the key concepts from this module.
If you were advising a government on what indicators to track beyond GDP, what five measures would you prioritize? Justify each choice.
Module 3: Poverty & Inequality
Poverty is not just about money—it's about powerlessness, vulnerability, and exclusion. And inequality matters not just for fairness but for growth, health, and social cohesion.
Understanding Inequality: The Gini Coefficient
The Gini coefficient measures income or consumption inequality on a scale from 0 (perfect equality) to 1 (one person has everything). Most countries fall between 0.25 and 0.65.
Gini Coefficients: South Asia in Global Context
Consumption vs. Income Gini: India's Gini appears moderate because official surveys measure consumption, not income. Consumption inequality understates true inequality because the rich save more. Wealth inequality in India is among the highest in the world.
India's Extreme Wealth Concentration
According to the World Inequality Lab and Oxfam India (2024), India has among the world's most extreme wealth concentration:
India's billionaire wealth grew by $150 billion in 2023—enough to fund all government health spending for 10 years. Meanwhile, wages for the bottom 50% have stagnated in real terms since 1991.
Intersecting Inequalities: Caste, Gender, Region
Poverty in South Asia is not random—it clusters along identifiable lines of social stratification.
MPI Poverty by Social Group (India, 2021)
| Social Group | MPI Headcount | Intensity | Population Share |
|---|---|---|---|
| Scheduled Tribes (ST) | 32.8% | 44.5% | 8.6% |
| Scheduled Castes (SC) | 21.0% | 42.1% | 16.6% |
| Other Backward Classes (OBC) | 15.6% | 41.0% | 41.1% |
| General/Other | 8.5% | 39.2% | 33.7% |
Interpretation: Scheduled Tribes are nearly 4x more likely to be MPI-poor than general category households. This gap has persisted for decades despite affirmative action policies—suggesting structural barriers beyond formal discrimination.
Gender Dimensions of Poverty
Female Labor Force Participation
India: 24% (one of world's lowest)
Bangladesh: 36%
Nepal: 26%
World average: 47%
Gender Pay Gap
Women earn 17% less than men for equivalent work (India)
Gap wider in informal sector
Motherhood penalty: 10-15% additional
Education Gap
Female literacy: 65% (India)
Male literacy: 82%
Gap closing in younger cohorts but persists in poor states
Asset Ownership
Only 13% of women own land individually (India)
Women less likely to have bank accounts, phones, IDs
Urban-Rural Divide
- MPI Headcount: 5.3%
- Per capita income: ₹2.1 lakh/year
- Piped water access: 78%
- Internet access: 67%
- MPI Headcount: 19.3%
- Per capita income: ₹0.9 lakh/year
- Piped water access: 44%
- Internet access: 38%
Why Does Inequality Matter?
Beyond moral concerns, inequality has measurable negative effects:
1. Growth: High inequality may reduce growth by limiting human capital investment among the poor (Galor & Zeira, 1993). IMF research finds high inequality reduces growth duration and stability.
2. Health: Even controlling for income, unequal societies have worse health outcomes. The "Spirit Level" hypothesis: inequality creates stress, erodes trust, and increases status competition.
3. Social mobility: Inequality today predicts inequality tomorrow. The "Great Gatsby Curve" shows high inequality correlates with low intergenerational mobility.
4. Political economy: Extreme wealth enables capture of political institutions, perpetuating extractive policies (Acemoglu & Robinson, 2012).
Policy Responses: Cash Transfers
Direct cash transfers have become a dominant poverty reduction strategy, enabled by digital payment infrastructure.
| Program | Country | Coverage | Transfer Amount | Cost (% GDP) |
|---|---|---|---|---|
| PM-KISAN | India | 110M farmers | ₹6,000/year ($72) | 0.4% |
| BISP | Pakistan | 9M households | PKR 8,750/quarter ($31) | 0.4% |
| Bolsa Família | Brazil | 21M families | R$600/month ($120) | 1.3% |
| Social Safety Nets | Bangladesh | 30M people | Various | 2.5% |
Evidence on cash transfers: Multiple RCTs show cash transfers reduce poverty, increase food consumption, improve child health, and often boost productive investment. Fears about "lazy poor" spending on alcohol/tobacco are largely unfounded (Evans & Popova, 2017).
Essential Reading
Check Your Understanding
Test your comprehension of the key concepts from this module.
