Comparative Economic Development

Defining the Developing World

The most common way to define the developing world is by per capita income.
World Bank Scheme- ranks countries on GNI per capita.
These economies are then classified as:
1. Low- income countries (LICs): Countries with a gross national income per capita of
less than $976 in 2008.
2. The middle-income countries: Countries with a gross national income per capita
between $976 and $11,906 in 2008.lower middle-income countries(LMCs),upper-
middle-income countries(UMCs),high-income OECD countries, and other high-
income countries(often, LMCs and UMCs are informally grouped as the middle-
income countries).
3. Newly industrializing countries (NICs): Countries at a relatively advanced level of
economic development with a substantial and dynamic industrial sector and with
close links to the international trade, finance, and investment system.
4. Least developed countries: A United Nations designation of countries with low
income, low human capital, and high economic vulnerability.

Basic Indicators of Development: Real Income, Health, and

Education
In this section, we examine basic indicators of three facets of development: real
income per capita adjusted for purchasing power; health as measured by life
expectancy, undernourishment, and child mortality; and educational attainments as
measured by literacy and schooling.
1. Purchasing Power Parity(PPP):
In accordance with the World Bank's income-based country classification scheme:
 Gross National Income (GNI) per capita, the most common measure of the overall
level of economic activity, is often used as a summary index of the relative
economic well-being of people in different nations.
It is calculated as the total domestic and foreign value added claimed by a
country's residents without making deductions for depreciation (or wearing out) of
the domestic capital stock.

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 Gross Domestic Product (GDP) measures the total value for final use of output
produced by an economy, by both residents and nonresidents.
Thus GNI comprises GDP plus the difference between the income residents receive
from abroad for factor services (labor and capital) less payments made to
nonresidents who contribute to the domestic economy Where there is a large
nonresident population playing a major role in the domestic economy (such as
foreign corporations), these differences can be significant.

Per capita GNI comparisons between developed and less developed countries,
exaggerated by the use of official foreign-exchange rates to convert national
currency figures into U.S. dollars. This conversion does not measure the relative
domestic purchasing power of different currencies.
In an attempt to rectify this problem, researchers have tried to compare relative GNIs
and GDPs by using purchasing power parity (PPP) instead of exchange rates as
conversion factors.
Purchasing power parity (PPP) Calculation of GNI using a common set of international
prices for all goods and services, to provide more accurate comparisons of living
standards.
In a simple version, purchasing power parity is defined as the number of units of a
foreign country's currency required to purchase the identical quantity of goods and
services in the local developing country market as $1 would buy in the United States.
In practice, adjustments are made for differing relative prices across countries so that
living standards may be measured more accurately.
Summary:
PPP measures show the number of units of developing country currency required to
purchase a basket of goods and services in the developing country market that costs
one dollar in the U.S.
Prices for most services tend to be much cheaper in developing countries than in the
U.S

2. Indicators of Health and Education

Besides average incomes, it is necessary to evaluate a nation's average health and
educational attainments, which reflect core capabilities.
Some basic indicators of income, health:
 Life expectancy (is the average number of years newborn children would live if
subjected to the mortality risks prevailing for their cohort at the time of their birth).
 The rate of undernourishment (means consuming too little food to maintain normal
levels of activity; it is what is often called the problem of hunger)
 The under-5 mortality rate.
 The crude birth rate.

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 Education (male and female adult literacy). Literacy is the fraction of adult males
and females reported or estimated to have basic abilities to read and write;
functional literacy is generally lower than the reported numbers.

Holistic Measures of Living Levels and Capabilities

The Traditional Human Development Index
The most widely used measure of the comparative status of socioeconomic
development is presented by the United Nations Development Program (UNDP) in its
annual series of Human Development Reports. The centerpiece of these reports, which
were initiated in 1990, is the construction and refinement of its informative Human
Development Index (HDI).
Human Development Index (HDI): An index measuring national socioeconomic
development, based on combining measures of education, health, and adjusted real
income per capita.
HDI based on three goals or end products of development:
1. Longevity as measured by life expectancy at birth.
2. Knowledge as measured by a weighted average of adult literacy and gross school
enrollment ratio.
3. Standard of living as measured by real per capita gross domestic product adjusted
for the differing purchasing power parity of each country's currency to reflect cost
of living and for the assumption of diminishing marginal utility of income.
The HDI ranks countries into four groups:
1. Low human development (0.0 to 0.499).
2. Medium human development (0.50 to 0.799).
3. High human development (0.80 to 0.90).
4. Very high human development (0.90 to 1.0).
Three main indicators that make up the Human Development Index:
Life expectancy, educational attainment, GDP per capita measured in PPP terms.
In the final index, each of the three components receives equal, or one-third, weight.
Thus:

