ECONOMIC DEVELO8PMENT – LESSON 2 – COMPARATIVE ECONOMIC DEVELOPMENT – 1 – 23 – 2025

REPORTERS: NANCY MALABANAN & LYOD DALIPE COURSE/YEAR/BLOCK: BSA-2B

2.1 INTRODUCTION

Developing Countries

Countries primarily in Asia, Africa, the Middle East, Latin America, eastern Europe, and the former Soviet
Union that are presently characterized by low levels of income and other development deficits. Used in the
development literature as a synonym for less developed countries, or collectively low and middle-income
countries. A large majority of countries have made substantial economic development progress over the
last few decades. At the same time, the global economy continues to present extreme contrasts.

2.2 WHAT IS THE DEVELOPING WORLD?

Defining the Developing World

The most common way to define the developing world is by per capita income. Several international
agencies, including the 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.

As of 2023, World Bank classifies 266 economies for analytical purposes into four income groups: low,
lower-middle, upper-middle, and high-income countries.

A special distinction is made among upper-middle-income or newly high-income economies, designating

some that have achieved relatively advanced manufacturing sectors as newly industrializing countries
(NICs).

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.

In 1987, 30% of reporting countries were classified as low-income and 25% as high-income countries.
Jumping to 2023, these overall ratios have shifted down to 12% in the low-income category and up to 40%
in the high-income category.

- 100% of South Asian countries were classified as low-income countries in 1987, whereas this share
has fallen to just 13% in 2023.
 - In the Middle East and North Africa there is a higher share of low-income countries in 2023 (10%)
than in 1987, when no countries were classified to this category.
- In Latin America and the Caribbean, the share of high-income countries has climbed from 9% in
1987 to 44% in 2023.
- Europe and Central Asia has a slightly lower share of high-income countries in 2023 (69%) than it
did in 1987 (71%).

BASIC INDICATORS OF A DEVELOPMENT

1. REAL INCOME – measured by purchasing power

- 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.

- GROSS NATIONAL INCOME (GNI)

The total domestic and foreign output claimed by residents of a country, consisting of gross domestic
product (GDP) plus factor incomes earned by foreign residents, minus income earned in the domestic
economy by nonresidents.

In accordance with the World Bank, income-based country classification scheme, GNI per capita is the
most common measure of overall level of economic activity and often used as a summary index of the
relative economic well being of people in different nations.

GNI PER CAPITA INCOME (adjusted)

Low-income countries (LICs). In the World Bank classification, countries with a GNI per capita of $1,145
or less for 2025.

Lower-middle income countries (LMICs). In the World Bank classification, countries with a GNI per
capita of $1,146 – 4,515 for 2025.

Upper-middle income countries (UMICs). In the World Bank classification, countries with a GNI per
capita of $4,516 – 14,005 for 2025.

High-income countries (HICs). In the World Bank classification, countries with a GNI per capita above
$14,005 in 2025.

- PURCHASING POWER PARITY – amount of goods you can get per 1 unit of currency

It is defined as the number of units of a foreign country’s currency required to purchase the identical
quantity of goods and services in the local developing country market as $1 would buy in the United
States. Also, it is a calculation of GNI using a common set of inter- national prices for all goods and
services, to provide more accurate comparisons of living standards.
 Generally, prices of nontraded 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.

Example: A cup of coffee in the US costs only 5 dollars while in China, it costs 25 yuan/yen.

PPP = 1 dollar = 5 yuan/yen

2. HEALTH – measured by life expectancy, undernourishment and child mortality

- Life expectancy at birth: Number of years a newborn infant could expect to live if prevailing
patterns of age-specific mortality rates at the time of birth stay the same throughout the infant’s
life.
3. EDUCATION -measured by literacy and schooling
- Expected years of schooling: Number of years of schooling that a child of school entrance age can
expect to receive if prevailing patterns of age-specific enrolment rates persist throughout the child’s
life.
- Mean years of schooling: Average number of years of education received by people ages 25 and
older, converted from education attainment levels using official durations of each level.

