Chapter 2
Comparative
Economic
Development
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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
– 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.
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2.1 Defining the Developing World
 World Bank Scheme- ranks countries on
GNP/capita
 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.
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2.1 Defining the Developing World
 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.
 Least developed countries A UN designation
of countries with low income, low human
capital, and high economic vulnerability.
 Human capital Productive investments in
people, such as skills, values, and health
resulting from expenditures on education, onthe-job training programs, and medical care.
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2.2 Basic Indicators of Development: Real
Income, Health, and Education
o Gross National Income (GNI)
o Gross Domestic Product (GDP)
o PPP method instead of exchange rates as
conversion factors
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2.2 Basic Indicators of Development: Real
Income, Health, and Education
 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.
 Value added The portion of a product’s
final value that is added at each stage of
production.
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2.2 Basic Indicators of Development: Real
Income, Health, and Education
 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.
 Capital stock 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.
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2.2 Basic Indicators of Development: Real
Income, Health, and Education
 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.
 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.
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2.3 Holistic Measures of Living Levels and
Capabilities
o
o
o
o
o
Health
Life Expectancy
Education
HDI as a holistic measure of living levels
o 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
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2.3 Holistic Measures of Living Levels and
Capabilities
 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.
 Dimension index = (Actual Value - Minimum
Value)/(Maximum Value - Minimum Value)
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2.4 Characteristics of the Developing World:
Diversity within Commonality
1. Lower levels of living and productivity
A. Poverty trap: At very low income levels, in fact, a
vicious circle may set in, whereby 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. This is known as a poverty
trap or what Nobel laureate Gunnar Myrdal called
“circular and cumulative causation.”
B. Dutch disease: Dutch disease is an economic term
for the negative consequences that can arise from
a spike in the value of a nation’s currency. (It
decreases the price competitiveness of exports, it
increases imports.)
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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: The situation of being
unable or only barely able to meet the
subsistence essentials of food, clothing,
shelter, and basic health care.
–World Poverty
4. Higher Population Growth Rates
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2.4 Characteristics of the Developing World:
Diversity within Commonality
4. Higher Population Growth Rates
–Crude Birth rates: The number of children
born alive each year per 1,000 population.
–Dependency burden: The proportion of the
total population aged 0 to 15 and 65+,
which is considered economically
unproductive and therefore not counted in
the labor force.
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2.4 Characteristics of the Developing World:
Diversity within Commonality
5. Greater Social Fractionalization
– Fractionalization Significant ethnic, linguistic,
and other social divisions within a country.
6. Larger Rural Populations but Rapid Ruralto-Urban Migration
7. Lower Levels of Industrialization and
Manufactured Exports
8. Adverse Geography
– Resource endowment A nation’s supply of
usable factors of production, including mineral
deposits, raw materials, and labor.
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2.4 Characteristics of the Developing World:
Diversity within Commonality
9.
Underdeveloped Financial and Other
markets
– Some aspects of market underdevelopment are
that they often lack:
A. a legal system that enforces contracts and
validates property rights;
B. a stable and trustworthy currency;
C. an infrastructure of roads and utilities that
results in low transport and communication
costs so as to facilitate interregional trade
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9.
Underdeveloped Financial and Other
markets (Contd.)
D. a well-developed and efficiently regulated
system of banking and insurance, with broad
access and with formal credit markets that select
projects and allocate loanable funds on the basis
of relative economic profitability and enforce
rules of repayment;
E. substantial market information for consumers
and producers about prices, quantities, and
qualities of products and resources as well as the
creditworthiness of potential borrowers;
F. social norms that facilitate successful long-term
business relationships.
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9.
Underdeveloped Financial and Other
markets (Contd.)
• Infrastructure Facilities that enable economic
activity and markets, such as transportation,
communication and distribution networks, utilities,
water, sewer, and energy supply systems.
• Imperfect markets market in which the
theoretical assumptions of perfect competition are
violated by the existence of, for example, a small
number of buyers and sellers, barriers to entry, and
incomplete information.
• Incomplete information The absence of
information that producers and consumers need to
make efficient decisions resulting in
underperforming markets.
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2.4 Characteristics of the Developing World:
Diversity within Commonality
10. Colonial Legacy and External
Dependence
–
–
–
–
Institutions
Private property
Personal taxation
Taxes in cash rather than in kind
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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
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International Migration
• The irony of international migration today,
however, is not merely that this traditional outlet
for surplus people has effectively been closed off
but that many of the people who migrate from
poor to richer lands are the very ones that
developing countries can least afford to lose: the
highly educated and skilled.
• Brain drain The emigration of highly educated
and skilled professionals and technicians from the
developing countries to the developed world.
• Brain drain vs. Brain Gain
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2.7 Comparative Development
• Economic institutions, which play an
important role in comparative development,
are defined by Nobel laureate Douglass North
as the “rules of the game” of economic life.
• 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.
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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
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BE POSITIVE !
BE PATIENT !
BE PROACTIVE !
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