2.

Comparative Economic
Development
Reason behind the study of comparative Economic Development

• Despite substantial economic development in

developing countries in recent years there is still
a large gap between developing and developed
countries in respect of development parameters.

▪ Output per worker in the United States is about

10 times higher than India and more than 50 times
higher than the Democratic Republic of Congo
(DRC) in 2011.

• Per capita income was $48,820 in the United

States, $3,640 in India, and $340 in the DRC.
• There are also enormous gaps in measures of
welfare.

• Life expectancy is 79 in the United States, 65 in India

and just 48 in the DRC.

• The percent of children who are underweight is

less than 3% in the United States but 43% in India and
24% in the DRC.

• Whereas almost all women are literate in the United

States, just 51% are in India and 57% in the DRC.
• How did such wide disparities between
developing and developed countries come
about?

• In the age of globalization in which movement

of people, information, and goods and services
so rapid and comparatively inexpensive, how
have such large gaps managed to persist and
even widen?
10 important common features of developing
countries
These areas are the following:
• 1. Lower levels of living and productivity

• 2. Lower levels of human capital

• 3. Higher levels of inequality and absolute poverty

• 4. Higher population growth rates

• 5. Greater social fractionalization

• 6. Larger rural populations but rapid rural-to-urban migration.

• 7. Lower levels of industrialization,

• 8. Adverse geography,

• 9. Underdeveloped financial and other markets

• 10. Lingering colonial impacts such as poor institutions and often external
dependence.
 2.1 Defining the Developing World
• The most common way to define the developing world is
by per capita income.

• International agencies like Organization for Economic

Cooperation and Development (OECD) and the United
Nations, offer classifications of countries by their
economic status,

• but the best-known system is that of the International

Bank for Reconstruction and Development (IBRD), more
commonly known as the World Bank.
• World Bank : is an organization known as
an “international financial institution” that
provides development funds to
developing countries in the form of
interest-bearing loans, grants, and technical
assistance.

• In the World Bank’s classification system,

213 economies with a population of at least
30,000 are ranked by their levels of gross
national income (GNI) per capita.
Classification of Economies by World Bank
In the World Bank’s classification system, 213 economies with a
population of at least 30,000 are ranked by their levels of
gross national income (GNI) per capita.
These economies are then classified as:

low-income countries ,
lower-middle-income countries ,
upper middle-income countries ,
high-income OECD countries, and other high-income countries.

Often, LMCs and UMCs are informally grouped as

The middle-income countries.

With a number of important exceptions, the developing countries are

those with low-, lower-middle, or upper-middle incomes
 Classification of Economies by World Bank
• Low-income countries (LICs)- defined as having per capita gross national income in 2011 of
$1,025 or less,

• Lower-middle-income countries (LMCs)- per capita GNI between $ 1,026 and $ 4,035;

• Upper middle-income countries (UMCs)- per capita GNI between $ 4,036 and $ 12,475;

• High-income OECD countries and other high-income countries - per capita GNI is $ 12,476 or
more.

• (Often, LMCs and UMCs are informally grouped as the middle-income countries.)
Some other categorisation of
developing countries
• a number of the countries grouped as “other high-
income economies”.
• Moreover, high-income countries that have one or
two highly developed export sectors but in
which significant parts of the population remain
relatively uneducated or in poor
• health, or social development is viewed as low for
the country’s income level, may be viewed as still
developing.
• Examples may include oil exporters such as Saudi
Arabia and the United Arab Emirates.
• Yet another way to classify the nations of
the developing world is through their
degree of international indebtedness, the
World Bank has classified countries as :
• severely indebted,
• moderately indebted,
• and less indebted
• The United Nations Development
Programme (UNDP) classifies countries
according to their level of human
development, including health and
education attainments as low, medium, high,
and very high.

• Another widely used classification is that of

the least developed countries For
inclusion, a country has to meet each of three
criteria: low income, low human capital, and
high economic vulnerability.
• 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.