2.3 COMPARING COUNTRIES BY HEALTH, EDUCATION AND INCOME INDEX

NEW HUMAN DEVELOPMENT INDEX

- United Nations Development Program (UNDP)

- Human Development Reports
 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 centrepiece 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.

Ranking of HDI

- Scale of 0 = Lowest Human Development

- Scale of 1 = Highest Human Development

DIMINISHING MARGINAL UTILITY

The concept that the subjective value of additional consumption lessens the total consumption becomes
higher.

2 steps in Calculating the NHDI

1. Creating the 3 “dimension indices” (Health, Education, Income Index)

2. Aggregating the resulting indices to produce the overall NHDI
 Dimension Index Formula
Actual Value−Minimum Value
MaximumValue−Minimum Value

Example:

- Life Expectancy Index = 79.93 – 20 / 85 – 20 = 0.922 (health index)

- Combined Schooling Index = (0.558 + 0.750) / 2 = 0.654 (education index)
- Standard of Living Index = I[n(13,011.7)-In(100)]/[In(75,000)-In(100)] = 0.735 (income index)

NHDI = 1/3 (income index) + 1/3 (health index) = 1/3 (education index)

COMPUTING THE NHDI

The use of geometric mean in computing the NHDI is important.

- When using arithmetic mean (adding all indexes and dividing by 3) in the HDI, the effect is to
assume perfect substitutability across income, health, and education. For example, a higher value
of the education index could compensate, one for one, for a lower value of the health index.
- In contrast, use of a geometric mean ensures that poor performance in any dimension directly
affects the overall index.
- As the UNDP puts it, the new calculation “captures how well rounded a country’s performance is
across the three dimensions.”
- So, in the New HDI, instead of adding up the health, education, and income indexes and dividing by
three, the HDI is calculated with the geometric mean, which is applied in the Costa Rica case as
follows:
1 1 1
HDI =H E I =√3 0.922∗0.654∗0.735=0.763
3 3 3

 PHILIPPINES RANKED FROM 116TH (2022) TO 113TH (2024) AS HIGH HUMAN DEVELOPED COUNTRIES
HAVING AN HDI OF 0.710.

Source: Human Development Index Chart 2022

WHAT IS THE NEW HUMAN DEVELOPMENT INDEX?

In 2010, the UNDP introduces a New Human Development Index which had notable changes from its
traditional HDI; the new version has clear strengths, but also a few potential drawbacks:

1. NHDI is computed with a geometric mean rather than a simple arithmetic mean.
2. GNI per Capita replaces the GDP per capita.
3. The education index has been completely revamped.
2 new components were added: average actual educational attainment of the whole population,
and expected attainment of today’s children.
4. Two previous components of the education index, literacy and enrolment, were correspondingly
dropped.
5. The upper goalposts (maximum values) in each dimension were increased to the observed
maximum rather than given a predefined cutoff.
6. The “lower goalpost” (maximum value) for income has been reduced.
7. A minor difference is that rather than using the common logarithm (log) to reflect diminishing
marginal benefit of income, the NHDI now uses the natural log (ln).

Human Development Index Ranking: How Does it Differ from Income Rankings?

One reason for the importance of the HDI is that income predicts rather weakly how countries will perform
on education and health, and on the HDI in particular.

Source: United Nations Development Program

2.4 KEY SIMILARITIES AND DIFFERENCES OF DEVELOPING COUNTRIES

Ten features help to define key similarities and differences among developing countries, and the mix and
severity of the economic development challenges facing any one country. Clearly, the scope of comparative
economic development goes far beyond income differences.

1. Levels of Income and Productivity

 Poverty Trap – low income leads to low investment in education and health, as well as plant and
equipment and infrastructure, which in turn leads to low productivity and economic stagnation.
 Nobel Laureate Gunnar Myrdal called “circular and cumulative causation”
Source: CIA, The World Factbook – Real GDP per capita 2025

 The top 10 countries with the highest GDP per capita are Luxembourg, Singapore, Monaco, Ireland,
and Qatar, each with their own economic prosperity and stability, largely driven by their finance,
banking, and tech sectors.
 Bermuda, Macau, and Isle of Man have small, specialized economies, high GDP per capita, while
Norway and Switzerland have robust, diversified economies with energy, finance, and technology
sectors.