Discuss the implications of using absolute vs. relative poverty measures for policy priorities in different contexts.
Module 4: Growth Models
Why do some countries grow rich while others stagnate? Growth theory provides frameworks for understanding the engines of prosperity—from capital accumulation to technological change to human capital.
The Harrod-Domar Model: Savings Drive Growth
The simplest growth model, dominant in 1950s development planning, makes growth a function of savings and capital efficiency:
The "financing gap" fallacy: This model justified massive foreign aid—if poor countries can't save enough, transfer capital from rich countries. But decades of aid often failed to generate growth because capital isn't the only binding constraint. Institutions, technology, and human capital matter too.
The Solow Model: Diminishing Returns & Convergence
Robert Solow's 1956 model revolutionized growth theory by introducing diminishing returns to capital. Adding more machines generates less additional output as capital accumulates.
Why Haven't Poor Countries Caught Up?
Solow predicts convergence, but global income gaps have widened since 1960. Why?
Low Savings
Many poor countries save 10-15% of GDP vs. 30-40% in East Asia. Lower savings → lower steady-state income.
High Population Growth
Capital must be spread across more workers. Pakistan's 2.4% population growth vs. Thailand's 0.3% means different outcomes.
Human Capital Gaps
The Solow model treats labor as homogeneous. In reality, education quality varies enormously—India's learning crisis means years of schooling ≠ skills.
Institutional Barriers
Corruption, weak property rights, and policy uncertainty reduce investment returns. Same capital generates less output in weak institutions.
The Lewis Model: Structural Transformation
W. Arthur Lewis (1954) described development as moving labor from low-productivity agriculture to high-productivity industry—the process of structural transformation.
Surplus labor in agriculture earns subsistence wages. Industry can hire these workers at slightly above subsistence, capturing the productivity gain as profit. These profits fund further investment, absorbing more labor—until surplus labor is exhausted ("Lewis turning point").
- Subsistence agriculture
- Surplus labor (MPL ≈ 0)
- Wages = average product
- Low productivity
- Manufacturing/Industry
- Capital-intensive production
- Wages = marginal product
- Profits reinvested
Has Lewis Transformation Happened?
| Country | Agri Share 1960 | Agri Share 2023 | Industry Share 2023 | Services Share 2023 |
|---|---|---|---|---|
| South Korea | 37% | 1.6% | 32% | 66% |
| China | 24% | 7.1% | 38% | 55% |
| India | 43% | 17% | 26% | 54% |
| Bangladesh | 53% | 11% | 35% | 53% |
| Pakistan | 46% | 22% | 19% | 58% |
India's anomaly: Agriculture's GDP share fell from 43% to 17%, but employment share only fell from 70% to 42%. This means agricultural labor productivity grew much slower than services—the opposite of Lewis's prediction. India may be experiencing "premature deindustrialization."
Endogenous Growth: Ideas Drive Prosperity
Paul Romer (2018 Nobel) showed that ideas—unlike physical capital—don't face diminishing returns. One person using an idea doesn't prevent others from using it. This makes sustained growth possible.
Non-Rivalry of Ideas
Once created, an idea can be used by unlimited people simultaneously. This creates increasing returns at the economy level.
Human Capital Externalities
Educated workers make others more productive. Lucas (1988) showed these spillovers justify public education subsidies.
R&D and Innovation
Countries that invest more in R&D grow faster. But developing countries can also "catch up" by adopting existing technologies.
The East Asian Miracle: What Worked?
The "Four Tigers" (South Korea, Taiwan, Singapore, Hong Kong) and later China achieved unprecedented growth through:
1. High savings rates (30-40%) — Much higher than Latin America or South Asia's 15-25%
2. Universal basic education — Near-universal literacy before industrialization began
3. Export orientation — Learning by exporting to competitive global markets, not protected domestic markets
4. Selective industrial policy — Governments picked sectors but imposed performance standards (export targets, sunset clauses)
5. Land reform — Breaking up large estates increased rural demand and reduced inequality
6. Macroeconomic stability — Low inflation, sustainable fiscal deficits, competitive exchange rates
India's Growth Trajectory
Essential Reading
Check Your Understanding
Test your comprehension of the key concepts from this module.
Choose a country with persistent low growth. Using growth theory concepts, diagnose why growth has been elusive.