• Least developed countries : A UN designation of countries

with low income, low human capital, and high economic
vulnerability.

• Human capital : Productive investments in people, such as

skills, values, and health resulting from expenditures on
education, on-the-job training programs, and medical care.
• Emerging market: was introduced at the International Finance Corporation
to suggest progress . This term has certain implications.

• First, emerging market is widely used in the financial press to suggest the
presence of active stock and bond markets; although financial deepening is
important, it is only one aspect of economic development,

• Second, referring to nations as markets may lead to an under emphasis on

some non-market priorities in development,

• Third, usage varies, and there is no established or generally accepted

designation of which markets should be labeled as emerging and which as
yet to emerge(the latter now sometimes dubbed frontier markets in the
financial press).

(frontier markets refer to economies or regions that are considered to be less developed or smaller
than emerging markets but have the potential for growth. They are typically in the early stages of
development, with a rapidly growing middle class, evolving infrastructure, and increasing investment
opportunities. However, they tend to be riskier compared to more developed emerging markets due to
factors like political instability, weaker financial markets, and lower liquidity)
 2.2 Basic Indicators of Development:
Real Income, Health, and Education

• In this section, we examine basic

indicators of three aspects of development
• real income per capita adjusted for
purchasing power;
• health as measured by life expectancy,
undernourishment, and child mortality;
• educational attainments as measured by
literacy and schooling.
 GNI and GDP
• In accordance with the World Bank’s income-based classification of
countries , Gross National Income (GNI) per capita, the most common
measure of the overall level of economic activity, is often used as a
base of the relative economic well-being of people in different countries.

• Gross National Income 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.

• In other words GNI is the total domestic and foreign output claimed by
residents of a country, consisting of GDP plus factor incomes earned by
foreign residents, minus income earned in the domestic economy by non
residents,

• In Indian context GNI is total value addition by Indians(In India + in

abroad).

As of the most recent data available, the Gross National Income (GNI)
per capita of the Philippines is approximately $4,180 USD (as of 2023).
Differentiation of GDP to GNP
Gross domestic product (GDP)

The total final output of goods and services-

- produced by the country’s economy
within the country’s territory

- by residents and nonresidents,

regardless of its allocation between
domestic and foreign claims.

https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=PH
• Value added : The portion of a product’s final
value added at each production stage.

• Depreciation (of the capital stock) : The

wearing out of equipment, buildings,
infrastructure, and other forms of capital,
reflected in write-offs to the value of the capital
stock.

• Capital stock : amount of physical good existing

at a particular time produced for use in the
production of other goods and services.
Why Purchasing Power Parity
• Per capita GNI comparisons between developed and
less developed countries are however 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)
• 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 simple words PPP is defined as the number of

units of a foreign currency required to purchase the
same quantity of goods and services in the local
developing country market.

• For example as one spends 25 US dollar to by some

goods & services in the United States then how many
US Dollar one would pay to buy the identical goods &
services in the Indian market.
• Generally, prices of non traded services are much lower in
developing countries because wages are so much lower.

• Clearly, if domestic prices are lower, PPP measures of GNI

per capita will be higher than estimates using foreign
exchange rates as the conversion factor.

• For example, China’s 2011 GNI per capita was only 10% of
that of the United States using the exchange-rate conversion
but rises to 17% when estimated by the PPP method of
conversion.

• Income gaps between developed and developing nations thus

tend to be less when PPP is used.
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.
• 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.
• Undernourishment means consuming too little
food to maintain normal levels of activity; it is what
is often called the problem of hunger.
• High fertility can be both a cause and a
consequence of underdevelopment, so the birth
rate is reported as another basic indicator.
• 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.
2.3 Holistic Measures of Living Levels
and Capabilities
The New Human Development Index,
• The most widely used measure of the
comparative status of socioeconomic
development is presented by the United
Nations Development Programme (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.
• The New HDI , like its predecessor, ranks each country on a
scale of 0 (lowest human development) to 1 (highest human
development) based on three goals or end products of
development:
• Long and healthy life as measured by life expectancy at birth;
• Knowledge as measured by a combination of average
schooling attained by adults and expected years of schooling for
school-age children; and
• Decent 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
• Diminishing marginal utility :The
concept that the subjective value of
additional consumption lessens as total
consumption becomes higher.

diminishing marginal utility — the more you have of

something, the less you enjoy it as you keep consuming.