Source: World Bank World Development Indicators

 The Philippines ranked 13th as the most populous country in 2024 and classified as a lower-middle
income country ever since World Bank came up with its classification scale whether internally in the
early 1980s or as officially published since 1989.

2. Human Capital Attainments
Human capital—including health, education, and skills—is vital to economic growth, as well as a
key aspect of human development. There has been dramatic progress in health and education in
most developing countries over the past quarter century. Despite this, there remain great
disparities in human capital around the world, as we saw when considering the components of
the Human Development Index.
PUPIL-TEACHER RATIO. Number of students who attend a school or university divided by the
number of teachers in the institution.
  The lower the pupil-teacher ratio shows the greater achievements in Grades Kinder – Grade 3.
 Students facing socio-economic disadvantages showed greatest gains in smaller class sizes during
primary grades.
 Students enjoy longer-term benefits the more years they spend with spend with reduced class sizes
and a lower ratio of students to teachers.

Source: UNESCO Institute for Statistics as of February 2020

3. Inequality and Absolute Poverty

High levels of inequality are prevalent in many low-income and middle-income countries, partly due to the historical
high inequality in Latin American countries.

Extreme Poverty – caused by lack of human capital, as well as social and political exclusion and other deprivations. It
causes great human suffering, so alleviating it is the top priority of international development.

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

Inequality is high in resource-rich developing countries, particularly in the Middle East and sub-Saharan Africa, with
Asia generally experiencing lower inequality despite rising trends.

Development economists are examining how poverty and inequality can cause slower growth, highlighting the "last
mile" of poverty reduction strategies, especially in challenging conditions like ongoing conflict, due to their central
importance in development.

4. Population Growth and Age Structure

Population growth rates are determined by the difference between the birth rate and the death rate (net of
migration). Population dynamics varies widely among regions. Populations of some developing countries, particularly
in Africa, continue to grow rapidly.

Europe and other new-developed countries experienced rapid population growth. However, in recent decades, the
majority of population growth has been concentrated in the developing world.

CRUDE BIRTH RATE – the number of children born alive each year per 1,000 population.
As large numbers of children become adults and join the workforce, children are a smaller fraction of the population.
And before these large generations retire, the fraction of the population older than working age remains small. The
result is called a “demographic dividend,” which provides a crucial opportunity for a country to grow rapidly and
become a high-income country. But with relatively few children, eventually the retired cohort will become a high
fraction of the population

DEPENDENCY BURDEN – proportion of the total population aged 0-15 and 65+, which is considered economically
unproductive and therefore not counted in the labor force. (older people and children)

A major implication of high birth rates is that the active labor force has to support proportionally almost twice as
many children as it does in richer countries. By contrast, the proportion of people over the age of 65 is much greater
in the developed nations. Both older people and children are often referred to as an economic dependency burden in
the sense that they are supported financially by the country’s labor force.

In 2022, the crude birth rate in the Philippines remained nearly unchanged at around 21.62 live births per 1,000
inhabitants. But still, the rate reached its lowest value of the observation period in 2022.

5. Rural Economy and Rural-to-Urban Migration

Economic development involves a shift from agriculture to manufacturing and services, with a significant portion of
the population in low- and middle-income countries living in rural areas. Despite modernization, rural areas often
face poverty, limited information, and social stratification. Rapid urbanization is underway, with hundreds of millions
moving from rural to urban areas. From 1960-2022, selected countries has a drastic change from rural to urban such
as Brazil, US, South Africa, China, Philippines, Vietnam, and India and the world is still growing beyond its 50%
threshold.
 6. Social Fractionalisation

Fractionalisation – Significant ethnic, linguistic, and other social divisions within a country.

