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ECD2401: DEVELOPMENT ECONOMICS

Topic 1: Why Study Development Economics?

Nature and Scope of Development

Economics
Development Economics (DE) is a relatively recent area of study. As an academic discipline, it
emerged after Second World War as a reaction to the spreading communist ideas of Karl Marx
in Eastern Europe countries devastated by the war. From the capitalist point of view, it was
conceived to reconstruct the destroyed economies of the Eastern Europe but more precisely as
a solution to the rapid industrialisation of these countries. Yet one should not lose sight and
confuse DE with Economics (Econs) or Political Economics (PE). A clear line of demarcation
exists between the three disciplines.

Econs is concerned with the efficient allocation of productive resources across time within the
framework of a laissez faire economy where markets are assumed to be perfect, prices adjust
automatically through the inter-play of market mechanisms, the consumer is sovereign and
economic agent (household, industry and government) is motivated by self-interest in decision
making. Summing up, Econs can be regarded as the study of how economic agents organise
and distribute productive resources between competing ends.

PE is concerned with studying the relationship between the political power and economic wants
of the society. It examines how the political power manipulates the available resources to
satisfy the needs of present and future generations. In short, the main concern of PE rests on
the role of the political power in making economic decision.

The concern of DE goes beyond what Econs and PE do and attends to other crucial issues
that threaten the progress of the economy at large. DE pays attention to the efficient allocation
of productive resources of the economy, achievement of sustained economic growth over time
but also deals with the social, political, institutional as well as geographical factors that are
instrumental in effecting the desired structural and institutional transformation of an economy.
In this respect, it studies the cultural, political, institutional and geographical dispositions of the
private and public sectors of the economy with the view of bringing about rapid, continuous and
widespread improvements in the living conditions of peoples in the developing regions of the
world. Thus, DE is a multi-dimensional discipline seeking to realise structural and institutional
changes in developing regions of the world by bringing effective trickle downs of the success in
economic growth attainment to the wider portions of their economies drawing from their

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economic, social, political and geographical conditions.

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In view of the above, DE shall concentrate on regions of the world in which the living condition
of the majority of the population is not satisfactory to guarantee a decent life and self-
development from all ramifications of human existence. Although initially concerned with the
reconstruction and industrialisation of the destroyed economies of Eastern Europe after Second
World War, nowadays its focus has extended to other regions of the world such as Africa, Asia,
Latin America, and former Soviet Union where a greater portion of the society earns a miserable
life.

Meaning of Development /Economic

Development
At the early stages of the study of development processes, economic growth was the main
yardstick for explaining the development of an economy. As a result, the concept of
development/economic development was interchangeably used with economic growth.
Accordingly, economic development meant the ability of an economy to move from a state of
stagnation to a status of increased and sustained level of production or income at a rate of at
least 5% over a period of time. Simply put, it is a steady process of increase in the production
capacity of an economy, accompanied by an increase in the level of national output or national
income at a minimum rate of 5% over time.

The achievement of exceptionally high rate of economic growth explains the general economic
performance or well-being of the economy and may be relevant in cross country comparison but
unsatisfactory in assessing the attainment of economic development of the economy. The
increase in the national output or national income of the economy over the period of concern
may arise from exceptional performance in one or two isolated sectors of the economy,
while other sectors are still lagging far behind. For example, the industrial sector alone may
be responsible for economic growth in an economy due to its high level of output
achievement in a given year than in the previous year, although the economic performance
of the agricultural sector and the sector of services is poor. Similarly, the manufacturing sector
and services sector together may induce economic growth as a result of their high level of
economic performance over a given period of time, while the economic performance recorded
by the agricultural sector in that period is still poor.

