Module 2 - Comparative Economic

Development
Course Code: Econ 2 (Economic Development)
Module Code: 1.0 (Principles and Concepts)
Lesson Code: 1.2 (Comparative Economic Development)
Sections: A, B, C & D
Economics Terminology of the Week:
Gross National Income (GNI) is the total amount of money earned by a nation's people
and businesses. It is used to measure and track a nation's wealth from year to year. The
number includes the nation's gross domestic product plus the income it receives from
overseas sources.

I. MODULE OBJECTIVES:
By the end of this module, Econ 2 students will have been able to:

1. Compare developed and developing countries based on IMF, UNDP and World Bank
standards; and
2. Understand the Human Development Index as a measure of development.

II. BRIEF REVIEW:

Development is a concept that is difficult to define; it is inevitable that it will also be
challenging to construct development taxonomy. Countries are placed into groups to try
to better understand their social and economic outcomes. The most widely accepted
criterion is labeling countries as either developed or developing countries.
There is no generally accepted criterion that explains the rationale of classifying
countries according to their level of development. This might be due to the diversity of
development outcomes across countries, and the restrictive challenge of adequately
classifying every country into two categories.
The developing/developed countries taxonomy became common in the 1960s as a way
to easily categorize countries in the context of policy discussions on transferring
resources from richer to poorer countries (Pearson et all, 1969). For a country
classification system, some international organizations have used membership of the
Organization of Economic Cooperation and Development (OECD) as a main criterion
for developed country status. Though not expressly stating a country classification
system, the preamble to the OECD convention does include a reference to the belief of
the contracting parties that “economically more advanced nations should co-operate in
assisting to the best of their ability the countries in process of economic development.
This consequently resulted in about 80-85 percent of the world’s countries labeled as
developing and 15-20 percent as developed.
Due to the absence of a methodology in classifying countries based on the level of
development, this module will focus on the development taxonomies of the IMF, UNDP,
and World Bank. To know the difference among these three institutions, watch this
video:

III. DISCUSSION PROPER:

A. DEFINING THE DEVELOPED AND DEVELOPING WORLD
1. The International Monetary Fund (IMF)’s Country Classification Systems

The International Monetary Fund (IMF) works to achieve sustainable growth and
prosperity for all of its 190 member countries. It does so by supporting economic
policies that promote financial stability and monetary cooperation, which are essential to
increase productivity, job creation, and economic well-being. The IMF is governed by
and accountable to its member countries.

The IMF has three critical missions: furthering international monetary cooperation,
encouraging the expansion of trade and economic growth, and discouraging policies
that would harm prosperity. To fulfill these missions, IMF member countries work
collaboratively with each other and with other international bodies.

In mid-1960s, the first classification system divided countries into (1) industrial
countries, (2) other high-income countries, and (3) less-developed countries. In the
early 1970s, the classification system divided countries into (1) industrial countries, (2)
primary producing countries in more developed areas, and (3) primary producing
countries in less developed areas. By the late 1970s, the classification system had
changed to (1) industrial countries, (2) other Europe, Australia, New Zealand, South
Africa, (3) oil exporting countries, and (4) other less developed areas. In early 1980, this
classification system was significantly simplified when IFS introduced a two category
system consisting of (1) industrial countries and (2) developing countries. The IFS never
motivated the choice of classification systems used. In May 1980, the IMF published for
the first time its World Economic Outlook (WEO). In support of the analysis, the WEO
utilized the country classification system used in the IFS.
The group of industrial countries in 1980 consisted of 21 countries, but in 1989 Greece
and Portugal were reclassified from developing to industrial countries. The relevant
report—the October 1989 WEO—is silent on the reasons for why this reclassification
took place. A similar reclassification took place in the November 1989 IFS, but also
without any explanation. In 1997, the industrial country group was renamed the
advanced country group “in recognition of the declining share of manufacturing common
to all members of the group.” At the same time Israel, Korea, and Singapore were
added to the group reflecting these countries’ “rapid economic development and the fact
that they now all share a number of important characteristics with the industrial
countries, including relatively high income levels (comfortably within the range of those
in the industrial country group), well-developed financial markets and high degrees of
financial intermediation and diversified economic structures with rapidly growing service
sectors.” Subsequent editions of the WEO have not further elaborated on the definition
of an advanced country. After 1997, additions to the advanced country group include
Cyprus (2001), Slovenia (2007), Malta (2008), the Czech Republic (2009), and the
Slovak Republic (2009). Relevant WEO reports provide no rationale for these
reclassifications, but in the case of Slovenia, Malta, and the Slovak Republic one can
note that the reclassifications took place at the time these countries joined the euro
area.
From 1993 to 2004, the WEO used an additional country grouping, countries in
transition. The 28 designated transition countries had previously used a centrally-
planned economic system. The transition country group consisted of the 15 former
Soviet Union republics, 12 central and eastern European countries, and Mongolia.
Insofar as a WEO database had been established for a particular country, prior to 1993
these countries had been included among developing countries. The criterion for
inclusion into the category of countries in transition was that the country in question was
in a “transitional state of their economies from a centrally administered system to one
based on market principles.” While the establishment of the category was
understandable, it suffered from an inherent weakness. The problem was that both
advanced and developing countries have economies “based on market principles,” and
as transition countries completed their transition, to where would they move? In the
event, over an eleven year period no transition country transited. In 2004, on the
occasion of the accession of eight countries in central and eastern Europe to the
European Union, the transition countries group was combined with the developing
countries group to form a new emerging and developing countries group. Countries in
the new group were defined for what they were not; i.e., they were not advanced. The
designation emerging and developing countries would seem to suggest a further
division exists between emerging countries and developing countries. That, however, is
not the case, but the operational category of low income, developing countries (PRGT-
eligible countries) constitutes a sub-group.
With that, the main criteria used by the IMF in country classification are:

A. per capita income level

B. export diversification
C. degree of integration into the global financial system.

The IMF uses either sums or weighted averages of data for individual
countries. However, the IMF’s statistical Appendix explains that this is not a strict
criterion, and other factors are considered in deciding the classification of countries.
Right now, the IMF refers to the classification of countries as:

A. Advanced and;
B. Emerging and Developing Economies.

Advanced Economies are sub-categorized into five (5):

A. Euro Area - The euro area, commonly called the eurozone (EZ), is a currency union of 20
member states of the European Union (EU) that have adopted the euro (€) as their primary
currency and sole legal tender, and have thus fully implemented EMU policies. These
countries include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovak Republic, Slovenia, and
Spain
B. Major Advanced Economies (G7) - The Group of Seven (G7) is an intergovernmental
political and economic forum. It is organized around shared values of pluralism, liberal
democracy, and representative government. These countries are Canada, France,
Germany, Italy, Japan, United Kingdom, United States. Originally, Russia is part of it calling
it as G8 but in 2014, Russia was suspended indefinitely from the group after annexing
Crimea, an autonomous republic of Ukraine. As a result, the G-8 is now referred to as the
G-7.
C. Newly Industrialized Asian Economies - The term came into use around 1970, when the
Four Asian Tigers of Taiwan, Singapore, Hong Kong and South Korea rose to become
globally competitive in science, technological innovation and economic prosperity as well as
NICs in the 1970s and 1980s, with exceptionally fast industrial growth since the 1960s; all
four countries having since graduated into high-tech industrialized developed countries with
wealthy high-income economies. There is a clear distinction between these countries and
the countries now considered NICs. In particular, the combination of an open political
process, high GNI per capita, and a thriving, export-oriented economic policy has shown
that these East Asian economic tiger countries have roughly come to a match with
developed countries as those of Western Europe as well Canada, Japan, Australia, New
Zealand and the United States.
D. Other Advanced Economies (Advanced Economies excluding G7 and Euro Area)
- Australia, Czech Republic, Denmark, Hong Kong SAR, Iceland, Israel, Korea, New
Zealand, Norway, Singapore, San Marino, Sweden, Switzerland, Taiwan Province of China
E. the European Union - Austria, Belgium, Bulgaria, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece
Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland,
Portugal, Romania, Slovak Republic, Slovenia
Spain, Sweden, United Kingdom

The Emerging and Developing Economies are sub categorized into seven (7):

