1/10/25, 3:11 AM Chapter 2 Comparative Economic Development

CHAPTER 2 COMPARATIVE ECONOMIC DEVELOPMENT

10 IMPORTANT FEATURES that DEVELOPING COUNTRIES shows:

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

DEFINING THE DEVELOPING WORLD

 The most common way to define the developing world is by “per capita income”. Some
organizations offer classifications of countries by their economic status but the best known is the
World Bank, it 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.
 Low-income countries, in the World Bank classification, countries with GNI per capita of less
than $1,025 in 2011.
 Middle-income countries, in the World Bank classification, are countries with a GNI per capita
between $1,025 and $12,475 in 2011.
 Newly industrializing countries (NICs), are countries at a relatively advanced level of economic
development with a substantial and dynamic

Another way to classify countries is by “level of international indebtness”.

 Least developed countries, a UN designation of countries with low income, low human capital,
and high economic vulnerability. For inclusion, a country has to meet each of three criteria: low
income, low human capital, and high economic vulnerability.

Basic Indicators of Development: Real Income, Health, and Education

 Gross National Income (GNI) per capita, the most common measure of the overall level of
economic activity, is often used as a summary index of the relative economic well-being of
people in different nations.
 Gross Domestic Product (GDP) measures the total value for final use of output produced by an
economy, by both residents and nonresidents.
 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. Some economists overcome this problem by using the “purchasing power
parity” as a conversion rate.
 Purchasing Power Parity (PPP) is the calculation of GNI using a common set of international
prices for all goods and services, to provide more accurate comparisons of living standards; e.g.
it is the number of units of currency. A required to purchase the identical quantity of the same
goods and services in the local developing country market as $1 would buy in the United States.

Indicators of Health and Education

1. Life expectancy- the average number of years newborn children would live if subjected to the
mortality risks prevailing to their cohort at the time of birth.
2. Undernourishment rate- consuming too little food to maintain normal levels of activity (e.g.
hunger)
3. Adult literacy- the proportion of adult population, over the age of 15 , which is literate,
expressed as a percentage of the whole adult population. A person is considered literate if
he/she can, with understanding, write and read short statement relating to his/her everyday life.

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 Net enrollment ratio in primary education- the number of children of primary school age who
are enrolled in schools to the total number of children at the primary school age.

Holistic Measures of Living Levels and Capabilities

 Human Development Index (HDI) is 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:
a. Longevity, a long and healthy life as measured by life expectancy at birth;
b. Knowledge as measured by a combination of average schooling attained by adults and expected
years of schooling for school-age children or adult literacy;
c. Decent standard of living as measured by real per capita gross domestic product adjust for the
differing purchasing power parity.

INCOME INDEX LIFE EXPECTANCY INDEX EDUCATION INDEX

HDI ¿ + +
3 3 3

log ( PPP GDP per capita ) −log(⁡100)

Whereas income index is equal to:
log ( 40,000 )−log(100)

population life expectancy−25

Life expectancy is equal to :
85− 25
2 1
Education index is equal to: ( Adult literacy index ) + (Grossenrollment index)
3 3
Where,
percentage of litercay
Adult literacy index:
100
percentage of enrolled∈school
Gross enrollment index:
100

ADVANTAGES OF HDI
 Reveals that a country can do much better than might be expected at a low level of income while
substantial income levels might not attain very high levels of HDI.
 Disparities in income are greater than disparities in other indicators of developments.
 Reminds us that by development we do not only mean higher income but also health and
education act as components of human capital.

DISADVANTAGES OF HDI
 Gross enrollment overstates the amount of schooling because in many countries a student who
begins primary school is counted as enrolled without considering whether the student drops out
at some stage.
 There is no formal justification for allowing 1/3 weight to every component.
 Quality plays no role in the indices

New elements of the new HDI are:

 GNI per capita replaces GDP per capita
 Education index changed; 1.) the average actual educational attainment (years of schooling) of
the whole population, 2.) expected attainment of today’s children
 Expected educational attainment introduced.
 Education index, literacy and enrollment have been dropped- literacy was measured in many
countries and enrollment doesn’t mean that a year was completed or that anything was learned.
 Maximum values in each dimension have been increased to the observed maximum.
 The minimum value for income has been reduced
 The common logarithm to reflect diminishing marginal benefit of income has been changed to
natural logarithm.
 NHDI is calculated using a geometric mean.