Module 5: Agriculture & Rural Development
Agriculture employs 42% of India's workforce but produces only 17% of GDP—a productivity gap that traps hundreds of millions in poverty. Understanding rural markets, land tenure, and credit constraints is essential for effective development work.
The Rural-Urban Productivity Gap
Productivity gap: Indian agricultural labor productivity is 1/5th China's and 1/25th the USA's. Moving workers from low-productivity agriculture to higher-productivity sectors could dramatically increase national income—if other sectors create jobs.
Rural Credit Markets: Why They Fail
Debraj Ray (Chapter 14) explains why formal credit markets often don't serve poor rural households:
Information Asymmetry
Banks cannot distinguish good borrowers from bad. Rural borrowers lack credit histories, formal documentation, or verifiable income.
No Collateral
Poor farmers lack assets to pledge. Without collateral, banks face unlimited downside if loans default.
Enforcement Difficulties
Weak legal systems make loan recovery costly. Farmers may default strategically knowing enforcement is unlikely.
Covariant Risk
All farmers in a region face the same weather. A drought causes mass defaults, making diversification impossible for local lenders.
Moneylender dominance: These market failures create space for informal moneylenders who use personal knowledge and social pressure to enforce loans—but charge 36-120% annual interest. This high cost of credit traps farmers in debt cycles and limits productive investment.
Land Tenure & Tenancy
The debate over sharecropping illustrates how institutions shape outcomes:
Marshallian view: Sharecropping is inefficient because tenants keep only 50% of output, reducing effort incentives.
Stiglitz-Cheung view: Sharecropping is an optimal contract given market imperfections—it shares risk between landlord and tenant when insurance markets are missing and labor monitoring is difficult.
Empirical evidence: Studies in India find productivity differences between owned and sharecropped land are small once you control for land quality—supporting the efficiency view. But tenancy insecurity remains a problem.
The Harris-Todaro Migration Model
Why do people migrate to cities even when urban unemployment is high?
Policy paradox: Creating more urban jobs may increase urban unemployment by attracting even more rural migrants. The only sustainable solution is raising rural productivity and incomes.
Check Your Understanding
Test your comprehension of the key concepts from this module.
Compare promoting large-scale commercial agriculture versus supporting smallholders. What are the tradeoffs?
Module 6: Industrialization & Structural Change
Manufacturing has historically been the path to prosperity—but India's "premature deindustrialization" raises questions about whether the old playbook still works in the 21st century.
The Manufacturing Question
Why Manufacturing Matters
Unconditional Convergence
Manufacturing productivity converges across countries regardless of institutions or geography. Services and agriculture don't show this pattern.
Mass Employment
Factories can absorb large numbers of workers with modest education. Services often require skills poor workers lack.
Linkages
Manufacturing creates demand for inputs (backward linkages) and supplies intermediate goods to other sectors (forward linkages).
Export Potential
Manufactured goods are tradable globally. Services face more barriers (language, regulatory, presence requirements).
The Informal Economy
90% of India's 500 million workers are informal—no written contracts, no social security, no labor protections. They contribute ~50% of GDP but receive 0% formal benefits. Informality is not a temporary stage but a persistent feature.
| Characteristic | Formal Sector | Informal Sector |
|---|---|---|
| Workers (India) | 50 million (10%) | 450 million (90%) |
| Average wage | ₹25,000/month | ₹8,000/month |
| Social security | EPF, ESIC, gratuity | None |
| Job security | Legal protections | Day-to-day |
| Productivity growth | Positive | Stagnant |
Services-Led Growth: India's Unique Path
India skipped manufacturing and jumped to services—particularly IT and business process outsourcing. Is this sustainable?
- IT/BPO exports: $250 billion
- Direct employment: 5 million
- High wages, formal jobs
- Global competitiveness
- Only 1% of workforce
- Requires elite education
- Can't absorb 10M/year
- AI automation threat
Check Your Understanding
Test your comprehension of the key concepts from this module.
Can African countries replicate East Asian manufacturing-led growth, or has automation changed the game?
Module 7: Education & Human Capital
India achieved near-universal enrollment but faces a devastating learning crisis. The challenge has shifted from getting children into school to ensuring they actually learn.
The Learning Crisis
Only 25% of Grade 3 students can read a Grade 1 text fluently. Only 26% of Grade 5 students can do basic division. Years of schooling ≠ years of learning. India's "learning-adjusted years of schooling" is 5.8 years—far below the 10.2 years students actually attend.