Table 1-1 provides information about the economic performance of three sectors of economic
activities of a hypothetical economy for four periods. In P1, the economy achieved an average
growth rate of 3% from P0, agriculture and services had an economic performance of 2% each
but industry achieved 5%. The general economic performance of the economy of 3% was below
the target at P1. In P2, the general economic performance of the economy of 5% was
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satisfactory compared to P1, but this was mainly induced by the magnificent economic
performance of 10% from the industry. In P3, the economy improved upon P2 and
accomplished an 8% economic growth rate arising from industry with 17% rate of

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economic performance and services with 5% level of economic performance, but

agriculture still remained stagnant at 2% level of economic performance. More interestingly in
P4, agriculture moved to
3% rate of economic performance, services shifted to 6% level of economic performance and
industry recorded 21% rate of economic performance. The overall economy achieved an
average economic performance of 10% but still no economic development could be judged to
have taken place because all sectors of the economy did not perform to the target minimum
requirement of 5%.

Table 1-1: Economic Performance (%) of Sectors of Economic Activities of a Hypothetical Economy
Period P1 P2 P3 P4
Sector
Agriculture 2% 2% 2% 3%
Services 2% 3% 5% 6%
Industry 5% 10% 17% 21%
Economy 3% 5% 8% 10%

NB: Performance yardstick is at least 5% growth

rate.

Drawing from the above example, one deduces that economic development entails the
performance of all sectors of the economy at least to the minimum requirement that warrants
the redistribution of the fruits from economic growth to the greater majority of the population.
Once the fruits from economic growth are redistributed to wider segments of the population,
there is hope that the lives of people will improve and a transformation of the economy at large
will follow.

Alternatively, the per capita income was used to explain the attainment of economic
development. The per capita income is generally computed as a ratio of the national income of
a particular year to the total population of the economy in that year. The bottom line of the per
capita income approach is to find the entitlement of an average citizen if the national income
were to be shared equally to the population of the economy. Unfortunately, the national income
is never redistributed equally since in reality some people will receive an income of k-times
higher than the computed per capita income; while others will earn an income of n-times lower
than the computed per capita. Further, the per capita income value is mainly theoretical for in
practice it does not accrue to the entire population of the economy. In fact in many developing
regions of the world, majority of the population lives on less than $ 1 a day (less than $ 365
per annum).

Table 1-2 provides the socio-economic details of a hypothetical economy for two years.
Between Y1 and
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Y2, the population of the economy increased by 0.9 million people (3%); the national income
rose by $

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10.62 billion (23.60%) and the per capita income augmented by $ 300 (20%). In individual years,
the per capita income was $ 1500 for Y1 and $ 1800 for Y2.

A careful observation of Table 1-2 raises two questions. The first one is to find out whether or
not the economy performed well between Y1 and Y2, and the second is to establish if every
member of the economy received his due entitlement of the fruits of economic growth in
individual years. The answer to the first question is affirmative but that of the second question
is certainly not because the theoretical proposal of equal redistribution of the fruits of economic
growth does not often approach reality owing to inequalities and selfishness among people.
Since the tiny fortunate segment of people in the economy will be motivated by self-interest in
decision making, there is no room for making sacrifice for the other. As a result, the effective
redistribution of the fruits of economic growth will not take place and the larger unfortunate
portion of people in the economy will continue to stagnate in poor living conditions.

Table 1-2: Socio-Economic Details of a Hypothetical Economy for Two Years

Year Y1 Y2 Absolute Increase (Y2 - Y1) Percentage Increase
Detail
Population (Million People) 30 30.9 0.9 3
National Income ($ Billions) 45 55.62 10.62 23.60
Per Capita Income ($) 1500 1800 300 20

