COMPARATIVE ECONOMIC

DEVELOPMENT
Economic Development
Viewed through the lens of
human development, the global
village appears deeply divided
between the streets of the haves
and those of the have-nots.
—United Nations Development Program, Human Development Report,
2006
Among countries colonized by European
powers during the past 500 years, those
that
were relatively rich in 1500 are now
relatively poor. . . . The reversal reflects
changes in
the institutions resulting from European
colonialism.
Simon Johnson
World disparities
1. Output per worker in the United States
is about 10 times higher than it is in
India and more than 50 times higher
than in the Democratic Republic of
Congo (DRC).
2. Real income per capita is $48,430 in
the United States, $2,930 in India, and
$280 in the DRC.
1. Life expectancy is 78 in the United
States, 65 in India, and just 46 in the
DRC.
2. The prevalence of undernourishment is
less than 2.5% in the United States but
22% in India and 75% in the DRC.
3. Literacy Rate Whereas almost all
women are literate in the United States,
just 51% are in India and 56% in the
DRC.
Features of Developing
Countries
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. Large 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.
Defining the Developing World

Countries are classified 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’s classification system

 210 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 (LICs),
 Lower middle income countries (LMCs),
 Upper middle income countries (UMCs),
 High income OECD(Organization for
Economic Corporations and Development)
countries, and other high-income countries.
World Bank
World Bank 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.
Low-income countries (LICs)
Low-income countries (LICs) In the World
Bank classification, countries with a
gross national income per capita of less
than $976 in 2008.
Middle-income countries

Middle-income countries In the World Bank

classification, countries with a GNI per
capita between $976 and $11,906 in
2008.
Newly industrializing countries (NICs)

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.
United Nations Development Program (UNDP)

1. Indebtedness
2. Human Development
Low, medium, high and very high
Least developed countries A United
Nations designation of countries with low
income,
low human capital, and high economic
vulnerability.
49 countries,33 of them in Africa,15 in
Asia, plus Haiti come under this criteria
low income, low human capital, and high
economic vulnerability.
 landlocked developing countries (of which
there are 30, half of them in Africa)
 “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 underemphasis 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 emerging and which as yet to emerge.
Basic indicators of development

1. Real income
2. Health
3. Education
In 2008 the total national income of all the
nations of the world was valued at more than
U.S.$58 trillion ,of which over $ 42 trillion
originated in the economically developed high
income regions and less than $16trillion was
generated in the less developed nations,
despite their representing about five sixths of
the world population.
 In 2008 Norway had 312 times the per
capita income of Ethiopia and 84 times
that of India.
GNIs & GDPs
 GNIs and GDPs by using purchasing
power parity (PPP) instead of exchange
rates as conversion factors.
 PPP is calculated using a common set of
international prices for all goods and
services.
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.
PPP
Purchasing power parity is defined as the
number of units of a foreign country’s
currency required to purchase the
identical quantity of goods and services in
the local developing country market as $1
would buy in the United States.
In practice, adjustments are made for
differing relative prices across countries
so that living standards may be measured
more accurately.
Example PPP
 The expenditure on a similar commodity
must be same in both currencies when
accounted for exchange rate. The
purchasing power of each currency is
determined in the process.
Example: Let's say that a pair of shoes
costs Rs 2500 in India. Then it should
cost $50 in America when the exchange
rate is 50 between the dollar and the
rupee.
Holistic Measures of living levels and
capabilities

The Traditional Development Index

1. Human Development Index (0 lowest
human development index 1 highest
human development index
2. Gross school enrollment ratio

3. Standard of living
The New Human Development Index

1. Gross national income (GNI) per capita replaces

gross domestic product (GDP) per capita. This
should be an unambiguous improvement :GNI
reflects what citizens can do with income they
receive, whereas that is not true of value added
in goods and services produced in a country that
go to someone outside it, and income earned
abroad still benefits some of the nation’s
citizens.
 As trade and remittance flows have been

expending rapidly, and as aid has been better

targeted to very low income countries, this
distinction has become increasingly important.
Education Index
2. Education Index:
 The average actual educational

attainment of the whole population.

 Expected attainment of today’s

children.
3. Expected Educational Attainment:
 Standard of education
4. The two previous components of the education
index, literacy and enrollment, have been
correspondingly dropped. In contrast to
expected attainment, literacy is clearly an
achievement, and even enrollment is at least a
modest achievement. However, literacy has
always been badly and too infrequently
measured and is inevitably defined more
modestly in a less developed country. And
enrollment is no guarantee that a grade will be
completed or for that matter that anything is
learned or that students (or teachers) even
attend.
5. The upper goalposts (maximum values)
in each dimension have been increased
to the observed maximum rather than
given a predefined cutoff.
In some ways, this returns the index to
its original design, which was criticized
for inadequately recognizing small gains
by countries starting at very low levels.
6. The lower goalpost for income has been
reduced. This is based on estimates for
Zimbabwe in 2007 that, if the data and their
interpretation hold up, represent a historic low
for recorded income.
7. Another 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).This reflects
a more usual construction of indexes.
8. Possibly the most consequential change is that
the NHDI is computed with a geometric mean,
as we examine next.
Characteristics of the Developing World:
Diversity within Commonality

 Lower levels of Living and Productivity

 Lower Levels of Human Capital
 Higher Levels of Inequality and Absolute
Poverty
 Higher Population Growth Rates
 Greater Social Fractionalization
 Larger Rural Populations but Rapid Rural
to Urban Migration
 Lower Levels of Industrialization and
Manufactured Exports
 Adverse Geography
 Underdeveloped Markets
 Lingering Colonial Imports and Unequal
International Relations
How Low Income countries today Differ from
Developed Countries in Their Earlier Stages

1. Physical and human resource endowments

2. Per capita incomes and levels of GDP in
relation to the rest of the world
3. Climate
4. Population size, distribution, and growth
5. Historical role of international migration
6. International trade benefits
7. Basic scientific and technological research
and development capabilities
8. Efficacy of domestic institutions