A. Central and Eastern Europe - Albania, Bosnia and Herzegovina, Bulgaria, Croatia,
Hungary, Kosovo, Latvia, Lithuania, FYR Macedonia, Montenegro, Poland, Romania,
Serbia, Turkey)
B. Commonwealth of Independent States - Armenia, Azerbaijan, Belarus, Georgia,
Kazakhstan, Kyrgyz Republic, Moldova, Mongolia, Russia, Tajikistan,
Turkmenistan, Ukraine, Uzbekistan
C. Developing Asia - Afghanistan, Bangladesh, Bhutan, Brunei
Darussalam, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao P.D.R.
Malaysia, Maldives, Myanmar, Nepal, Pakistan, Papua New
Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-
Leste, Tonga, Tuvalu, Vanuatu, Vietnam
D. ASEAN-5 - Indonesia, Malaysia, Philippines, Thailand, and Vietnam
E. Latin America and the Caribbean - Antigua and Barbuda, Argentina, The Bahamas,
Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica, Dominican
Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica,
 Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and
the Grenadines, Suriname, Trinidad and Tobaco, Uruguay, Venezuela
F. Middle East and North Africa - Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait,
Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Syria, Tunisia,
United Arab Emirates, Yemen
G. Sub-Saharan Africa - Angola, Benin, Botswana, Burkina Faso, Burundi, Comoros,
Democratic Republic of the Congo, Republic of Congo, Côte d'Ivoire, Equatorial Guinea,
Eritrea, Ethiopia, Gabon, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho,
Liberia, Madagascar, Malawi, Mali, Mauritius, Mozambique, Namibia, Niger, Nigeria,
Rwanda, São Tomé and Príncipe, Senegal, Seychelles, Sierra Leone, South Africa, South
Sudan, Swaziland, Tanzania, Togo, Uganda, Zambia, Zimbabwe

2. The World Bank’s Country Classification Systems

The World Bank is an international financial institution that provides loans and grants to
the governments of low- and middle-income countries for the purpose of pursuing
capital projects. The World Bank is the collective name for the International Bank for
Reconstruction and Development (IBRD) and International Development Association
(IDA), two of five international organizations owned by the World Bank Group. It was
established along with the International Monetary Fund at the 1944 Bretton Woods
Conference. After a slow start, its first loan was to France in 1947. In the 1970s, it
focused on loans to developing world countries, shifting away from that mission in the
1980s. For the last 30 years, it has included NGOs and environmental groups in its loan
portfolio. Its loan strategy is influenced by the United Nations' Sustainable Development
Goals, as well as environmental and social safeguards.

As of 2022, the World Bank is run by a president and 25 executive directors, as well as
29 various vice presidents. IBRD and IDA have 189 and 174 member countries,
respectively. The U.S., Japan, China, Germany and the U.K. have the most voting
power. The bank aims loans at developing countries to help reduce poverty. The bank is
engaged in several global partnerships and initiatives, and takes a role in working
toward addressing climate change. The World Bank operates a number of training
wings, and it works with the Clean Air Initiative and the UN Development Business. It
works within the Open Data Initiative and hosts an Open Knowledge Repository.
The classification tables include all World Bank members, plus all other economies with
populations of more than 30,000. The World Bank’s classification of the world’s
economies is based on estimates of gross national income (GNI) per capita. Previous
World Bank publications might have referred to this as gross national product, or GNP.
The GNI is gross national income converted to international dollars using purchasing
power parity rates. An international dollar has the same purchasing power over GNI as
a U.S. dollar has in the United States. The GNI per capital is also used as input to the
Bank’s operational classification of economies, which determines their lending eligibility.
The most current World Bank Income classifications by GNI per capita (updated July 1
of every year) are as follows:

▪ Low income: $1,135 or less

▪ Lower middle income: $1,136 to $4,465
▪ Upper middle income: $4,466 to $13,845
▪ High income: $13,846 or more

Low- and middle-income economies are usually referred to as developing economies,