Due to the discrepancy between what holds in principle (every member of the economy
receiving an equal portion of the national income of the economy) and what actually obtains on
the ground (some people receiving more than and others receiving less than the share of a
member in the national income of the economy) as highlighted above, the per capita
income alternative to explaining economic development of an economy also proved unfit.
The success story of hitting targeted economic growth rates in many developing economies
(e.g. Brazil) between the 1950s and 1960s without provoking significant improvements in the
living conditions of the masses of people who were still trapped in the web of extreme and
widespread poverty, rising unemployment A new meaning of economic development viewing it
as a multi-dimensional process soliciting rapid economic growth as well as major changes in
people’s attitudes, social organisation and national institutions in order to accommodate the
problems of poverty, unemployment and income distribution inequalities in developing
economies emerged in early
1970s following the criticisms of the early definition by Dudley Seers in 1969. Seers argued that
for an economy to qualify as developed, it must succeed in substantially reducing the levels of
poverty, unemployment and income distribution inequalities of its population over a period of
time. Otherwise, even if the per capita income of the economy doubles in the presence of
increasing rate in one or two and in the extreme case all the three of these crucial problems of
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human existence, it would be awful to place

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it on the list of developed economies. With the “capabilities” approach, Amartya Sen
(1998 Nobel laureate in Economics) corroborates the same argument. Sen maintained that
economic development can be seen as the general improvement of human well-being by
addressing the problems of nutrition, health and education; poverty reduction, social inclusion
and freedom of choice for people. This shows that the initial perception of economic
development as an economic phenomenon is no longer tenable.

Drawing from the above assertion, we shall admit that economic development occurs in an
economy only when there is evidence of significant decline and eradication of poverty,
unemployment and income distribution inequalities among its members. In short, the fulfilment
of these three conditions is synonymous with improvement in the quality of life or good life for
all in the economy. Hence, one can say that economic growth is a necessary but not sufficient
condition for achieving economic development. If we subscribe to this new perception of
economic development, then how do we measure it?

Measurement of Economic Development

Three approaches are generally used to quantify the level of economic development of
economies. These include the World Bank Classification criterion (WBC), purchasing power
parity method (PPP) and the human development index approach (HDI). An examination of each
follows below.

The World Bank Classification criterion uses the per capita gross national income (PCGNI)
based on official foreign exchange rates conversion into international dollars to categorise
countries of the world into advanced (developed) and developing economies. In 2005,
advanced economies (AEs) were identified as those countries having PCGNI of at least
$ 10726 and developing economies as those with PCGNI of at most $ 10725. Further, three
levels were used to distinguish between developing economies as follows: low-income
economies (LIE) with PCGNI less or equal to $ 875, lower-middle-income economies (LMIE) with
PCGNI between $ 876 and $ 3465, and upper-middle-income economies (UMIE) with PCGNI
between $ 3466 and $ 10725. Table 1-3 gives a tabular presentation of the discussion.

Table 1-3: The Economic Development Classification Benchmarks of the World Bank
(2005)
Category of Economy Sub-Category of Economy Per Capita Gross National Income ($)
Advanced Economies - ≥ 10726
Low-income economies ≤ 875
Developing Economies Lower-middle-income economies 876 = PCGNI ≤ 3465
Upper-middle-income economies 3466 = PCGNI ≤ 10725

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See the WBC list of world economies by region and PCGNI in 2007 in Todaro and Smith (2009: 42
- 43).

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However, measuring the level of economic development based on official foreign exchange
rates conversion of PCGNI of economies into international dollars does not account for the
differences in the cost of living in different economies, especially when the comparison is done
between advanced and developing economies. The foreign exchange rates conversion approach
is not satisfactory in that respect due to the difference in currency strength of economies and
problems associated with the national income accounting (overestimation, underestimation,
poor quality of data, informal sector activity, choice of index year, non-marketed goods and
services, subsistence economy …). As a remedy to these problems, the purchasing power parity
method of measuring economic development is suggested.