The more you get of something, the less

value it adds to your happiness.
Calculating the New HDI
• There are two steps in calculating the New HDI:
• first, creating the three “dimension indices”; and
• second, aggregating the resulting indices to
produce the overall New Human Development
Index (NHDI).
• After defining the relevant minimum and maximum
values (or lower and upper “goalposts”), each
dimension index is calculated as a ratio that
basically is given by the percent of the distance
above the minimum to the maximum levels that a
country has attained
Calculating the New HDI
• Dimension index =
• Actual Value – Min. Value / Max. Value – Min.
Value

• Using these three measures of development and

applying the formula to data for all 187 countries
for which data is available, HDI currently ranks
countries into four groups:
• Low human development (0.0 to 0.535),
• Medium human development (0.536 to 0.711),
• High human development (0.712 to 0.799), and
• Very high human development (0.80 to 1.0).
Calculating the New HDI
• The Human Development Index (HDI) is a composite
measure that evaluates a country's overall development
by considering three key factors:

1. Life expectancy (health)

2. Education (average years of schooling for adults, and

expected years of schooling for children)

3. Income (Gross National Income per capita, adjusted for

purchasing power parity)
Formula to Compute HDI:
The HDI is calculated by taking the average of three normalized indices—one for
each factor. Here's how it's done:
1.Normalize each indicator by comparing it to the minimum and maximum values
for that indicator globally.

2. Calculate the index for each factor:

1. Health Index = (Life Expectancy − Min Life Expectancy) / (Max Life
Expectancy − Min Life Expectancy)

2. Education Index = (Mean Years of Schooling − Min Mean Years of

Schooling) / (Max Mean Years of Schooling − Min Mean Years of Schooling)

3. Income Index = (Log(GNI per capita) − Log(Min GNI per capita)) / (Log(Max
GNI per capita) − Log(Min GNI per capita))

3. Average the three indices to get the HDI score:

Example Calculation:
Let’s go through a simple example of how to compute HDI. Suppose we have the
following data for a country:
•Life expectancy = 75 years (Min = 20, Max = 85)
•Mean years of schooling = 8 years (Min = 0, Max = 15)
•GNI per capita = $12,000 (Min = $100, Max = $100,000)
Interpreting the HDI Score:
•An HDI of 0.691 would fall into the medium human development category
(based on global standards set by the UNDP).

•0.000 indicates low human development, and 1.000 represents high human
development.

Conclusion:
The HDI provides a snapshot of a country's overall development, factoring in
health, education, and income. By comparing HDI scores across countries, we
can gain insights into the relative development of nations and identify areas for
improvement in various sectors.
What is new in the New HDI?
• 1. Calculating with a geometric mean.
• Probably most consequential: The index is now computed with a
geometric mean, instead of an arithmetic mean

• A geometric mean is also used to build up the overall education

index from its two components

• Traditional HDI added the three components and divided by 3

• New HDI takes the cube root of the product of the three component
indexes

• The traditional HDI calculation assumed one component traded off

against another as perfect substitutes, a strong assumption

• The reformulation now allows for imperfect substitutability

The United Nations Development Programme
(UNDP) now also offers the:
• Inequality-Adjusted Human
Development Index (IHDI)—which
imposes a penalty on the HDI that
increases as inequality across people
becomes greater—and
• The Gender Inequality Index (GII), as well
as an important innovation,
• The Multidimensional Poverty Index
(MPI),
Significance of HDI
• The Human Development Index, in its Traditional as well
as New forms, has made a major contribution to
improving our understanding of what constitutes
development,
• Which countries are succeeding (as reflected by rises in
their NHDI over time), and
• How different groups and regions within countries are
faring.
• By combining social and economic data, the NHDI
allows nations to take a broader measure of their
development performance, both relatively and
absolutely.
Significance of HDI
• The New HDI and its Traditional version when used in
conjunction with other economic measures of
development greatly increase our understanding of
which countries are experiencing development and
which are not.