Why Returns to Education Vary
Standard economics predicts education increases wages. But returns depend on quality, labor market conditions, and signaling vs. human capital effects:
Signaling Theory
Education may signal innate ability rather than build skills. If employers can't observe productivity directly, degrees serve as sorting mechanisms.
Human Capital Theory
Education genuinely increases productivity through cognitive skills, knowledge, and discipline. Returns reflect real skill gains.
Credential Inflation
As education expands, jobs that once required high school now demand degrees. Individual returns persist but social returns may be lower.
Evidence from RCTs
High impact, cost-effective:
- Teaching at the right level (Pratham's TaRL): 0.7 SD learning gains
- Deworming: Increases school attendance 25%, long-term earnings
- Information on returns: Telling students/parents about wage returns increases enrollment
Moderate impact:
- Reducing class size: Positive but expensive
- Teacher incentives: Works if well-designed
- Computer-assisted learning: Mixed results
Limited impact:
- Just providing textbooks without pedagogical change
- Building schools without addressing quality
- Flip charts, libraries alone
Check Your Understanding
Test your comprehension of the key concepts from this module.
Discuss the "learning crisis" - why do many countries achieve enrollment but not learning outcomes?
Module 8: Health & Nutrition
Health is both a cause and consequence of poverty. Malnourished children become less productive adults; health shocks push families into debt; and the poor face systematic barriers to quality healthcare.
India's Health Paradox
The stunting crisis: 35% of Indian children under 5 are stunted—short for their age due to chronic malnutrition. Stunting causes irreversible cognitive damage, reducing lifetime earnings by 10-20%. India accounts for one-third of the world's stunted children.
Nutrition-Based Poverty Traps
Debraj Ray (Chapter 13) shows how nutrition creates poverty traps through efficiency wages:
Why do employers pay above market-clearing wages?
- Nutrition model: Higher wages → better nutrition → higher productivity
- Shirking model: Higher wages → cost of job loss → workers work harder
- Turnover model: Higher wages → less quitting → lower training costs
- Gift exchange: Higher wages → worker loyalty → extra effort
All these mechanisms create equilibrium unemployment—labor markets don't clear.
Healthcare Market Failures
Information Asymmetry
Patients cannot judge doctor quality. Das et al. (2016) find most Indian doctors fail basic competency tests but patients cannot distinguish good from bad.
Supplier-Induced Demand
Doctors prescribe unnecessary treatments. India has among the world's highest C-section rates in private hospitals—financial incentives, not medical need.
Absenteeism
Government health workers absent 40% of the time in some areas. Public system failures push poor to expensive private care.
Catastrophic Expenditure
55 million Indians pushed into poverty annually by health costs. Out-of-pocket spending is 55% of health expenditure—among world's highest.
Essential Reading
Check Your Understanding
Test your comprehension of the key concepts from this module.
Should limited resources go to primary healthcare (preventive) or hospitals (curative)? Make the evidence-based case.
Module 9: Credit & Financial Inclusion
Access to credit is essential for smoothing consumption, investing in productive assets, and managing risk. Yet formal financial systems systematically exclude the poor—creating space for both exploitation and innovation.
The Microfinance Revolution
Muhammad Yunus's Grameen Bank pioneered group lending to overcome information and enforcement problems. The model spread globally, but impact evaluations have tempered initial enthusiasm.
Joint liability: Groups of 5-20 borrowers guarantee each other's loans. If one defaults, others must pay—creating peer pressure for repayment.
Social collateral: Reputation in the community substitutes for physical collateral. Defaulters face social sanctions.
Sequential lending: Loans start small and grow with repayment history. This screens borrowers over time.
Weekly meetings: Public repayment in group meetings increases accountability and provides monitoring.
What RCTs Show About Microfinance
What It Does
Increases business investment, shifts from wage labor to self-employment, provides consumption smoothing, increases female control over household resources.
What It Doesn't Do
Dramatic poverty reduction, large income increases, women's "empowerment" (in measured outcomes), transformation of borrowers into entrepreneurs.
Risks
Over-indebtedness (multiple borrowing), high interest rates (20-30%), mission drift as MFIs commercialize, Andhra Pradesh crisis (2010).