Purchasing Power Parity method (PPP) maintains that the exchange rates between currencies
of say two economies are at par when their purchasing power is identical in each of the two. In
other words, PPP is the number of units of a currency of a given economy (E1) required i n
o r d e r t o purchase the same amount of goods and services in that economy (E1) as would a
unit of currency of another economy (E2) buy in its own domestic market (E2). Unlike the foreign
exchange rate conversion approach which is mainly determined by the supply and demand of
currencies based on traded goods and services whose prices tend to equalise internationally
(ignoring tariffs, costs of transportation…), the PPP depends on the prices of traded goods and
services as well as those of non-traded goods (immobile goods like houses) and services
(haircut, clearing of a piece of land, landscaping…) that are mainly determined by the unit cost of
labour (very low in poor economies). Note that in general, the lower the level of economic
development and the poorer an economy is, the lower the ratio of the price of non-traded
goods and services to traded goods and services will be. As a result, using the foreign
exchange rate as a conversion factor will understate the standard of living of a developing
economy whose currency is weak compared to an advanced economy with a strong currency.
As a better alternative to the foreign exchange rate conversion approach, the real foreign
exchange rate (PPP) conversion works as follows.

Considering the particulars of two hypothetical economies in period t and a reference currency
M of another economy identified as E3 where the following conditions hold. The GNI of the first
economy E4 is A439.65 billion with a population of 45 million and the GNI of the second
economy E5 is L165 billion for a population of 30 million. The foreign exchange rate between
the economies is as follows: M1 to A10 for E4 and M1 to L20 for E5. Consider that the cost of
clearing an acre of land in E3 is M20. The actual cost of getting the same job done is A50 in E4
and L80 in E5.

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Workings: The equivalent cost of M20 based on the exchange rates between the countries in the
domestic market of E4 is A200 (20*10 = 200), while in the domestic market of E5 it is L400
(20*20 = 400). On this ground, the value of currency A is underestimated 4 fold (200 ÷ 50 = 4)
and the value of currency L

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deflated 5 fold (400 ÷ 80 = 5). As far as the clearings of an acre of land are concerned, the PPP
rates of exchange between the economies are M1 to A2.5 (20 ÷ 50 = 1÷ 2.5 = 0.4) for E4 and
M1 to L4 (20 ÷ 80
= 1÷ 4 = 0.25) for E5. Now if PCGNI of the two economies were divided by 2.5 instead of 10 for
E4 and by 4 instead of 20 for E5, their PCGNI through PPP exchange rates conversion would
be M3908 (9770 ÷ 2.5 = 3908) and M1375 (5500 ÷ 4 = 1375), respectively. A comparison of the
two approaches of conversion reveals that PPP exchange rate conversion technique raises
PCGNI of the economies by 300% for E4 and 400% for E5 over the estimates of the official
foreign exchange rate conversion method.

Table 1-4: Particulars of Two Hypothetical Economies in

Period t

Economy Currency Populatio GNI PCGNI PCGNI PCGNI

Name n (Billion) (Domestic (Foreign- (Purchasin
(Million Currency ) Exchange Rate g
People) Conversion in M ) Power Parity in M
E4 A 45 439.65 9770 977 ) 300%)
3908 (+
E5 L 30 165 5500 275 1375 (+ 400%)

Despite the superiority of PPP over WBC (both focus on income), problems persist. Some other
important components of a better human life such as education and health are still ignored,
hence the use of the human development index (HDI) approach.

The Human Development Index (HDI) approach is yet another option to measuring
economic development of an economy. Initiated by the United Nations Development
Programme (UNDP), HDI provides a holistic approach to measuring the level of economic
development attained in an economy. HDI combines together the income index, life expectancy
index and education index to account for the level of wellbeing of people in an economy. In
applying the technique, UNDP assumed the following. The PCGNI adjusted to PPP accounts for
cost of living and measures the standard of living. The principle of diminishing marginal utility of
income holds. Life expectancy at birth is a proxy measure for health. Education is measured by
a weighted average of two-thirds of adult literacy rate and one-third of years of schooling.
Knowledge is chosen as proxy for education. The maximum PCGNI to be achieved for future
generation in an economy is $ 40000 and the minimum possible PCGNI for an economy is $ 100.
Life expectancy at birth in an economy is 85 years maximum and 25 years minimum.