• By modifying a country’s overall NHDI to reflect income

distribution, gender, regional, and ethnic differentials, we
are now able to identify not only whether a country is
developing but also whether various significant groups
within that country are participating in that development
2.4 Characteristics of the Developing World:
Diversity within Commonality
• There are important historical and economic
commonalities among developing countries that have
led to their economic development.
• At the same time, however, there is a great deal of
diversity throughout the developing world, even within
these areas of broad commonality.
• Different development problems call for different specific
policy responses and general development strategies.
• .
10 Characteristics of the Developing World:
Diversity within Commonality

• 1. Lower Levels of Living and Productivity,

• 2. Lower Levels of Human Capital,
• 3. Higher Levels of Inequality and Absolute Poverty,
• 4.Higher Population Growth 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,
• 9. Underdeveloped Markets,
• 10. Lingering Colonial Impacts and Unequal International Relations
1.a.Lower Levels of Living and
Productivity

• Low level of living standard and productivity is

common feature of developing world .

• In very low income countries a vicious circle

of poverty or poverty trap may be found in which low
income leads to low investment in education and health
,plant and equipment and infrastructure, which in turn
leads to low productivity . Nobel laureate Gunnar
Myradal has called it circular and cumulative
causation.
1.b.Lower Levels of Living and Productivity

• The low-income countries are themselves a very

diverse group with greatly differing development
challenges.
• There is also a large gap in productivity among
developing nations,.
• Among developing countries the wide disparity in
income is largely related to the large gaps in
output per worker, for example in 2011 it was 6 in
sub sahara,9 in southern Asia,10 in south east
Asia,14 in eastern Asia and 21 in northern Africa.

• Further explained in Chapter 5

2.a. Lower Levels of Human Capital

• Human capital—health, education, and

skills—is vital to economic growth and
human development..
• lagged in its average levels of nutrition,
health (as measured by life expectancy or
undernourishment), and education
(measured by literacy).

- Chapter 8
3.a.Higher Levels of Inequality and Absolute Poverty

• The enormous gap in per capita incomes between rich and poor
nations is a major indicator of the huge global economic disparities.
But at the same time it is necessary to look at the gap between rich
and poor within individual developing countries.
• Inequality varies greatly among developing countries, it is
particularly high in many resource-rich developing countries, notably
in the Middle East and sub-Saharan Africa but generally much
lower inequality in Asia.
• A large majority of the extreme poor live in the low-income
developing countries of sub-Saharan Africa and South Asia. Here
extreme poverty is due to low human capital , social and political
exclusion and other deprivations
• Several African countries, including Sierra Leone and South Africa,
also have among the highest levels of inequality in the world.

Absolute poverty
The situation of being unable or only barely able to meet the subsistence
essentials of food, clothing, shelter, and basic health care.

discussion in Chapter 5
4. Higher Population Growth Rates
most population growth has been centered in low-income
and, to some extent, middle-income, countries. Compared
with developed countries, which often have crude birth
rates near or even below replacement (zero population
growth) levels, low-income developing countries typically
still have high crude birth rates (the number of children
born alive each year per 1,000 population)

Population growth rates are determined by the difference

between the birth rate and the death rate (net of migration).
Cont’d : Higher Population Growth Rates

• 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. Both older people and
children are often referred to as an
economic dependency burden in the
sense that they must be supported
financially by the country’s labor force .
5.Greater Social Fractionalization
Fractionalization -Significant ethnic, linguistic, and other social
divisions within a country.