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Major advantage of the HDI:
 One major advantage of the HDI is that it does reveal that a country can do much
better than might be expected at a low level of income and that substantial income
gains can still accomplish relatively little in human development.
 the HDI reminds us that by development we clearly mean broad human
development, not just higher income. Many countries, such as some of the higher-
income oil producers, have been said to have experienced "growth without
development." Health and education are inputs into the national production
function in their role as components of human capital, meaning productive
investments embodied in persons, such as skills, values, and health resulting from
expenditures on education, on-the-job training programs, and medical care.
Improvements in health and education are also important development goals in
their own right.
There are other criticisms and possible drawbacks of the HDI:
 One is that gross enrollment in many cases overstates the amount of schooling
because in many countries a student who begins primary school is counted as
enrolled without considering whether the student drops out at some stage.
 Equal (one-third) weight is given to each of the three components, which clearly
has some value judgment behind it, but it is difficult to determine what this is.
The New Human Development Index
November 2010, the UNDP introduced its New Human Development Index (NHDI),
intended to address some of the criticisms of the HDI.
What is new in the New HDI?
 Calculating with a geometric mean:
o Probably most consequential: The index is now computed with a geometric
mean, instead of an arithmetic mean((adding up the component indexes and
dividing by three) in the HDI, the effect is to assume perfect substitutability
across income, health, and education)
o A geometric mean is also used to build up the overall education index from its
two components
o Traditional HDI added the three components and divided by 3
o New HDI takes the cube root of the product of the three component indexes
o The traditional HDI calculation assumed one component traded off against
another as perfect substitutes, a strong assumption
o The reformulation now allows for imperfect substitutability.
So in the NHDI, instead of adding up the health, education, and income indexes and
dividing by 3, the NHDI is calculated with the geometric mean:
𝑵𝑯𝑫𝑰 = 𝑯𝟏/𝟑 𝑬𝟏/𝟑 𝑰𝟏/𝟑
Where H stands for the health index, E stands for the education index, and I stands for
the income index.
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 Other key changes:
o Gross national income per capita replaces gross domestic product per capita
o Revised education components: now using the average actual educational
attainment of the whole population, and the expected attainment of today’s
children.
o The maximum values in each dimension have been increased to the observed
maximum rather than given a predefined cutoff
o The lower goalpost for income has been reduced due to new evidence on lower
possible income levels

Characteristics of the Developing World:

This section examines the ten major areas of "diversity within commonality" in the
developing world.
1. Lower levels of living and productivity
2. Lower levels of human capital (health, education, skills)
3. Higher Levels of Inequality and Absolute Poverty
Absolute Poverty World Poverty
4. Higher Population Growth Rates
Crude Birth rates.
5. Greater Social Fractionalization
6. Larger Rural Populations but Rapid Rural-to-Urban Migration
7. Lower Levels of Industrialization and Manufactured Exports
8. Adverse Geography
Resource endowments
9. Underdeveloped Financial and Other markets
Imperfect markets Incomplete information
10. Colonial Legacy and External Dependence
Institutions Private property
Personal taxation Taxes in cash rather than in kind

1. Lower levels of living and productivity

 At very low income levels, in fact, a vicious circle may set in, whereby low income
leads to low investment in education and health as well as plant and equipment
and infrastructure, which in turn leads to low productivity and economic
stagnation. This is known as a poverty trap.
 However, it is important to stress that there are ways to escape from low income.
 Indeed, some star performers among now high-income economies such as South
Korea and Taiwan were once among the poorest in the world.

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 One common misperception is that low incomes result from a country's being too
small to be self-sufficient or too large to overcome economic inertia. However,
there is no necessary correlation between country size in population or area and
economic development.

2. Lower levels of human capital (health, education, skills)

 Human capital—health, education, and skills is vital to economic growth and human
development. We have already noted the great disparities in human capital
around the world while discussing the Human Development Index. Compared with
developed countries, much of the developing world has lagged in its average
levels of nutrition, health (as measured, for example, by life expectancy or
undernourishment), and education (measured by literacy).
 Moreover, there are strong synergies (complementarities) between progress in
health and education, For example, under-5 mortality rates improve as mothers'
education levels rise.
 The well-performing developing countries are much closer to the developed world
in health and education standards than they are to the lowest-income countries.
Although health conditions in East Asia are relatively good, sub-Saharan Africa
continues to be plagued by problems of malnourishment, malaria, tuberculosis,
AIDS, and parasitic infections.