India's Financial Inclusion Revolution
JAM Trinity = Jan Dhan + Aadhaar + Mobile. This digital infrastructure enables direct benefit transfers, bypassing intermediaries. Government claims $33 billion in annual savings from reduced leakage. 318 schemes now use direct transfers to 1.4 billion Aadhaar-linked accounts.
Check Your Understanding
Test your comprehension of the key concepts from this module.
How should policymakers balance promoting financial inclusion while protecting vulnerable borrowers from over-indebtedness?
Module 10: Trade & Globalization
Trade has been the engine of East Asian transformation—but its benefits are uneven. Understanding who gains and loses from globalization is essential for designing policies that spread prosperity.
India's Trade Liberalization
Tariff reversal: After decades of liberalization, India has raised tariffs since 2018 under "Atmanirbhar Bharat" (self-reliant India). This marks a shift toward protectionism, though economists debate whether this will boost or hinder manufacturing.
Bangladesh's Garment Success
Bangladesh demonstrates how trade can transform a poor country:
1. Labor flexibility: Easier to hire and fire workers; less rigid labor laws than India
2. Duty-free access: LDC status gives preferential market access to EU and US
3. Focused specialization: Deep expertise in garments rather than diversification
4. Women's employment: Social acceptance of women in factories (partly due to NGO influence)
5. Lower wages: Minimum wage ~$95/month vs. India's ~$180 in some states
Global Value Chains
Modern trade is about tasks, not finished products. Countries specialize in stages of production—but South Asia remains weakly integrated into global value chains compared to East Asia.
| Country | GVC Participation (%) | Forward Linkages | Backward Linkages |
|---|---|---|---|
| Vietnam | 57% | 15% | 42% |
| Thailand | 47% | 18% | 29% |
| Bangladesh | 33% | 7% | 26% |
| India | 35% | 17% | 18% |
| Pakistan | 28% | 11% | 17% |
Check Your Understanding
Test your comprehension of the key concepts from this module.
Should developing countries pursue free trade or strategic protection? Draw on historical evidence.
Module 11: Institutions & Governance
"Institutions are the rules of the game in a society" (Douglass North). The 2024 Nobel Prize to Acemoglu, Johnson, and Robinson confirmed what development economists have long suspected: institutions explain most of the variation in prosperity across countries.
The Colonial Origins Hypothesis
The argument:
- European colonizers faced different mortality rates in different places
- Where mortality was high (tropics), they created extractive institutions—designed to transfer resources to colonizers
- Where mortality was low (temperate zones), they settled and created inclusive institutions—property rights, rule of law
- These institutional differences persisted after independence
- Extractive institutions → poor countries today; Inclusive institutions → rich countries
Key innovation: Using settler mortality as an "instrument" for institutions, showing causation runs from institutions to income, not reverse.
Acemoglu, Johnson, and Robinson won the 2024 Nobel in Economics "for studies of how institutions are formed and affect prosperity." Their work showing that inclusive political and economic institutions cause development has reshaped the field.
Inclusive vs. Extractive Institutions
- Secure property rights for broad population
- Rule of law applies equally
- Open markets with fair competition
- Public services accessible to all
- Political power is distributed
- Examples: South Korea, Botswana post-independence
- Property rights for elites only
- Rule of law protects powerful
- Entry barriers protect incumbents
- Public goods captured by elites
- Political power concentrated
- Examples: Colonial Latin America, present-day DRC
Governance in South Asia
| Country | Control of Corruption | Government Effectiveness | Rule of Law | Regulatory Quality |
|---|---|---|---|---|
| Sri Lanka | 38 | 48 | 47 | 42 |
| India | 44 | 55 | 50 | 46 |
| Nepal | 30 | 22 | 32 | 27 |
| Bangladesh | 19 | 26 | 26 | 22 |
| Pakistan | 24 | 27 | 24 | 29 |
| Afghanistan | 4 | 6 | 2 | 3 |
Percentile rank (0-100). Source: World Bank Worldwide Governance Indicators 2022
India's institutional paradox: India has strong formal institutions (independent judiciary, free press, competitive elections) but weak implementation. "State capacity"—the ability to actually deliver services and enforce rules—remains limited, especially at local levels.
Check Your Understanding
Test your comprehension of the key concepts from this module.
If institutions are key to development, how do countries actually change them? Why do extractive institutions persist?