• The greater the ethnic, linguistic, and religious diversity of a

country, the more likely it is that there will be internal strife and
political instability.

• Some of the most successful development experiences South

Korea, Taiwan, Singapore, and Hong Kong have occurred in
culturally homogeneous societies in other words ethnic
problems were not there.

• whether the ethnic and religious composition or diversity of a

developing nation leads to conflict or cooperation can be
important determinants of the success or failure of
development efforts
6.a.Larger Rural Populations but Rapid Rural-to-Urban Migration

Region Population Urban share (%)

(millions 2009)
World 6810 50
More developed 1232 75
countries
Less developed 5578 44
countries
Sub Saharan Africa 836 35
Nothern Africa 205 50
Latin America & 580 77
C.Sea
West Asia 231 64
South Central Asia 1726 31
South East Asia 597 43
East Asia 1564 51
Easter Europe 295 69
6.Larger Rural Populations but Rapid Rural-to-
Urban Migration
• One of the major characteristics of economic development today is a
shift from agriculture to manufacturing and services.
• More people live in cities than in rural areas.
• As far as developing countries are concerned, a much higher share of
the population lives in rural areas, and correspondingly fewer in urban
areas
• But a massive population shift is also under way as hundreds of
millions of people are moving from rural to urban areas, fueling rapid
urbanization
• But at the same time sub-Saharan Africa and most of Asia still remain
predominantly rural.
7. Lower Levels of Industrialization and
Manufactured Exports
• Industrialization is associated with high productivity and
incomes and has been a hallmark of modernization and
national economic power.
• That is why most developing countries have made
industrialization a high national priority, with a number of
prominent success stories in Asia.
• Generally, developing countries have a far higher share
of employment in agriculture than developed countries.
• Moreover , in developed countries, agriculture
represents a very small share of both employment and
output. For example it is about 1% to 2% in Canada, the
United States and United Kingdom.
7.b.Lower Levels of Industrialization and
Manufactured Exports

• In Madagascar while about 82% of both men and women

worked in agriculture , it represented only a quarter of
total output. In Indonesia, 41% of both men and women
worked in agriculture, but it represented just 14% of
output.
• There is also a gender perspective in this regard. For
example in Latin America a significantly higher
proportion of men work in agriculture than women;
• But in many countries in Africa and Asia, a larger
proportion of women work in agriculture.
7.c.Lower Levels of Industrialization and
Manufactured Exports
• Structural transformation of employment has been
occurring in developing countries.
• During 1990-1992 to 2008-11 there have been
substantial declines over this two-decade period in the
share in employment in agriculture in most developing
countries.
• For example, in Indonesia the proportion of men who
work in agriculture fell from 54% to 37%; and the
proportion of women who work in agriculture fell from
57% to 35%.
7.d.Lower Levels of Industrialization and
Manufactured Exports
• At the same time, the share of employment in industry in many
developed countries is smaller now than in some developing
countries, particularly among women, as developed countries
continue their secular trend to switch to from industry to service
sector employment.
• Relatively few countries managed a substantial gain of the fraction
in manufacturing in this period; Indonesia, Turkey, and Mexico
showed modest gains, particularly for men.
• Other evidence indicates that a large fraction of global
manufacturing jobs were gained in one country—China—during this
period; but comparable data for China were unavailable for
comparison.
• But the share of industrial employment in Africa remains low for both
men and women in most countries
7.e.Lower Levels of Industrialization and
Manufactured Exports
• Along with lower industrialization, developing
nations tended to have a higher dependence
on primary export.
• 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.
• However, the low-income countries ,
particularly those in Africa, remain highly
dependent on a relatively small number of
agricultural and mineral exports.
8. a. Adverse Geography