HDI ranks economies on a scale of zero to one broken into three human development
categories. As a result, economies with an HDI between 0 and 0.499 are low human

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development economies (LHDE), economies with an HDI between 0.500 and 0.799 are medium
human development economies (MHDE)

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and those with an HDI between 0.800 and 1 are high human development economies (HHDE)
as shown in Table 1-5.

Table 1-5: The Economic Development Classification Benchmarks of the UNDP (1990)
Category of Economy Human Development Index
Low Human Development 0 ≤ HDI ≤ 0.499
Medium Human Development 0.5 ≤ HDI ≤ 0.799
High Human Development 0.8 ≤ HDI ≤ 1

A simple and straightforward formula for computing HDI is given below.

HDI = (Income index + Life expectancy index + Education index)

÷3

Each of the three components is calculated as follows:

Income index = ln (CINC/min INC) ÷ ln (max INC/min INC)

ln: Natural log

CINC: Current PPP per capita income
max INC: Maximum PPP per capita income ($ 40000)
min INC: Minimum possible PPP per capita ($ 100)

Life expectancy index = (CLE – min LE) ÷ (max LE – min

LE)

CLE: Current life expectancy at birth

max LE: Maximum life expectancy at birth (85 years)
min LE: Minimum life expectancy at birth (25 years)

Education Index = ([2 * (Adult literacy index)] + [Gross enrolment index])

÷3

Adult literacy index = (CALR – min ALR) ÷ (max ALR – min

ALR)

CALR: Current adult literacy rate

max ALR: Maximum adult literacy rate (100%)
min LE: Minimum adult literacy rate ( 0%)

Gross enrolment index = (CGER – min GER) ÷ (max GER – min

GER)

CGER: Current gross enrolment rate

max GER: Maximum gross enrolment rate (100%)
min GER: Minimum gross enrolment rate (0%)

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An illustration based on information of a hypothetical economy is given below. In year y, the

economy had the following socio-economic particulars. The purchasing power parity per
capita income was $
15000, life expectancy at birth stood at 72 years. The proportion of the population that can read
and write reached 64 and the rate of school enrolment at the various levels of education was 76.
Using the data, the HDI for the economy can be computed and the economy categorised
accordingly.

Table 1-6 shows that in year y, the income index of the economy was 0.836 and the life
expectancy index was 0.783. Also, it indicates that the adult literacy index was 0.640; the gross
enrolment index was 0.760 and the education index was 0.680. On the aggregate, the human
development index of the economy translated to 0.776 implying that the economy belonged in
the category of medium human development economies. However, if the human development
index were computed as 0.347, the economy would have fallen under the category of low human
development economies. Likewise, if the human development index were 0.921, the economy
would have been in the category of high human development economies.

Table 1-6: Computation of HDI and Categorisation of a Hypothetical Economy in Year y

Particulars PPP PCGNI Life Literacy Enrolment Education HDI Category
Estimates 15000 72 64 76 - - Medium
Index 0.836 0.783 0.640 0.760 0.680 0.776 HDE

HDI measure reveals some striking merits and drawbacks. These include the followings.

-The disparities in health and education indicators are lesser than disparities in income indicator.
-An economy with low PPP PCGNI can perform much better than anticipated and large gains in
incomes can still perform comparatively little in human development.
-Economic development is synonymous with broad human development but not improvement in
GNI levels only without corresponding improvement in other indicators of well-being.
-Health and education are components of human capital and inputs of the production

function. As regards the drawbacks, a few can be mentioned.

-The choice of life expectancy and knowledge as respective proxies for health and education is
subjective and based on the criterion of sufficient availability of data (there is room for getting
better proxies).
-No consideration is given to the quality of health and education received (productivity issue).
-Dividing HDI by three assigns equal weight to each of the components of the statistic and
since each is measured in different units; it becomes difficult to read meaning into what equal
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weight explains.