and the Upper Middle Income and the High Income are referred to as Developed
Countries.
The World Bank adds that the term is used for convenience; ‘it is not intended to imply
that all economies in the developing group are experiencing similar development or that
other economies in the developed group have reached a preferred or final stage of
development’.
In 1978, the World Bank, for the first time, constructed an analytical country
classification system. The occasion was the launch of the World Development Report.
Annexed to the report was a set of World Development Indicators (WDI), which
provided the statistical underpinning for the analysis.16 The first economic classification
in the 1978 WDI divided countries into three categories: (1) developing countries, (2)
industrialized countries, and (3) capital-surplus oil-exporting countries.17 Developing
countries were categorized as low income (with GNI/n of US$250 or less) and middle-
income (with GNI/n above US$250).
Instead of using income as a threshold between developing and industrialized countries,
the Bank used membership in the OECD. However, four OECD member (Greece,
Portugal, Spain, and Turkey) were placed in the group of developing countries, while
South Africa, which was not a member of the OECD, was designated as an
industrialized country. Coming right on the heels of the 1973–74 oil price shock, the
analytical category for capital-surplus oil-exporters was understandable. However,
countries were not classified consistently as some capital surplus oil exporters (Iran,
Iraq, and Venezuela), which were included among developing countries. In addition,
none of the derogations from the stated principles underlying the classification system
was explained. The resulting classification system included two relatively poor countries
(South Africa with a GNI/n of US$1,340 and Ireland with a GNI/n of US$2,560) in the
group of industrialized countries, whereas five countries (Israel, Singapore, and
Venezuela, and OECD-members Greece and Spain) with income levels exceeding that
of Ireland’s were classified as developing. At the time, three of these five countries—
Greece, Spain, and Venezuela—were active borrowers from the IBRD whereas lending
to South Africa and Israel had ceased in 1966 and 1975 respectively.
Major reforms to the country classification system were introduced in the 1989 WDI.
First, a high-income country category—to include countries with a GNI/n above
US$6,000—was established by combining the old industrial and capital-surplus oil-
exporter categories. No rationale was provided for the cut-off level, but the threshold
was set at 12½ times the low income threshold or about double that of average world
income level; it was also well-above the IBRD graduation threshold. Thirty countries
(including all OECD member countries with the exception of Turkey) were in the new
high-income group. Second, within the middle income developing countries group, a
subdivision between lower and upper middle-income countries was established using as
a threshold the income cut-off between softer and harder IBRD borrowing terms. Third,
with the abolishment of the industrialized countries category, the developing countries
category was also dropped. However, it was acknowledged that it might be “convenient”
to continue to refer to low- and middle-income countries as developing countries.
As all economic thresholds are maintained (approximately) constant in real terms in line
with the methodology used on the operational side, the economic classification
thresholds are subject to a secular downward trend relative to average world income.
From 1987 (the base year for the 1989 classification reform) to 2009, the world price
level—as measured by the increase in the World Bank’s operational thresholds—about
doubled, but the average per capita nominal income almost tripled. Consequently, the
low-income threshold fell from 16 to 11 percent of average world income over this
period and the high-income threshold fell from 189 to 140 percent. The terminology
suggests that the thresholds are defined relative to the size distribution; this, however, is
not the case. The thresholds are not relative, but absolute, and it is possible for all
countries to be classified as either low-income or high income at the same time. This
raises questions about the appropriateness of the terminology. For example, with a
continued trend increase in average world income the high-income threshold will fall
below the average world income level. Therefore, consideration could be given to
renaming the category to something that would do justice to the fact that the threshold is
an absolute and not a relative threshold.
For the current 2024 fiscal year, country income is calculated using the World Bank
Atlas method.

A. Low-income economies
Afghanistan Guinea-Bissau Sierra Leone

Burkina Faso Haiti Somalia

Burundi Korea, Dem. People's Rep. South Sudan

Central African Republic Liberia Sudan

Chad Madagascar Syrian Arab Republic

Congo, Dem. Rep Malawi Tajikistan

Eritrea Mali Togo

Ethiopia Mozambique Uganda

Gambia, The Rwanda Niger Guinea Yemen, Rep.