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 Net enrollment ratio in primary education- the number of children of primary school age who
are enrolled in schools to the total number of children at the primary school age.

Holistic Measures of Living Levels and Capabilities

 Human Development Index (HDI) is 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:
a. Longevity, a long and healthy life as measured by life expectancy at birth;
b. Knowledge as measured by a combination of average schooling attained by adults and expected
years of schooling for school-age children or adult literacy;
c. Decent standard of living as measured by real per capita gross domestic product adjust for the
differing purchasing power parity.

INCOME INDEX LIFE EXPECTANCY INDEX EDUCATION INDEX

HDI ¿ + +
3 3 3

log ( PPP GDP per capita ) −log(⁡100)

Whereas income index is equal to:
log ( 40,000 )−log(100)

population life expectancy−25

Life expectancy is equal to :
85− 25
2 1
Education index is equal to: ( Adult literacy index ) + (Grossenrollment index)
3 3
Where,
percentage of litercay
Adult literacy index:
100
percentage of enrolled∈school
Gross enrollment index:
100

ADVANTAGES OF HDI
 Reveals that a country can do much better than might be expected at a low level of income while
substantial income levels might not attain very high levels of HDI.
 Disparities in income are greater than disparities in other indicators of developments.
 Reminds us that by development we do not only mean higher income but also health and
education act as components of human capital.

DISADVANTAGES OF HDI
 Gross enrollment overstates the amount of schooling because in many countries a student who
begins primary school is counted as enrolled without considering whether the student drops out
at some stage.
 There is no formal justification for allowing 1/3 weight to every component.
 Quality plays no role in the indices

New elements of the new HDI are:

 GNI per capita replaces GDP per capita
 Education index changed; 1.) the average actual educational attainment (years of schooling) of
the whole population, 2.) expected attainment of today’s children
 Expected educational attainment introduced.
 Education index, literacy and enrollment have been dropped- literacy was measured in many
countries and enrollment doesn’t mean that a year was completed or that anything was learned.
 Maximum values in each dimension have been increased to the observed maximum.
 The minimum value for income has been reduced
 The common logarithm to reflect diminishing marginal benefit of income has been changed to
natural logarithm.
 NHDI is calculated using a geometric mean.

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Europe itself, over short distances and temporary. The bulk of migrates however still
consisted of surplus rural workers.
 Brain drain- the emigration of highly educated and skilled professionals and technicians from
the developing countries to the developed world.
6. International Trade Benefits
 International free trade has been called the “engine of growth”.
 Free trade- trade in which goods can be imported and exported without any barriers in the
forms of tariffs, quotas, or other restrictions.

7. Basic Scientific and Technological Research and Development Capabilities

 High rates of growth have been sustained by the interplay between mass applications of
many new technologies. The process of scientific and technological advance in all its
stages, from basic research to product development, is heavily concentrated in the rich
nations. Research funds are spent on solving the economic and technological problems
of concern to rich countries in accordance with their own economic priorities and
resource endowments.
8. Efficacy of Domestic Institutions
 By the time of their early industrialization, many developed countries, had economic
rules in place that provided relatively broad access to opportunity for individuals with
entrepreneurial drive.
 The developed countries also typically enjoyed relatively stronger political stability and
more flexible social institutions with broader access to mobility.

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.

Two reasons to believe that convergence is going to happen:

 Replicating technology has become very cheap and much more time efficient, than creating on.
This explains the fact that developing countries would not need to start their part from very
early beginning.
 The impact of additional capital output would be expected to be similar in a developed country
that has already a lot of capital in relation to the size of its workforce that in a developing
country where capital is scarce. As a result, we would expect higher investment rates in
developing countries, either through domestic sources or through attracting foreign
investments.
Relative Country Convergence- to examine whether poorer countries are growing faster than richer
countries. As long as this is happening, poor countries would be on a path to eventually “catch up” to the
income levels of rich countries.

Absolute Country Convergence- because of the large initial gap between the developed and least
developed countries, income gains are still a small fraction of that of the developed countries, despite
their high growth figures.

Population-Weighted Relative Country Convergence- this approach frames the question so as to weight
the importance of a country’s per capita income growth rate proportionally to the size of the population.

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