• Many analysts argue that geography must play

some role in problems of agriculture , public
health, and comparative development.
• For example Landlocked economies, common in
Africa, often have lower incomes than coastal
economies.
• 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.
• Even global warming is projected to have its
greatest negative impact on Africa and South Asia
8.b. Adverse Geography

• The extreme case of favorable physical

resource endowment is the oil rich Persian
Gulf states.
• At the other extreme are countries like Chad,
Yemen, Haiti, and Bangladesh, where
endowments of raw materials and minerals
and even fertile land are relatively minimal.
• Resource endowment : A nation’s supply of
usable factors of production, including
mineral deposits, raw materials , and labour.
9.a.Underdeveloped Markets
• Imperfect 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 –
(1) a legal system that enforces contracts and
validates property rights;
(2) a stable and trustworthy currency;
(3) an infrastructure of roads and utilities that results
in low transport and communication costs so as to
facilitate interregional trade;
9.b.Underdeveloped Markets

(4) 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;
(5) substantial market information for consumers and
producers about prices, quantities, and qualities of
products and resources as well as the
creditworthiness of potential borrowers; and
(6) social norms that facilitate successful long-term
business relationships
9.c.Underdeveloped Markets

• Imperfect market : A market in which the

theoretical assumptions of perfect
competition are violated by the existence
of, for example, a small number of buyers
and sellers, barriers to entry, and
incomplete information.
• Incomplete information : The absence of
information that producers and consumers
need to make efficient decisions resulting
in underperforming markets.
10.a.Lingering Colonial Impacts and Unequal
International Relations
• Colonial Legacy : Most developing countries
were once colonies of Europe or otherwise
dominated by European or other foreign powers,
• Institutions created during the colonial period often
had harmful effects on development.
• Both domestically and internationally, developing
countries have more often lacked institutions and
formal organizations of the type that have
benefited the developed world.
• Even several decades after independence, the
effects of the colonial era linger for many
developing nations, particularly the least
developed ones.
10.b.Lingering Colonial Impacts and Unequal
International Relations

• External Dependence : Relatively ,

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.
10.c.Lingering Colonial Impacts and Unequal
International Relations

• More generally, developing nations have weaker

bargaining positions than developed nations in
international economic relations.
• Developing nations are also dependent on the
developed world for environmental preservation, on
which hopes for sustainable development depend.
• One of the greatest concern is that global warming is
projected to harm developing regions more than
developed ones;
• yet both accumulated and current greenhouse gas
emissions still largely originate in the high-income
countries, despite the role of developing-country
deforestation and growing emissions from lower
middle-income countries such as China and India.
2.5 How Low-Income Countries Today Differ from Developed Countries in
Their Earlier Stages:

Physical and Human Resource Endowments

●Most less developed countries are poorly endowed (especially Asia). Also parts
of Africa and Latin America require heavy investment to exploit the resources

●The difference in skilled human resource endowments is even more

pronounced

●Romer: the technology gap between rich and poor nations are divided into an
object gap (factories, roads, etc) and an idea gap (also called ingenuity gap:
business knowledge, worker motivation, etc) → No such human resource gaps
existed for now developed countries on the eve of industrialization.

Relative Levels of Per Capita Income and GDP

●Living standards of now developed were not great during industrialization, but
they certainly weren’t economically debilitating as they are now for developing
countries
Climatic Differences
●Economically most successful countries are located in the temperate zone –
this dichotomy cannot be ignored, although the effects of climate might be
explanatorily limiting on the greater scheme of inequality etc.

Population Size, Distribution, and Growth

●Before and during their early growth years, Western nations experienced a
very slow rise in population growth – this is not the case for most developing
countries now.