Module 12: Policy Evaluation & the RCT Revolution
The 2019 Nobel Prize to Banerjee, Duflo, and Kremer recognized the "experimental approach to alleviating global poverty." Randomized controlled trials have transformed how we know what works in development.
Why RCTs Matter
The question: Did the program cause the outcome, or would it have happened anyway?
The problem: We can't observe the same person both with and without treatment (the "counterfactual").
Selection bias: People who participate in programs differ from those who don't. Comparing participants to non-participants conflates program effect with selection.
The solution: Random assignment creates statistically identical groups. The control group IS the counterfactual for the treatment group.
Landmark RCT Findings
Deworming (Kenya)
Kremer & Miguel (2004): Deworming pills cost $0.50/child/year, increase school attendance 25%, raise adult earnings 20% a decade later. Among most cost-effective interventions ever measured.
Bednets (Kenya)
Cohen & Dupas (2010): Free bednets used as much as purchased ones, contradicting claims that free distribution causes waste. Changed WHO policy to recommend free distribution.
Remedial Education (India)
Banerjee et al. (2007): Pratham's "Teaching at the Right Level" program raised test scores by 0.28 SD at ~$5/child. Now scaled to millions across multiple countries.
Cash Transfers (Multiple)
GiveDirectly studies: Unconditional cash transfers increase consumption, assets, and psychological wellbeing. No increase in "temptation goods" (alcohol, tobacco).
J-PAL and the Evidence Revolution
Critiques of RCTs
RCTs are powerful but not perfect:
- External validity: Results from one context may not apply elsewhere
- General equilibrium effects: Scaling up changes the system being studied
- Ethical concerns: Withholding treatment from control groups
- Cost and time: Years and millions of dollars for one answer
- What questions get asked: Funders shape the research agenda
- The "small questions" critique: RCTs answer narrow questions, may miss big picture (Deaton critique)
Essential Reading
Deepen Your Learning
Check Your Understanding
Test your comprehension of the key concepts from this module.
What is the appropriate role of RCT evidence in development policy? What questions require other methods?
Module 13: Capstone Project
Apply the frameworks, evidence, and analytical skills from this course to produce a comprehensive development policy analysis of a country or intervention of your choice.
Project Overview
The capstone project demonstrates your ability to integrate multiple development economics concepts, engage critically with empirical evidence, and produce policy-relevant analysis.
Development Policy Analysis
Week 1: Country & Issue Selection
Select a developing country and specific development challenge. Justify why this issue matters.
Week 2: Diagnostic Analysis
Apply course frameworks to diagnose the issue. Use data (HDI, poverty measures, Gini) to characterize the problem.
Week 3: Evidence Review
Review empirical evidence on interventions. What do RCTs tell us? Be explicit about external validity concerns.
Week 4: Policy Recommendations
Develop specific, feasible recommendations. Address implementation challenges and political economy constraints.
Deliverables
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Policy Brief (3000-4000 words): Comprehensive analysis including context, diagnosis, evidence review, and recommendations.
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Data Visualization: At least 3 original visualizations presenting key data about your country/issue.
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Evidence Synthesis Table: Structured summary of 5-10 relevant empirical studies.
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Evaluation Design (500 words): How you would rigorously evaluate your proposed intervention.
Evaluation Criteria
Accurate application of development economics frameworks and appropriate use of data.
Quality of literature review and critical assessment of external validity.
Feasibility of recommendations and attention to implementation challenges.
Clarity, organization, and quality of visualizations.
South Asia Deep Dive
South Asia is home to 1.9 billion people—a quarter of humanity. It contains the world's largest democracy, the fastest-growing major economy, and some of the most dramatic development transformations in history. It also contains extreme inequality, persistent poverty, and unique challenges.
Regional Overview
| Country | Population (M) | GDP per capita (PPP) | HDI Rank | Growth (2023) |
|---|---|---|---|---|
| India | 1,428 | $9,183 | 134 | 7.2% |
| Pakistan | 240 | $6,470 | 164 | -0.2% |
| Bangladesh | 173 | $8,137 | 129 | 5.8% |
| Nepal | 30 | $4,883 | 146 | 1.9% |
| Sri Lanka | 22 | $14,553 | 78 | -2.3% |
| Bhutan | 0.8 | $13,162 | 125 | 4.1% |
| Maldives | 0.5 | $22,270 | 87 | 4.4% |
| Afghanistan | 42 | $2,138 | 182 | 3.0% |
Sources: World Bank WDI 2023, UNDP HDR 2023-24
India's Development Puzzle
India presents a paradox: world's fastest-growing major economy, yet 230 million in multidimensional poverty. World-class IT exports, yet 35% of children stunted. Why?