B. Lower middle-income economies:

Angola Honduras Papua New Guinea

Algeria India Philippines

Bangladesh Kenya São Tomé and Principe

Benin Kiribati Senegal

Bhutan Kyrgyz Republic Solomon Islands

Bolivia Lao PDR Sri Lanka

Cabo Verde Lesotho Tanzania

Cambodia Mauritania Timor-Leste

Cameroon Micronesia, Fed. Sts. Tunisia

Comoros Moldova Ukraine

Congo, Rep. Mongolia Uzbekistan

Côte d'Ivoire Morocco Vanuatu

Djibouti Myanmar Vietnam

Egypt, Arab Rep. Nepal West Bank and Gaza

El Salvador Nicaragua Zambia

Eswatini Nigeria Zimbabwe

Ghana Pakistan

C. Upper middle-income economies:

Albania Fiji Montenegro

American Samoa Gabon Namibia

Argentina Georgia North Macedonia

Armenia Grenada Paraguay

Azerbaijan Guatemala Peru

Belarus Guyana Russian Federation

Belize Indonesia Samoa

Bosnia and Herzegovina Iran, Islamic Rep. Serbia

Botswana Iraq South Africa

Brazil Jamaica St. Lucia

Bulgaria Jordan St. Vincent and the Grenadines

China Kazakhstan Suriname

Colombia Kosovo Thailand

Costa Rica Lebanon Tonga

Cuba Libya Turkey

Dominica Malaysia Turkmenistan

Dominican Republic Maldives Tuvalu

Equatorial Guinea Marshall Islands Venezuela, RB

Ecuador Mexico

D. High-income economies:

Andorra Greece Palau

Antigua and Barbuda Greenland Panama

Aruba Guam Poland

Australia Hong Kong SAR, China Portugal

Austria Hungary Puerto Rico

Bahamas, The Iceland Romania

Bahrain Ireland Qatar

Barbados Isle of Man San Marino

Belgium Israel Saudi Arabia

Bermuda Italy Seychelles

British Virgin Islands Japan Singapore

Brunei Darussalam Korea, Rep. Sint Maarten (Dutch part)

Canada Kuwait Slovak Republic

Cayman Islands Latvia Slovenia

Channel Islands Liechtenstein Spain

Chile Lithuania St. Kitts and Nevis

Croatia Luxembourg St. Martin (French part)

Curaçao Macao SAR, China Sweden

Cyprus Malta Switzerland

Czech Republic Mauritius Taiwan, China

Denmark Monaco Trinidad and Tobago

Estonia Nauru Turks and Caicos Islands

Faroe Islands Netherlands United Arab Emirates

Finland New Caledonia United Kingdom

France New Zealand United States

French Polynesia Northern Mariana Islands Uruguay

Germany Norway Virgin Islands (U.S.)

Gibraltar Oman

3. United Nations Development Programme’s (UNDP) Country Classification

System

The United Nations Development Programme (UNDP) is a United Nations agency

tasked with helping countries eliminate poverty and achieve sustainable economic
growth and human development. The UNDP emphasizes developing local capacity
towards long-term self-sufficiency and prosperity.

Based at United Nations Headquarters in New York City, it is the largest UN

development aid agency, with offices in 177 countries. The UNDP is funded entirely by
voluntary contributions from UN member states.
The UNDP’s country classification system is calculated from the Human Development
Index (HDI), which aims to take into account the multifaceted nature of development.
HDI is a composite index of three indices measuring countries achievement in three
things:

A. Longevity/life expectancy,
B. education and
C. income.
It also recognizes other aspects of development such as political freedom and personal
security. The 2013 report which follows on from the 2010 report used the Gross
National Income per capita (GNI/n) with local currency estimates converted into
equivalent US dollars. It also uses equal country weights to construct the HDI
distribution. Currently, 47 countries out of 186 compared. In the classification system:

A. Developed countries are countries in the top quartile of the HDI distribution (very high
human development) - Norway, Ireland, Switzerland, Hong
Kong, Iceland, Germany, Sweden, Australia, Netherlands, Denmark, Finland, Singapore, United
Kingdom, Belgium, New Zealand, Canada, United
States, Austria, Israel, Japan, Liechtenstein, Slovenia, South
Korea, Luxembourg, Spain, France, Czechia, Malta, Estonia, Italy, United Arab
Emirates, Greece, Cyprus, Lithuania, Poland, Andorra, Latvia, Portugal, Slovakia, Hungary, Saudi
Arabia, Bahrain, Chile, Croatia, Qatar, Argentina, Brunei, Montenegro, Romania, Palau, Kazakhsta
n, RussianFederation, Belarus, Turkey, Uruguay, Bulgaria, Panama, Bahamas, Barbados, Oman, G
eorgia, Costa Rica, Malaysia, Kuwait, Serbia, and Mauritius
B. Developing countries consists of countries in three groups:

▪ High human development group (HDI percentiles 51-75) - Seychelles, Trinidad and
Tobaco, Albania, Cuba, Iran, Sri Lanka, Bosnia and Herzegovina, Grenada, Mexico, Saint Kitts and
Nevis, Ukraine, Antigua and Barbuda, Peru, Thailand, Armenia, North
Macedonia, Colombia, Brazil, China, Ecuador, Saint Lucia, Azerbaijan, Dominican
Republic, Moldova, Algeria, Lebanon, Fiji, Dominica, Maldives, Tunisia, Saint Vincent and the
Grenadines, Suriname, Mongolia, Botswana, Jamaica, Jordan, Paraguay, Tonga, Libya, Uzbekistan,
Bolivia, Indonesia, Philippines, Belize, Samoa, Turkmenistan, Venezuela, South
Africa, Palestine, Egypt, Marshall Islands, Vietnam, and Gabon
▪ Medium human development group (HDI percentiles 26-50)
- Kyrgyzstan, Morocco, Guyana, Iraq, El Salvador, Tajikistan, Cape
Verde, Guatemala, Nicaragua, Bhutan, Namibia, India, Honduras, Bangladesh, Kiribati, Sao Tome
and Principe, Micronesia, Laos, Eswatini, Ghana, Vanuatu, East
Timor, Nepal, Kenya, Cambodia, Equatorial Guinea, Zambia, Myanmar, Angola, Republic of Congo,
the Zimbabwe, Solomon Islands, Syria, Cameroon, Pakistan, Papua New Guinea, and Comoros
▪ Low human development group with bottom quartile HDI
- Mauritania, Benin, Uganda, Rwanda, Nigeria, Ivory
Coast, Tanzania, Madagascar, Lesotho, Djibouti, Togo, Senegal, Afghanistan, Haiti, Sudan, Gambia,
Ethiopia, Malawi, Democratic Republic of the Congo, Guinea-
Bissau, Liberia, Guinea, Yemen, Eritrea, Mozambique, Burkina Faso, Sierra
Leone, Mali, Burundi, South Sudan, Chad, Central African Republic, and Niger

To identify high HDI achievers and consequently developed countries, the UNDP used
a number of factors. One way is is to look at countries with positive income growth and
good performance on measures of health and education relative to other countries at
comparable levels of development. Another way was to look for countries that have
been more successful in closing the “human development gap,” as measured by the
reduction in their HDI shortfall (the distance from the maximum HDI score).
The UNDP’s country classification system is built around the Human Development
Index (HDI) launched together with the Human Development Report (HDR) in 1990. To
capture the multifaceted nature of development, the HDI is a composite index of three
indices measuring countries’ achievements in longevity, education, and income. Other
aspects of development—such as political freedom and personal security—were also
recognized as important, but the lack of data prevented their inclusion into the HDI.
Over the years, the index has been refined, but the index’s basic structure has not
changed. In the HDR 2010, the income measure used in the HDI is Gross National
Income per capita (GNI/n) with local currency estimates converted into equivalent US
dollars using PPP. Longevity is measured by life expectancy at birth. For education, a
proxy is constructed by combining measures of actual and expected years of schooling.
Measures of achievements in the three dimensions do not enter directly into the sub-
indices, but undergo a transformation.
In the HDR 1990 countries were divided into low-, medium-, and high-human
development countries using threshold values 0.5 and 0.8. In the HDR 2009, a fourth
category—very high human development—was introduced with a threshold value of 0.9.
No explanations for these thresholds were provided in either the 1990 or the 2009
report. The HDR 1990 also designated countries as either industrial or developing (at
times the terminology of ‘north’ and ‘south’ was used as well).
By the time of the HDR 2007/08, the industrial country grouping had been replaced by:
(1) member countries of the OECD and (2) countries in Central or Eastern Europe or
members of the Commonwealth of Independent states, while the developing countries
group was retained. This presentation, however, had partially overlapping
memberships; for example, OECD members Mexico and Turkey were also designated
as developing countries and the Central/Eastern European countries of Czech Republic,
Hungary, Poland, and Slovakia were also members of the OECD. In the HDR 2009
these overlapping classifications were resolved by introducing the new category
“developed countries” consisting of countries that have achieved very high human
development; other countries were designated as developing. The distinction between
developing and developed countries was recognized as “somewhat arbitrary.”
In the HDR 2010, absolute thresholds were dropped in favor of relative thresholds. In
the new classification system, developed countries are countries in the top quartile in
the HDI distribution, those in the bottom three quartiles are developing countries. The
report did not provide an explanation for this shift from absolute to relative thresholds
nor did it discuss why the top quartile is the appropriate threshold. The UNDP uses
equal country weights to construct the HDI distribution; in this distribution, 15 percent of
the world’s population lives in designated developed countries. The report did not
discuss this choice of weights.
To further understand the United Nations Development Programme, watch this video:

B. CHARACTERISTICS OF A DEVELOPING COUNTRY

A developing country is a nation that fares poorly on the HDI and has low levels of
industrialization. HDI stands for Human Development Index. A developing country is
less developed than a developed country. We also refer to developed countries
as advanced economies.
A developing country is a relatively poor agricultural country that is trying to become
more advanced economically. It is also seeking to become more advanced socially.
The World Trade Organization (WTO) says that the majority of its membership consists
of developing countries. The WTO is a global organization Links to an external site. that
deals with the rules and regulations of trade between countries.
The Cambridge Dictionary has the following definition of the term.:
“A country with little industrial and economic activity and where people generally have
low incomes.”
Developing country – a ‘tricky’ term
The World Bank describes the terms ‘developing world’ and ‘developing country’ as
‘tricky.’ Using the terms is tricky even when people use them cautiously and are not
judging the country’s development status. When listing or categorizing countries for
statistics and reports, the World Bank does not use the term ‘developing country.’
According to the World Bank:
“The World Bank has for many years referred to Links to an external site. ‘low and
middle-income countries’ as ‘developing countries’ for convenience in publications, but
even if this definition was reasonable in the past, it’s worth asking if it has remained so
and if a more granular definition is warranted.”
The IMF, in the World Economic Outlook, used the terms advanced
economies, emerging markets, and developing economies. IMF stands
for International Monetary Fund Links to an external site..
Some of the most important features of developing countries are listed below and
explained thereafter.

• Low Industrial Base

• Low Human Development Index (HDI)
• High marginal Productivity of Capital
• Low labor productivity
• Poor Institutions
• Imperfect Markets
• Low technology proliferation
• Raw material exporting
• Relative land abundance
• Plenty of challenges

Due to a low industrial base, developing countries may also be referred to as low
income countries. Therefore, the term “Low and middle income countries” may also
generally mean developing countries.
High marginal Productivity of Capital
Developing countries are characterized by a very low base in as far as capital is
concerned. That also means a unit of capital can do more than it could do in developed
countries. Developed countries are characterized by capital saturation, and it means
that investor funds/loanable funds are plentiful in their supply on the market to the
extent that an investor is not always able to get the first chance at the best returns
project. On the other hand, developing countries are capital starved, and very good
projects can spend years before attracting any funds. Thus, capital in developing
countries is likely to fund the best ‘high return’ projects ceteris paribus (holding other
factors constant). Secondly, given the relative absence of technology, a small amount of
capital can ensure jumps in technological investment that can have an important
multiplier effect on productivity, incomes and welfare. Investing in an ox-drawn plough in
a peasant area in a developing country can protect the beneficiary family from hunger,
potentially also allowing it to sell excess produce on the market. This would not be the
same in an advanced country where the ‘ox-drawn’ plough might now be a relic found
only in museums.
Low labor productivity
With the little or no proliferation of technologies that complement labor, there is also
very low labor productivity (output per unit of labor) in developing countries. However,
labor complementation is only part of the story. Human capital theory tells us that
developing Western countries have had less children per household, allowing them to
invest more per child in terms of training and education whereas in a number of
developing countries societies still invest in more children per family – hence reducing
the amount of money that can be invested per child. Hence, the low labor productivity.
Poor Institutions
Institutions are related to the rule of law, transparency, property rights enforcement and
corruption (among other issues). Ruttan and Hayami (1984) defines institutions as the
organizational or societal rules that assist in facilitating coordination by helping
members of the society/organization develop expectations that form the basis of
interaction. Corruption, transparency and rule of law are important topics in the
development discourse because without them there is little or no development. In the
words of Demsetz (1967), “property rights specify how persons may be benefited and
harmed, and, therefore, who must pay whom to modify the actions taken by persons”.
According to Demsetz (1967), property rights function by ensuring greater
internalization of externalities by properly guiding incentives. Externalities (to be
discussed in greater detail in later topics) are scenarios in which individuals are affected
by a transaction that they are not party to. These effects can either be positive or
negative. As an example, if politicians can unfairly benefit from ‘protection payments’
from a business, then property rights are ill-defined and institutions are not well-formed
in such a jurisdiction.
Imperfect Markets
Three defining conditions for perfect markets are free market entry and exit, many
buyers and sellers and perfect (widely available) information. Perfect markets are free
markets without any exogenous barriers or restrictions. However, in developing
countries the low rates of technological proliferation may result in market imperfections.
Market imperfections are distorted markets that do not reflect genuine market
equilibrium. For example, for certain political ends, a government may enforce certain
ideological training programs (diplomas and degrees) in a manner that do not
correspond to the dictates of the market in any way, thus creating market distortions by
creating an oversupply of graduates that are not sought after on the market. Due to low
technological proliferation (internet for example), a recent graduate in a developing
country may struggle to find a position that matches his or her profile yet in a developed
country there may be job matching programs or even phone applications that match
graduate profiles to jobs to create nearly a ‘perfect information’ scenario.
Low technology proliferation
Developing countries are also not as technologically advanced as their developed
counterparts. The industrial revolution did not take place in many developing parts of
the world, and ‘catch-up’ is the name of the ‘game’ that developing countries are
currently engaged in. However, importing technology is expensive. Where developing
countries do manage to import technology it is usually in the form or finished products or
components for assembly. Despite the high technology costs, developing countries also
have a long way to go from the perspective of increasing technical capabilities and their
applications in universities.
Raw material exporting
Related to low technological proliferation, developing countries are mostly raw material
exporters because they lack the technology to convert those materials into finished
products.
Plenty of challenges
‘You heard that right’. In some developing countries almost nothing works. There are no
proper roads, clinics, educational and recreational facilities for young people. In some
developing countries there is no electricity and piped water even in urban areas. The
schools and universities do not have enough capacity, and there are no proper
provisions in the constitution or rather enforcement of property rights to ensure the right
incentives are there to attract capital and investment.