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-In most circumstances, gross school enrolment overstates the amount of schooling in many
economies (once primary school is started, enrolment is recorded and no attention is paid
to whether or not the student dropped out at some stage of the education process).
-The maximum target of $ 40000 RPCGNI is not always the maximum (some economies have
exceeded that limit).
-The maximum of 100% for gross school enrolment can sometimes be exceeded (old student
coming back to school).

One important point worth mentioning with HDI is that in general it tends to rise with rise in RPCGNI
for richer economies can invest more in human capital components (health and education) to raise
productivity. Yet despite this anticipated trend, large variation between incomes and other
measures of wellbeing persists. So, the fundamental issue between RPCGNI approach and HDI
method rests on the ranking of economies and difference that results thereafter. If the difference
between the rankings (RPCGNI raking minus HDI ranking) is negligible, then RPCGNI could be
regarded as a true measure of socio- economic development of an economy. On the contrary, it
becomes imperative to account for health and education indicators (necessity of HDI approach). A
positive difference between the two rankings shows the relative improvement in the economic
performance of the economy when HDI approach is used instead of RPCGNI method on one hand.
On the other hand, a negative difference between the two explains the reverse. The striking issues
in Table 1-7 is that E2 registered the highest HDI (0.943) and E5 the lowest (0.389). Relative
RPCGNI of the economies one notices that the real per capita income in E2 is about 66% (499500÷
3010 = 165.94 – 100 = 65.94) higher than what it is in E5. Yet, it can be observed that E3 and E4
had almost the same HDI (0.783 and 0.795) despite the fact that RPCGNI is more than double
(897400 ÷ 3987 = 225.08) in E4.

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Table 1-7: Relative Performance of Selected Economies Using RPCGNI and HDI Approaches
GNI GNI RPCGNI RPCGNI HDI RPCGNI Rank –
Economy
($ Billions) Rank ($) Rank HDI Rank HDI Rank
E1 78.15 53 5210 25 0.831 19 +6
E2 59.94 87 4995 36 0.943 12 +24
E3 159.48 22 3987 39 0.783 37 +2
E4 130.56 29 8974 19 0.795 35 –16
E5 75.25 75 3010 72 0.389 91 –19
E6 59.76 92 2988 82 0.401 73 +9

The examination of the differences in the socio-economic performance of economies can be

broken down to the analysis of existing disparities across social groups, district areas, gender or
any other components of an economy to enable the understanding of how these different
components participate in the process of economic development. In this respect, the main
contribution of HDI is the enhancement of our understanding on what constitutes economic
development, which economies are progressing based on rise of HDI over time, how different
groups and regions perform relative to others with the view to focusing policies on aspects that
require attention. This said, what are the common features of developing economies?
Objectives of Economic
Development
Since economic development is a physical reality as well as a state of mind and
necessitates improvements in all aspects of human life, the society needs to fashion some
combination of socio- economic and institutional practices that can secure the means for
attaining a better life for people. To actualise this dream, three objectives commonly referred to
as universal core values of development are set.

1. To increase the availability and broaden the distribution of essentials of life, that is to say to
ensure the sustenance of people (ability to meet essentials of life such as food, shelter,
education, protection...);
2. To raise the standard of living of people through offer of better income packages; provision of
more jobs, high quality system of education, and better attention to cultural and human values
so as to improve the substance of well-being and produce greater personalities and national
self-esteem (feeling a sense of being a person worthy of self-respect and spared from being
used as a tool by others for their own interests);
3. To enlarge the array of economic and social choices at the reach of people and nations by
emancipating them from dependence and servitude (feeling free from material alienation and
social servitude to nature, people, oppression, misery, dogmatic beliefs: fatality).
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The millennium development goals (MDGs) agenda which is a partnership signed in 2000
between advanced and developing economies to create a conducive national and international
environment for development reinforces the three universal core values of economic
development. The MDGs agenda identifies the problems confronting the humanity, sets
concrete targets to attain and suggests ways and means for achieving the targets. A complete
list of the goals and targets of the MDGs agenda is given in Table 1-10.