Missing Manufacturing
India jumped from agriculture to services, bypassing labor-intensive manufacturing. Manufacturing employs only 11% vs. 28% in China. This limits job creation for the 10 million entering the workforce annually.
Women Left Behind
Female labor force participation is 24%—among world's lowest. It has declined as incomes rose. Social norms, safety concerns, and lack of appropriate jobs keep women home.
Health System Failures
Public health spending is 1.3% of GDP. 55 million pushed into poverty by health costs annually. Private sector dominates but quality is poor and prices high.
Education Quality Crisis
Near-universal enrollment masks learning crisis. Half of Grade 5 students can't read Grade 2 text. Skills mismatch leaves millions unemployable despite degrees.
The Bangladesh Surprise
Bangladesh outperforms India on most social indicators despite lower income. Life expectancy: 72 vs. 67. Female LFPR: 36% vs. 24%. Stunting: 28% vs. 35%. How?
- NGO penetration: BRAC, Grameen, ASA reach millions with health, education, microfinance
- Women in manufacturing: 4 million in garment factories, economic independence
- Family planning success: Fertility fell from 7 to 2 in three decades
- Remittances: $22 billion/year from workers abroad
Sri Lanka's Collapse (2022)
Sri Lanka was South Asia's development success story—until it wasn't. The 2022 crisis offers lessons:
- Debt trap: External debt reached $51 billion; unable to service
- Twin deficits: Persistent fiscal and current account deficits
- Policy errors: Tax cuts, money printing, organic farming mandate
- FX crisis: Reserves fell to zero; fuel, medicine, food shortages
- Political collapse: President fled; IMF bailout required
Lesson: Good social indicators don't immunize against macro mismanagement.
Future Challenges
The next decades will reshape development economics. Climate change threatens hard-won gains. Technology disrupts pathways that worked for East Asia. Demographic transitions create both dividends and burdens. The 2030 SDG deadline looms.
Climate & Development
India contributed 3% of cumulative historical emissions but faces 25% of global climate damages. The poorest countries—who contributed least to the problem—face the worst impacts. Climate change is fundamentally a development and justice issue.
Technology Disruption
AI & Automation
Will AI eliminate the services jobs that employ millions? IT/BPO sector faces disruption. But AI may also enable leapfrogging—better healthcare diagnostics, personalized education, agricultural advice.
Reshoring & Nearshoring
Post-COVID, firms are shortening supply chains. Will "China+1" benefit South Asia, or will automation bring manufacturing back to rich countries?
Digital Public Infrastructure
India's UPI, Aadhaar, ONDC show how digital rails can transform service delivery. But also raise surveillance, exclusion, and privacy concerns.
Agricultural Technology
Precision agriculture, drought-resistant crops, mobile-based extension services could boost yields. Climate-smart agriculture is essential for food security.
The SDG Challenge
2030 is five years away. Most SDG targets will be missed.
- SDG 1 (No Poverty): 700 million still in extreme poverty globally
- SDG 2 (Zero Hunger): Hunger increased since 2019; stunting decline too slow
- SDG 4 (Quality Education): Learning crisis worsened by COVID; 6 years behind target
- SDG 5 (Gender Equality): At current pace, 300 years to achieve parity
- SDG 13 (Climate Action): Emissions still rising; 2.8°C trajectory
Source: UN SDG Report 2023—only 12% of targets on track globally.
Development Economics Lexicon
A comprehensive vocabulary of key terms in development economics, from foundational concepts to contemporary debates.
Poverty Trap
A self-reinforcing mechanism where poverty begets poverty across generations through lack of capital, health, and education.
Dutch Disease
The negative impact on an economy from a resource boom, typically causing currency appreciation and manufacturing decline.
Structural Transformation
The reallocation of economic activity from agriculture to manufacturing and services as economies develop.
Capabilities Approach
Amartya Sen's framework focusing on what people can do and be, rather than income or utility alone.