3. Higher Levels of Inequality and Absolute Poverty

 Globally, the poorest 20% of people receive just 1.5% of world income. The lowest
20% now roughly corresponds to the approximately 1.4 billion people living in
extreme poverty on less than $1.25 per day at purchasing power parity. Bringing
the incomes of those living on less than $1.25 per day up to this minimal poverty
line would require less than 2% of the incomes of the world's wealthiest 10%. Thus
the scale of global inequality is immense.
 But the enormous gap in per capita incomes between rich and poor nations is not
the only manifestation of the huge global economic disparities. but, it is also
necessary to look at the gap between rich and poor within individual developing
countries. Very high levels of inequality—extremes in the relative incomes of
higher- and lower-income citizens—are found in many middle-income countries.
 Extreme poverty is due in part to low humane capital but also to social and
political exclusion and other deprivations.
 Extreme poverty represents great humane misery.

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4. Higher Population Growth Rates
 In recent decades, most population growth has been centered in the developing
world. Compared with the developed countries, which often have birth rates near
or even below replacement (zero population growth) levels, the low-income
developing countries have very high birth rates.
 The proportion of people over the age of 65 is much greater in the developed
nations. Both older people and children are often referred to as an economic
dependency burden (The proportion of the total population aged 0 to 15 and 65+,
which is considered economically unproductive and therefore not counted in the
labor force) in the sense that they must be supported financially by the country's
labor force (usually defined as citizens between the ages of 15 and 64).
 We may conclude, therefore, that not only are developing countries characterized
by higher rates of population growth, but they must also contend with greater
dependency burdens than rich nations.
5. Greater Social Fractionalization
 Low-income countries often have ethnic, linguistic, and other forms of social
divisions, sometimes known as fractionalization. This is sometimes associated with
civil strife and even violent conflict, which can lead developing societies to divert
considerable energies to working for political accommodations if not national
consolidation. It is one of a variety of governance challenges many developing
nations face.
6. Larger Rural Populations but Rapid Rural-to-Urban Migration:
 One of the hallmarks of economic development is a shift from agriculture to
manufacturing and services. In developing countries, a much higher share of the
population lives in rural areas. Although modernizing in many regions, rural areas
are poorer and tend to suffer from missing markets, limited information, and social
stratification. A massive population shift is also under way as hundreds of millions
of people are moving from rural to urban areas, fueling rapid urbanization, with its
own attendant problems.
7. Lower Levels of Industrialization and Manufactured Exports:
 Along with lower industrialization, developing nations have tended to have a
higher dependence on primary exports. Most developing countries have diversified
away from agricultural and mineral exports to some degree. The middle-income
countries are rapidly catching up with the developed world in the share of
manufactured goods in their exports, even if these goods are typically less
advanced in their skill and technology content. However, the low-income countries,
particularly those in Africa, remain highly dependent on a relatively small number
of agricultural and mineral exports. Africa will need to continue its efforts to
diversify its exports
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8. Adverse Geography
 Many analysts argue that geography must play some role in problems of
agriculture, public health, and comparative underdevelopment more generally.
Landlocked economies, common in Africa, often have lower incomes than coastal
economies. As can be observed on the map on the inside cover, developing
countries are primarily tropical or subtropical, and this has meant that they suffer
more from tropical pests and parasites, endemic diseases such as malaria, water
resource constraints, and extremes of heat.

9. Underdeveloped Financial and Other markets

 Markets and incomplete information are far more prevalent in developing
countries, with the result that domestic markets, notably but not only financial
markets, have worked less efficiently .
 Some aspects of market underdevelopment are that they often lack:
o A legal system that enforces contracts and validates property rights.
o A stable and trustworthy currency.
o An infrastructure of roads and utilities that results in low transport and
communication costs so as to facilitate interregional trade.
o A well-developed and efficiently regulated system of banking and insurance,
with broad access and with formal credit markets that select projects and
allocate loanable funds on the basis of relative economic profitability and
enforce rules of repayment.
o Substantial market information for consumers and producers about prices,
quantities, and qualities of products and resources as well as the
creditworthiness of potential borrowers.
o Social norms that facilitate successful long-term business relationships.