C. THE HUMAN DEVELOPMENT INDEX (HDI)

Organizations can use the SDGs as a framework for assessing progress of their
development activities. However, in assessing the development progress of societies
and countries, the Human Development Index (HDI) is an important metric. “The HDI
was created to emphasize that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic growth alone” (UNDP,
2019). HDI is a “summary measure of average achievement in key dimensions of
human development: a long and healthy life, being knowledgeable and having a decent
standard of living” (UNDP, 2019). “HDI is the geometric mean of normalized indices for
each of the three dimensions” of health, education and standard of living. Figure
below shows the HDI components.
Dimensions and calculation:
1. Old method (HDI before 2010).
The HDI combined three dimensions last used in its 2009 report:

• Life expectancy Links to an external site. at birth, as an index of population health and
longevity to HDI
• Knowledge and education, as measured by the adult literacy Links to an external site. rate
(with two-thirds weighting) and the combined primary, secondary, and tertiary gross
enrollment ratio Links to an external site. (with one-third weighting).
• Standard of living Links to an external site., as indicated by the natural logarithm Links to an
external site. of gross domestic product Links to an external site. per capita Links to an
external site. at purchasing power parity Links to an external site..

This methodology was used by the UNDP until their 2011 report.
The formula defining the HDI is promulgated by the United Nations Development
Programme (UNDP Links to an external site.). In general, to transform a raw variable.
2. New Method (2010 HDI onwards)
Published on 4 November 2010 (and updated on 10 June 2011), the 2010 Human
Development Report Links to an external site. calculated the HDI combining three
dimensions:

• A long and healthy life: Life expectancy at birthLinks to an external site.

• Education index Links to an external site.: Mean years of schooling and Expected years of
schooling
• A decent standard of living: GNI Links to an external site. per capita (PPP Links to an
external site. international dollars Links to an external site.)

In its 2010 Human Development Report, the UNDP began using a new method of
calculating the HDI. The three indices are used in Life Expectancy Index, Education
Index Links to an external site.(Mean Years of Schooling Index and Expected Years of
Schooling Index) and Income Index.
Based on the 2020 Human Development Report showing the 2019 data, below is the
Top 10 countries with very high human development indices.
Meanwhile, here is the Human Development Index of the Philippines as compared with
that of other ASEAN countries:

IV. EVALUATION
1. Attendance to Class Discussion
2. Active participation

V. REFERENCES
https://www.imf.org/external/pubs/ft/wp/2011/wp1131.pdfLinks to an external site.
https://www.imf.org/external/pubs/ft/wp/2011/wp1131.pdfLinks to an external site.
http://www.a4id.org/policy/understanding-the-developeddeveloping-country-
taxonomy/#:~:text=The%20main%20criteria%20used%20by,of%20data%20for%20indiv
idual%20countries Links to an external site..
https://www.imf.org/external/pubs/ft/weo/2012/02/weodata/groups.htm#eaLinks to an
external site.
https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-
and-lending-groups