Table1-10: The Millennium Development Goals and

Targets
Goal Goals Description Goal
Numbers Targets
1 Eradicate extreme A: Halve, between 1990 and 2015, the proportion of people with
poverty and hunger income less
than $1
B: Achieve full and productive employment and decent work for all,
including women and young people
C: Halve, between 1990 and 2015, the proportion of people who suffer
2 Achieve universal from hunger
A: Ensure that, by 2015, children everywhere, boys and girls alike, will be
primary education able
3 Promote gender A: Eliminate gender disparity in primary and secondary education,
equality and preferably
empower women by 2005, and in all levels of education by 2015

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4 Reduce child A: Reduce the under-five rate by 2/3, between 1990 and 2015
mortality
5 Improve maternal A: Reduce the maternal mortality ratio by 3/4, between 1990 and 2015
health B: Achieve universal access to reproductive health by 2015
6 Combat HIV/AIDS, A: Halt of HIV/AIDS combat by 2015 and reverse its spread
malaria and other B: Achieve universal access to HIV/AIDS treatment for all interested
diseases persons by 2010
C: Halt malaria and other major diseases combat by 2015 and
reverse their incidence
7 Ensure A: Integrate principles of sustainable development into country
environmental policies and
sustainability programmes and reverse the loss of environmental resources
B: Reduce biodiversity loss, achieving significant reduction in the rate
of loss by 2010
C: Halve, by 2015, the proportion of people without sustainable access
8 Develop a global f d further
A: Develop i ki d b irule-based,
an opened, i i predictable, non-
partnership discriminatory
for trading and financial system with a commitment to good
development governance, development and poverty reduction – both nationally and
internationally
B: Address special needs of developing economies: tariff and quota free
access for least developed countries' exports; enhanced programme
of debt relief for heavily indebted poor countries (HIPC) and
cancellation of official bilateral debt; and more generous ODA for
countries committed to poverty reduction
C: Address special needs of landlocked developing economies and
small island developing States (through the Programme of Action for
the Sustainable Development of Small Island Developing States
and the outcome of the
22nd special session of the General Assembly)
D: Deal comprehensively with the debt problems of developing
economies through national and international measures in order to
make debt sustainable in the long term
E: In cooperation with pharmaceutical companies, provide access to
ff d bl i ld i d l i i

Characteristics of Developing
Regions
No two economies of the world are similar in all respects. This is obvious owing to differences
in cultural heritage, natural endowments, political ideologies and geographical locations.
However, it is possible to construct a profile of a few elements that cut across the boundaries
of many economies or regions based on some classification. Based on the balkanisation of
the world into advanced (developed) and developing regions, the common characteristics of
developing regions of the world can be enumerated as follows:

-High rates of population growth (at least 2.5% per

annum);
-Heavy dependency burdens (more than 6 people in a family, extended family
responsibility);
-Widespread of poverty and high levels of inequality (more than 50 % of poor
population);

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-Greater social fragmentation (ethnicity, religious beliefs, social
unrest…);
-Low levels of living (short life expectancy at birth, high rate of child
mortality…);
-Low levels of human capital (limited access to education,
health…);
-Low levels of productivity (low levels of commitment to assigned
duties);
-High rates of unemployment (above 10% rates of
unemployment);
-Heavy dependence on agricultural sector and primary-products exports (agriculture as source
of incomes to majority of people);
-Prevalence of imperfect markets (underdeveloped financial sector, labour and commodity
markets, informal sector);
-Larger rural populations and fast rural exodus (high rates of movements to cities for white
collar jobs);
-Colonial heritage (external vulnerability, political, economic dependence,
indebtedness…);
-Relative importance of public, private sectors and civil society (concurrent involvement in
issues in the society);
-Low levels of industrialisation and industrial exports (limited number of industries and large
scale production of goods);
-Adverse Geographical (limited physical endowment of resources, location in areas prone to
climatic disadvantages, heat, tropical and sub-tropical diseases…).

