Chapter 2

Comparative
Economic
Development

Copyright © 2012Copyright
Pearson ©Addison-Wesley. All rights reserved.
2012 Pearson Addison-Wesley. All rights reserved.
2-1
Common characteristics of developing countries
• These features in common are on average and with
great diversity, in comparison with developed
countries:
– Lower levels of living and productivity
– Lower levels of human capital – poverty trap
– Higher levels of inequality and absolute poverty
– Higher population growth rates
– Greater social fractionalization
– Larger rural population - rapid migration to
cities
– Lower levels of industrialization and
manufactured exports
– Adverse geography
– Underdeveloped financial and other markets
– Colonial Legacies - poor institutions etc.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
2-2
2.1 Defining the Developing World

• World Bank Scheme- ranks countries on

GNP/capita
– LIC, LMC, UMC, OECD (see Table 2.1 and Figure
2.1)
• low-income countries (LICs),
• lower-middle-income countries (LMCs)
• Upper middle-income countries (UMCs)
• Organization for Economic Cooperation and
Development (OECD) high-income OECD countries

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-3
Table 2.1 Classification of Economies by Region and
Income, 2010

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-4
Table 2.1 Classification of Economies by Region and Income,
2010 (continued)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-5
Table 2.1 Classification of Economies by Region and Income,
2010 (continued)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-6
Figure 2.1 Nations of the World, Classified by
GNI Per Capita

Source: Data from Atlas of Global Development, 2nd ed., pp. 10–11. © Collins Bartholomew
Ltd., 2010.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-7
2.2 Basic Indicators of Development: Real
Income, Health, and Education

• Gross National Income (GNI)

• Gross Domestic Product (GDP)
• PPP (Purchasing Power Parity) method
instead of exchange rates as conversion
factors (see Figure 2.2)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-8
 (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.

(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.

Capital stock is the total amount of physical goods existing at

a particular time that have been produced for use in the
production of other goods and services.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-9
 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.

Value added The portion of a product’s final value that

is added at each stage of production.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-10
2.3 Holistic Measures of Living Levels and
Capabilities

• Health
• Life Expectancy
• Education
• HDI as a holistic measure of living levels
•

• HDI can be calculated for groups and regions in a

country
– HDI varies among groups within countries
– HDI varies across regions in a country
– HDI varies between rural and urban areas

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-11
 Human Development Index (HDI) An index
measuring national socioeconomic development,
based on combining measures of education, health,
and adjusted real income per capita.

Diminishing marginal utility The concept that the

subjective value of additional consumption lessens
as total consumption becomes higher.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-12
Table 2.3 Commonality and Diversity: Some
Basic Indicators

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-13
Figure 2.3 Human Development Disparities within
Selected Countries

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-14
Figure 2.3 Human Development Disparities within
Selected Countries (continued)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-15
Table 2.4 2009 Human Development Index
for 24 Selected Countries (2007 Data)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-16
Table 2.5 2009 Human Development Index
Variations for Similar Incomes (2007 Data)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-17
2.3 Holistic Measures of Living Levels and
Capabilities

• The New Human Development Index

• Introduced by UNDP in November 2010
(United Nations Development Program)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-18
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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-19
What is new in the New HDI?
2. Other key changes:

• Gross national income per capita replaces gross domestic

product per capita
• Revised education components: now using the average
actual educational attainment of the whole population, and
the expected attainment of today’s children
• The maximum values in each dimension have been
increased to the observed maximum rather than given a
predefined cutoff
• The lower goalpost for income has been reduced due to new
evidence on lower possible income levels

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-20
Table 2.6
The 2010
New Human
Development
Index (NHDI),
2008 Data

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-21
2.4 Characteristics of the Developing World:
Diversity within Commonality

1. Lower levels of living and productivity

2. Lower levels of human capital (health,
education, skills)
3. Higher Levels of Inequality and Absolute
Poverty
– Absolute Poverty
– World Poverty
4. Higher Population Growth Rates
– Crude Birth rates - The number of children
born alive each year per 1,000 population.

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-22
Figure 2.4 Shares of Global Income, 2008

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-23
Table 2.7 The 12 Most and Least Populated Countries
and Their Per Capita Income, 2008

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-24
Figure 2.5 Under-5 Mortality Rates, 1990 and 2005

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-25
Table 2.8 Primary School Enrollment and Pupil-
Teacher Ratios, 2010

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-26
Figure 2.6 Correlation between Under-5 Mortality
and Mother’s Education

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-27
Figure 2.7 Number of People Living in
Poverty by Region, 1981–2005

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-28
Table 2.9 Crude Birth Rates Around the
World, 2009

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-29
2.4 Characteristics of the Developing World:
Diversity within Commonality

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
– Resource endowments

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-30
2.4 Characteristics of the Developing World:
Diversity within Commonality

9. Underdeveloped Financial and Other

markets
– Imperfect markets
– Incomplete information
10. Colonial Legacy and External
Dependence
– Institutions
– Private property
– Personal taxation
– Taxes in cash rather than in kind
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
2-31
2.5 How Low-Income Countries Today Differ
from Developed Countries in Their Earlier
Stages

• Eight differences
– Physical and human resource endowments
– Per capita incomes and levels of GDP in relation to the
rest of the world
– Climate
– Population size, distribution, and growth
– Historic role of international migration
– International trade benefits
– Basic scientific/technological research and development
capabilities
– Efficacy of domestic institutions

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-32
2.6 Are Living Standards of Developing
and Developed Nations Converging?

• 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-33
2.7 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-34
Nature and Role of Economic
Institutions
• 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

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-35
Role of Institutions

• Acemoglu, Johnson, and Robinson’s

“reversal of fortune” and extractive
institutions
• Bannerjee and Iyer, “property rights
institutions.” Landlords versus cultivators

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-36
Concepts for Review

• Absolute poverty • Economic Institutions

• Brain drain • Fractionalization
• Capital stock • Free trade
• Convergence
• Gross domestic product
• Crude birth rate
• (GDP)
Dependency burden
• Depreciation (of the capital • Gross national income
stock) (GNI)
• Diminishing Marginal Utility • Human capital
• Divergence • Human Development Index
(HDI)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-37
Concepts for Review (cont’d)

• Imperfect market • Purchasing power parity

• Incomplete information (PPP)
• Infrastructure • Research and development
• Least developed countries (R&D)
• • Resource endowment
Low-income countries
(LICs) • Terms of trade
• Middle-income countries • Value added
• Newly industrializing • World Bank
countries (NICs)

Copyright © 2012 Pearson Addison-Wesley. All rights reserved.

2-38