 This is sometimes associated with civil strife and even violent conflict, one of the most difficult
governance challenges for economic development.
 High ethnic fragmentation in countries can contribute to lower economic growth, schooling,
political stability, and infrastructure. The greater a country's ethnic, linguistic, and religious
diversity, the more likely it is to experience internal strife and political instability, especially if
inequality falls along these identity group lines.
 High fractionalization = High internal strife and political instability
 Ethnic groups often face discrimination, social exclusion, and systematic disadvantages, with over
half of developing countries experiencing interethnic conflict.
 Here is the top 5 most racially diverse country as of 2025.

Source: Data Pandas 2025

7. Level of Industrialization and Manufactured Export

 Industrialized countries are often referred to as “advanced economies” due to their high
productivity and incomes.
 However, many developing countries prioritize industrialization, particularly in low-skill and lower-
wage industries.
 Developing countries typically have a higher share of employment and output in agriculture, with
some low-income countries having over two-thirds of their population working in agriculture. In
contrast, most developing nations have relatively low productivity in agriculture compared to
other sectors.
 Developing nations, despite lower industrialization, have a higher dependence on primary exports,
with most diverging away from agricultural and mineral exports. Middle-income countries are
catching up with developed countries, while low-income countries, especially in Africa, remain
highly dependent.

8. Geography and Natural Resource Endowment

Resource endowment – a nation’s supply of usable factors of production, including mineral
deposits, raw materials, and labor.
 Geography plays a significant role in the distribution of natural resources, such as minerals, in
countries like the Persian Gulf states. However, high mineral wealth doesn't guarantee
 development success, as conflicts over profits can lead to social strife, undemocratic governance,
inequality, and armed conflict.
 Social scientists argue geography influences agriculture, public health, and development.
Landlocked economies in Africa often have lower incomes. Tropical or subtropical regions suffer
from tropical pests, diseases, water resource constraints, and extreme heat.

9. Extent of Financial and Other Market Development

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.

Economic institutions – are humanly devised constraints that shape interactions in an economy,
including formal rules in constitutions, laws, contracts, and market regulations, as well as
informal rules in behavior, conduct, values, and customs.
Market underdevelopment in developing nations often lacks a legal system, stable currency,
infrastructure, well-regulated banking and insurance systems, substantial market information,
and social norms.
These factors, along with economies of scale, thin markets, widespread externalities, and poorly
regulated property resources, result in highly imperfect markets. Small externalities can interact
to create large distortions in an economy, potentially presenting an underdevelopment trap.

10. Quality of Institutions and External Dependence

Colonial Legacy – most developing countries were once colonized by European powers or
dominated by foreign powers. Colonial institutions often had detrimental effects on development,
favoring wealth extractors over creators. Developing countries often lack formal organizations and
institutions that have benefited the developed world, both domestically and internationally.

Property Rights - The acknowledged right to use and benefit from a tangible (e.g., land) or
intangible (e.g., intellectual) entity that may include owning, using, deriving income from, selling
and disposing.

Decolonization was a significant event in the 20th century, with over 80 former European colonies
joining the United Nations. However, the effects of the colonial era, including stolen resources,
persist in many developing nations. Colonial powers' decisions on whether to encourage
investments or exploit resources for the colonizing elite led to extreme inequality, with
development-facilitating or development-inhibiting institutions having a long lifespan.

 High inequality, often linked to ethnicity, often emerged due to slavery and coercion of
indigenous populations. This had long-term consequences, particularly in Latin America.
Postcolonial elites took over exploitative roles, leading to less investment in democratic
institutions, public goods, and education.

External Dependence and Unequal International Relations - Developing countries have been less
influential in international relations, leading to adverse consequences for development.
 Agreements within the World Trade Organization, such as agricultural subsidies and intellectual
property rights, have often been unfavorable to developing countries.
  Most middle-income economies, except China and India, have weaker bargaining positions than
developed nations.
 Developing nations also face cultural dependence, environmental dependence, and more
challenging economic development starting positions compared to developed countries.