10. Colonial Legacy and External Dependence

 Colonial Legacy Most developing countries were once colonies of Europe or
otherwise dominated by European or other foreign powers, and institutions
created during the colonial period often had pernicious effects on development
that in many cases have persisted to the present day.
 External Dependence Relatedly, developing countries have also been less well
organized and influential in international relations, with sometimes adverse
consequences for development. For example, agreements within the World Trade
Organization (WTO) and its predecessors concerning matters such as agricultural
subsidies in rich countries that harm developing-country farmers and one-sided
regulation of intellectual property rights have often been relatively unfavorable to
the developing world.

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How Low-Income Countries Today Differ from Developed Countries in
Their Earlier Stages
Eight differences
1. Physical and human resource endowments
2. Per capita incomes and levels of GDP in relation to the rest of the world
3. Climate
4. Population size, distribution, and growth
5. Historic role of international migration
6. International trade benefits
7. Basic scientific/technological research and development capabilities
8. Efficiency of domestic institutions

1. Physical and human resource endowments:

 Contemporary developing countries are often less well endowed with natural
resources than the currently developed nations were at the time when the latter
nations began their modern growth. Some developing nations are blessed with
abundant supplies of petroleum, minerals, and raw materials for which world
demand is growing; most less developed countries.
 The difference in skilled human resource endowments is even more pronounced.
The populations of today's low-income developing nations are often less
educated, less informed, less experienced, and less skilled than their counterparts
were in the early days of economic growth in the West.

2. Per capita incomes and levels of GDP in relation to the rest of the world:
 The people living in low-income countries have, on average, a lower level of real
per capita income than their developed-country counterparts had in the
nineteenth century. First of all, nearly 40% of the population of developing
countries is attempting to subsist at bare minimum levels.

3. Climate differences:
 Almost all developing countries are situated in tropical or subtropical climatic
zones. It has been observed that the economically most successful countries are
located in the temperate zone. Although social inequality and institutional factors
are widely believed to be of greater importance, the dichotomy is more than
coincidence.

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4. Population size, distribution, and growth:
 At this point, it is sufficient to note that population size, density, and growth
constitute another important difference between less developed and developed
countries. Before and during their early growth years, Western nations
experienced a very slow rise in population growth.

5. Historic role of international migration:

 In the nineteenth and early twentieth centuries, a major outlet for excess rural
populations was international migration, which was both widespread and large-
scale.
 The irony of international migration today depend on Brain drain (The emigration
of highly educated and skilled professionals and technicians from the developing
countries to the developed world).

6. The Growth Stimulus of International Trade:

 International free trade(in which goods can be imported and exported without any
barriers in the forms of tariffs, quotas, or other restrictions) has been called the
"engine of growth" that propelled the development of today's economically
advanced nations during the nineteenth and early twentieth centuries.
 Where developing countries are successful at becoming lower-cost producers of
competitive products with the developed countries (e.g., textiles, clothing, shoes,
some light manufactures), the latter have often resorted to various forms of tariff
and nontariff barriers to trade, including "voluntary" import quotas, excessive
sanitary requirements, intellectual property claims, antidumping "investigations,"
and special licensing arrangements. But in recent years an increasing number of
developing countries, particularly China and others in East and Southeast Asia,
have benefitted from expanded manufactures exports to developed countries.

7. Basic scientific/technological research and development capabilities:

 Basic scientific research and technological development have played a crucial role
in the modern economic growth experience of contemporary developed countries.
 And even today, the process of scientific and technological advance in all its
stages, from basic research to product development, is heavily concentrated in the
rich nations, despite the emergence of China and India as destinations for research
and development (R&D) activities of multinational corporations.

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8. Efficiency of domestic institutions:
 Another difference between most developing countries and most developed
countries at the time of their early stages of economic development lies in the
efficiency of domestic economic, political, and social institutions.
 The developed countries also typically enjoyed relatively stronger political
stability and more flexible social institutions with broader access to mobility.

Long-Run Causes of Comparative Development

 Schematic Representation
 Geography
 Institutional quality- colonial and post-colonial
 Colonial legacy- pre colonial comparative advantage
 Evolution and timing of European development
 Inequality- human capital
 Type of colonial regime

Nature and Role of Economic Institutions

 Institutions provide ―rules of the game‖ of economic life
 Provide underpinning of a market economy
 Include property rights; contract enforcement
 Can work for improving coordination,
 Restricting coercive, fraudulent and anti-competitive behavior
 Providing access to opportunities for the broad population-
 Constraining the power of elites, and managing conflict
 Provision of social insurance
 Provision of predictable macroeconomic stability

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