The Historical Role for International Migration

●International migration was a major outlet for excess rural population in the 19th
and early 20th century – home governments were relieved of costs of providing
for the unemployed, plus a not insignificant portion of foreign earnings were being
sent back home
●Mass emigration has very little scope for reducing pressures of overpopulation
in developing countries now
●US: immigration has been a problem and people feel like immigrants are taking
advantage = backlash against them – Proposition 187 in California taking away
benefits.
●Also many of the people who immigrate are the ones that are most needed by the
home countries, aka the educated and skilled – they move permanently = “brain
drain” → loss of valuable human resources
●Paradoxically, might be benefit of “brain gain” where people might be encouraged
to acquire skills

The Growth Stimulus of International Trade

●Non-oil exporting developing countries are unable to generate rapid economic

growth through world trade – their terms of trade have declined over years (price
received for exports relative to price to be paid for imports)
●When developing countries become lower-cost producers of competitive products
with developed countries, the latter set up barriers to trade (tariff and non)

Basic Scientific and Technological Research and Development

●Capabilities Scientific and technological advance largely concentrated in rich

countries
●Poor countries do not have the financial resources or the scientific and
technological know-how to undertake the kind of research and development
(R&D) that is in their economic long-term interest.
●Not in advance over anyone…

Efficacy of Domestic Institutions

●Douglass North: “even if the formal rules may be changed overnight,

informal rules usually change only ever so gradually”

● Developed countries also usually enjoyed relatively stronger political

stability and more flexible social institutions with broader access to mobility.

●Especially in Africa, colonizers more arbitrarily determined national

boundaries.
4.6 Are Living Standards of Developing and Developed Nations
Converging?

Divergence: A tendency for per capita income (or output) to grow

faster in higher-income countries than in lower-income countries so
that the income gap widens across countries over time (as was seen in
the two centuries after industrialization began).

Convergence: The tendency for per capita income (or output) to grow
faster in lower-income countries than in higher-income countries so that lower-
income countries are “catching up” over time. When countries are
hypothesized to converge not in all cases but other things being equal
(particularly savings rates, labor force growth, and production technologies),
then the term conditional convergence is used.
Feature Divergence Convergence

The process of two or more things moving apart The process of two or more things coming
Meaning
or becoming less similar. together or becoming more similar.

Direction Moving away from each other. Moving towards each other.

Outcome Increased difference or variety. Decreased difference or increased similarity.

Two lines moving towards a central point or

Visual Representation Two lines moving away from a central point.
meeting at a point.

* Globalization: Cultures and economies

* Evolution: Species evolving to adapt to becoming more interconnected and similar. <br>
different environments, becoming more distinct. * Technological Advancement: Different
<br> * Economic Development: Countries technologies converging to perform similar
Examples initially similar diverging in wealth and functions (e.g., smartphones combining camera,
development levels. <br> * Language: Dialects internet, phone). <br> * Linguistic
of a language gradually becoming so different Convergence: People speaking different
they become separate languages. languages in close contact adopting similar
grammatical structures or vocabulary.

Focus Emphasizes differences and diversification. Emphasizes similarities and unification.

Used to explain diversification, specialization, Used to explain standardization, integration, and

Application
and increasing heterogeneity. increasing homogeneity.
At the dawn on the industrial era, real living standards in richest countries
were no more than 3 times as great as poorest countries – now, ratio is
almost 100 to 1.

If growth experience were similar, technology transfer and more rapid capital
accumulation would explain that developing countries are catching-up by
growing faster on average than developed countries.

●Technology transfer: developing countries could “leapfrog” over earlier

stages of technological development, learn from past mistakes and move to
high-productivity methods

By some examples, the later a country begins modern economic

growth, the faster they can double output per worker.
●More rapid capital accumulation:

law of diminishing returns dictates that the impact of additional capital on output
should be smaller in developed countries who have a lot of capital already,
whereas it is scarce in developing countries.

●Although China and South Asia have had larger growth rates than OECD
countries in 1990-2003 period, many of the poorest countries remain in relative
stagnation.

Evidence of unconditional convergence is hard to find

but there is increasing evidence of “per capita income convergence,”
weighting changes in per capita income by population size.
Thank You