Reflection
Choose a term from the lexicon and find a real-world example from South Asia that illustrates the concept. How does context shape how the concept manifests?
Meet the Founders of ImpactMojo
This course is brought to you by two practitioners passionate about democratizing development education.
Varna
Founder & Lead of Learning Design
Development Economist with a PhD, specializing in social impact measurement, gender studies, and development research across South Asia.
Vandana
Co-Founder & Lead of Partnerships
Education and development professional with 15+ years of experience designing impactful learning programs across India. Top Contributor in Education (Jobs for Her, 2022).
Explore More on ImpactMojo
Development Economics Lexicon
Master the vocabulary of development economics with our comprehensive glossary of 63 essential terms across 8 thematic categories—from growth theory and poverty measurement to RCTs and institutional economics.
The lexicon covers foundational concepts you'll encounter throughout this course and in the broader literature. Each term includes a precise definition, real-world example, and key academic sources.
Resources & Further Learning
Development economics rewards deep engagement. Below are the essential readings, data sources, video lectures, and tools to continue your learning journey.
Core Textbooks
Development Economics
The foundational textbook. Rigorous yet accessible. Covers growth, poverty, inequality, credit, land, nutrition. Still unmatched 25 years later.
Course papers →Poor Economics
Nobel laureates explain what RCTs reveal about poverty. Accessible, surprising, essential. The evidence-based development primer.
Development as Freedom
The capabilities approach in full. Development is expanding human freedoms, not just growing GDP. Philosophy meets economics.
Why Nations Fail
Institutions explain everything. Extractive vs. inclusive institutions determine prosperity. From 2024 Nobel laureates.
Video Lectures
MRU Development Economics
256 short videos covering the entire field. Clear explanations with real-world examples. Perfect complement to readings.
Watch all videos →MIT OCW Development
Full MIT courses with lecture notes, problem sets, exams. PhD-level rigor, free access.
Access course →NotebookLM Study Companion
We've loaded core papers into NotebookLM. Ask questions, get summaries, explore connections.
Open NotebookLM → Data Sources
| Source | Coverage | Key Variables | Link |
|---|---|---|---|
| World Bank WDI | 200+ countries, 1960-present | GDP, poverty, health, education, trade | data.worldbank.org |
| UNDP Human Development | 190+ countries | HDI, MPI, gender indices | hdr.undp.org |
| Poverty & Inequality Platform | 160+ countries | Poverty rates, Gini, income shares | pip.worldbank.org |
| Penn World Table | 180+ countries, 1950-2019 | GDP PPP, capital, TFP, labor share | rug.nl/ggdc |
| DHS / NFHS | 90+ countries, micro-level | Health, fertility, nutrition, wealth | dhsprogram.com |
| ASER / Pratham | India (rural), annual | Learning outcomes, enrollment | asercentre.org |
| World Inequality Database | Global, historical | Income & wealth inequality | wid.world |
Key Organizations
J-PAL
Abdul Latif Jameel Poverty Action Lab. The hub for RCTs in development. Policy publications, evidence reviews, training.
povertyactionlab.org →World Bank Research
Development Research Group. Working papers, policy reports, flagship publications like World Development Report.
World Bank Research →UNDP
Human Development Reports, MPI methodology, SDG tracking. The capabilities approach in action.
undp.org →Our World in Data
Beautiful visualizations of development data. Long-term trends, cross-country comparisons, research syntheses.
ourworldindata.org → Landmark Papers
Institutions & Growth:
- Acemoglu, Johnson & Robinson (2001). "The Colonial Origins of Comparative Development"
- North (1990). Institutions, Institutional Change and Economic Performance
Poverty & RCTs:
- Banerjee et al. (2015). "Six Randomized Evaluations of Microcredit"
- Miguel & Kremer (2004). "Worms: Identifying Impacts on Education and Health"
Human Capital:
- Duflo (2001). "Schooling and Labor Market Consequences of School Construction in Indonesia"
- Jensen (2010). "The (Perceived) Returns to Education and the Demand for Schooling"
Agriculture & Labor:
- Harris & Todaro (1970). "Migration, Unemployment, and Development"
- Stiglitz (1974). "Incentives and Risk Sharing in Sharecropping"
Trade:
- Topalova (2010). "Factor Immobility and Regional Impacts of Trade Liberalization"
- Rodrik (2016). "Premature Deindustrialization"