2.5 ARE LIVING STANDARDS OF DEVELOPING AND DEVELOPED NATIONS CONVERGING?

Historically, rich countries had three times higher living standards than poorest. Today, the ratio approaches
100, indicating divergence in economic growth rates between developed and developing countries.

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.

Convergence – a tendency for lower-income countries experience faster per capita income growth than
higher-income countries, allowing them to catch up over time. This phenomenon is influenced by savings
rates, labor force growth, and production technologies.

The Great Divergence – a two-century period of exponential productivity and income growth in early
industrializing countries, led to stagnation in most other countries, with living standards still largely
unimproved in least-developed countries. On the other hand, the Industrial Revolution, which began 250
years ago in England, led to significant economic growth and improved living standards in countries like
West Europe and North America.

Two Major Reasons to Expect Convergence

1. Technology transfer – allows developing countries to "leapfrog" earlier stages of technological

development, enabling faster growth. This advantage of backwardness allows them to move quickly
to high-productivity techniques of production.
2. Diminishing returns to factor accumulation. High capital intensity leads to lower marginal product
and profitability, resulting in higher investment rates in developing countries.
The conventional method for determining per capita income convergence or divergence at the
country level involves estimating growth rates as a function of initial income.

Perspectives on Income Convergence

1. Relative Income Convergence at the Country Level

The conventional method for determining per capita income convergence or divergence at the
country level involves estimating growth rates as a function of initial income.
2. Conditional Convergence
The focus is on the direction of convergence, not its full projection. A weaker convergence
hypothesis suggests conditions for convergence, suggesting global economies may be moving
towards convergence.
3. The Importance of Avoiding Selection Bias
Research on convergence in the mid-1980s used data from developed OECD countries, concluding
strong convergence. However, data divergence was found when adding developing countries,
highlighting the importance of selecting countries at the beginning of study periods.
4. Population-Weighted (Per Capita) Income Convergence
As can be perceived in the figures, in the first periods (1952–1978) there was clear per capita
divergence. By the middle period (1978–1991) divergence had become much less pronounced. In
the latter periods, and especially in 2004–2017, there was strong per capita (re-)convergence,
 driven in significant part by historically rapid growth in the two largest countries. among the
countries for which we have data.

5. Absolute Income Convergence

China and India have experienced rapid growth since 1990, leading to relative country convergence.
However, income gains are generally smaller due to their low starting income levels. Sub-Saharan
Africa's growth rate matches high-income OECD, but absolute income gains are smaller.
6. World-As-One-Country Convergence
This studies and interpret a fall in inequality as convergence, while a rise in inequality means
divergence. This approach considers changes in inequality within and between countries. Despite
this, development often occurs at the national level, unlike world-as-one-country inequality.
7. The Future of Convergence: Opportunities and Risks
The convergence trend, although encouraging, may be hindered by technological divides, climate
change, narrow interest groups, and armed conflict, but may eventually lead to a sustainable global
re-convergence.

2.5 LONG-RUN CAUSES OF COMPARATIVE DEVELOPMENT

Schematic Representation

 Geography
 Institutional quality- colonial and post-colonial
 Colonial legacy pre-colonial comparative advantage
 Evolution and timing of European development
 Inequality - human capital
 Type of colonial regime
Nature and Role of Economic Institutions

Economic Institutions

"Humanly devised" constraints that shape interactions (or "rules of the game) in an economy, including
formal rules embodied in constitutions, laws, contracts, and market regulations, plus informal rules
reflected in norms of behavior and conduct, values, customs, and generally accepted ways of doing things.
Countries with higher incomes can afford better institutions, so it is challenging to identify the impact of
institutions on income. But recently, development economists have made influential contributions toward
achieving this research goal.

 Institutions provide "rules of the game" of economic life

 Provide underpinning of a market economy Include property rights, contract enforcement
 Can work for improving coordination,
 Restricting coercive, fraudulent and anti-competitive behavior
 Providing access to opportunities for the broad population
 Constraining the power of elites, and managing conflict Provision of social insurance
 Provision of predictable macroeconomic stability.
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