Casting our mind back to the European industrial revolution of the 18th century which fueled
economic progress in today’s advanced economies; one would say that in 2011, developing
economies are over 200 years lagging behind schedule. Then an obvious question comes to
mind. In what ways did the early stages of economic growth of contemporary advanced
economies differ from the situation of today’s developing economies?

A list of a few variables is given below to account for the differences between the conditions of
the two worlds.
Table 1-9: Differences in Economic Development Frameworks for Developed and Developing Economies
Variables Early Setup of Today’s Advanced Current Setup of Today’s Developing Economies
Economies’ Growth Process
Climatic -Mostly located in temperate regions -Almost all located in tropical or sub-tropical
with a climate that favours regeneration regions where extreme heat and humidity negatively
Differences of forests, productivity of crops, animals affect productivity of crops, animals, workers and
and workers regeneration of forests
-Free from parasitic -Reservoir of serious parasitic diseases (malaria..)
diseases

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Physical and -Availability of capital to exploit available -Most economies with less natural resource
Human natural resources endowments (Asia: A few with petroleum,
Resource mineral resources and raw materials)
Endowments -High access to education, -Lack of capital to exploit available natural
information, skills and experience resources (Africa, Latin America)
-Low access to education, information, skills and
experience

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Share of Per -Economically advanced compared to the -About 40% of the population living at bare
rest of the world minimum levels of income
Capita Income
and GPD in -High real per capita income compared to -Low level of real per capita income
rest of the world
the World
Size, -Very slow population growth rate of 2% -Fast population growth rate of at least 2.5% per
Distribution per annum maximum annum
and Growth of - Population spread across areas -Concentration of population in a few areas
Population -Generally low population estimates -Highly populated compared to developed
relative to developing economies economies (India, Nigeria, Egypt, Brazil,
Indonesia…)
Role of -Mainly concerned unskilled labour -Mainly concerned skilled labour: brain drain
issue (1/3 of Africa’s skilled labour lost to USA
International and Europe in late 1980s
Migration

Growth of -Establishment of large-scale industries -Terms of trade deteriorated for decades in many
through rapid expansion of export markets economies after WWI
International
Trade -Ability to participate in growth of -Limited access to the dynamics of international
international exchange through free trade, trade (competitiveness) through imposition of
free movements of capital and migration of trade barriers, sanitary requirements, special
unskilled surplus labour across boundaries licensing and intellectual property claims

Research and -High rates of population growth sustained -Lack of financial resources and technological
Development by mass applications of new technological know-how to undertake long-term economic
Capabilities innovations and further addition to stock of interests of Research and Development
knowledge Programme
-Interest in developing high quality -Interest in low quality products, small markets,
products, large markets and advanced use of more labour than capital in production
methods of production processes
Efficacy of -Existence of economic rules of the game Existence of high inequality and poor institutions
Domestic that provided relatively broad access to that facilitated extraction instead of provision of
Institutions opportunity for entrepreneurs incentives for productivity established by colonial
-Relative political stability and more powers
flexible social institutions -Arbitrary demarcation of national boundaries of
economies by colonial powers

Looking at the operational framework of the two worlds, one would like to know what the core
values of economic development are.

References
Thirlwall, A.P. (1999): Growth and Development with Special Reference to Developing Economies,
6e London: McMillan Press Ltd (Chap.1 &3).
Todaro, M.P. and Smith, S.C. (2012): Economic Development, 11e, London: Addison-Wesley (Chap.1
&2).

ECD2401: Development Economics