copyright © 2009 pearson addison-wesley. all rights reserved. chapter 2 comparative economic...

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 2

Comparative Economic Development

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Extreme Contrasts:

• Output per worker in the US is 10 times that it is in India. 50 times that it is in Congo.

• Life expectancy is 78 years of age in the US. 64 in India. 44 in Congo.

• Ratio of undernourishment is 2% in US. 20% in India. 74% in Congo.

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Lesson Plan:

• Define developing world and describe how development is measured.

• Discuss the shared characteristics of developing countries.


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Common characteristics of developing 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 and rapid migration to cities.

• Lower levels of industrialization.

• Adverse geography.

• Underdeveloped financial and other markets.

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Defining the Developing World

Two Approaches:

1. Income per capita.

2. Human Development Index (HDI).

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1. Per Capita Income:

World Bank system ranks countries by GNI per capita.

– Low Income Countries ($875 or less).

– Lower Middle Income Countries ($876 - $3,465).

– Upper Middle Income Countries ($3,466 - $10,725).

– High Income Countries ($10,726 or more).


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2. Human Development Index (HDI):

• United Nations Development Program (UNDP) formulates HDI as

a weighted average development index of

– standard of living,

– health conditions, and

– educational attainments in a country.


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Table 2.1: Classification of economies by region and income (2007)

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(Latin America and the Caribbean)

(Sub-Saharan Africa)


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Figure 2.1: Nations of the World classified by GNI per capita.

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Measuring development for quantitative

comparison across countries.

1. Real Income per Capita

• GDP measures the total market value of final goods and services produced in a country (regardless of whether residents or non- residents supply productive factors).

• Link between GNI and GDP?

• GNI equals GDP plus income residents receive from abroad for factor services (labor and capital) minus payments to non-

residents who contribute to domestic economy.

•

.

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Figure 2.2: Income per capita in selected countries.

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• For comparative analysis between countries, we need to convert LDC national currencies into US dollars.

• The use official foreign exchange (FX) rates exaggerate the discrepancy between MDCs and LDCs. Reason?

• FX rates don’t account for the differences in cost of living across countries.

• Prices of non-traded services (i.e. haircut) are lower in LDCs due to significantly lower wages.

• .



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Purchasing Power Parity (PPP):

• PPP as a conversion factor (alternative to FX rates).

• PPP is the number of units of a foreign country currency required to purchase an item in the local LDC market that costs $1 in the US.

• Income (therefore development) gaps between are smaller when one converts currencies using PPP rather than official FX rates.



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Table 2.2:A Comparison of per capita GNI (2005)

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Two Approaches:

1. Income per capita.

2. Human development index.

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2. Human Development Index:

• The most ambitious attempt to analyze the comparative status of socioeconomic development systematically and comprehensively has been undertaken by the United Nations Development Program (UNDP) in its annual series of Human Development Reports

• The centerpiece of these reports is the Human Development Index, that attempt to rank all countries on a scale of

– 0 (lowest human development), to

– 1 (highest human development)



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HDI ranks countries based on 3 goals of development:

1. Longevity - measured by life expectancy at birth

2. Knowledge - measured by a weighted average of adult literacy (2/3) and years of schooling (1/3).

3. Standard of Living - measured by real per capita GDP adjusted by PPP.


comparison across countries

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HDI =1/3*(income index) + 1/3*(life expectancy index) + 1/3*(education index)

(refer to Text Book, Pages 50-51)


comparison across countries

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Table 2.3: Commonality and Diversity Some Basic Indicators.

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Figure 2.3: human development disparities within selected countries

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Figure 2.3: human development disparities within selected countries.

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Table 2.4 Human Development for 23 Selected Countries (2004 Data)

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Table 2.4: Human Development for 23 Selected Countries (2004 Data) (continued)

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Table 2.5 Human Development Index Variations for Similar Incomes (2004 Data)

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Measuring Development for Quantitative Comparison across Countries


• Main Advantage.

Development necessitates, in addition to higher incomes, improvements in health conditions and educational opportunities.

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• Disadvantages.

1. Gross enrollment index overstates the amount of schooling.

2. In the formulation of life expectancy index, no attention is paid to the quality of life.

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• It should be stressed that in the big picture, the HDI has a strong tendency to rise with per capita income, as wealthier countries can invest more in health and education

• Nevertheless, there is still great variation between income and broader measures of well-being

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Income and the HDI:selected examples

Many Countries has HDI significantly different from that predicted by their income

•Guinea and Nigeria have similar HDI despite the fact that real income is 89% higher in Guinea.

•Costa Rica has an almost identical HDI as Qatar, despite the fact that Qatar has more than double the real per capita income as Costa Rica

•South Africa: HDI ranking is # 121, 66 places lower than its middle-income ranking

•Chile: lower income than South Africa, but ranks # 38 in HDI development

Remark: 2004 data

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Characteristics of the developing world: diversity within commonality

1. Lower levels of productivity and living standards:

• Productivity gaps Widening income gaps Unequal income distribution among countries.

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Figure 2.4: shares of global income (2005)

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1. Lower levels of productivity and living standards:

• High income growth in East Asia (i.e. China, Korea, Taiwan, etc.).

• Stagnant growth in sub-Saharan Africa.

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2. Lower levels of human capital:

• Developing world is behind advanced nations in average levels of nutrition, health (measured by life expectancy), and educational (measured by literacy).

• Middle income LDCs are closer to high income nations in health and education standards than they are to low income LDCs.

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Figure 2.5: Under-5 Mortality Rates 1990 and 2005

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Table 2.7: Primary School Enrollment and Pupil-Teacher Ratios

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3. Higher Levels of Inequality and Poverty:

• Global income inequality (poorest 20 percent receives 1.5 percent of World income)

• Extent of poverty in an individual LDC depends on:

Average level of national income. Degree of inequality in income distribution.

• Absolute poverty, representing the minimum level of income required to satisfy basic needs (i.e. food, clothing, shelter), is higher in LDCs due to low average incomes.

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4. Higher Population Growth Rates:

• 2.0 percent per year in Low income countries.

• 1.1 percent per year in Middle income countries.

• 0.7 percent per year in High income countries.


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5. Greater Social Divisions:

Two Determinants of Development Success.

1. Ethnic and religious composition of a developing nation.

2. Whether such diversity leads to conflict (i.e. Africa) or cooperation (i.e. United States).


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6. Larger rural populations and rapid migration:

• Rural-urban migration is faster in developing world. Still, rural

populations exceed urban populations.


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Table 2.9: The urban population in developed countries and developing regions

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7. Lower Levels of Industrialization

• Industrialization high productivity high incomes to be achieved

through a national economic transformation.

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Table 2.10: Share of the Population employed in the industrial sector in selected countries (2000-2005 (%))

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Characteristics of the developing World: diversity within commonality

8. Adverse Geography:

Two aspects:

1. Unfavorable geographical locations.

(i.e. LDCs suffer more from tropical diseases, water resource

constraints, and extremes of heat).

2. Scarcity of resource endowments.

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Characteristics of the developing World: diversity within commonality

9. Underdeveloped financial and other markets:

• Imperfect markets (lack a legal system that enforces contracts and

validates property rights, a strong infrastructure of roads and utilities,

a well developed system of banking and insurance, etc.).

• Incomplete information (consumers and producers lack considerably

information regarding prices, quantities, qualities of goods, services,

resources).

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Convergence in Living Standards

Two Reasons for Convergence:

1. Technology transfer: it is cheaper to replicate technology than to undertake the original research and development investment.

2. Rapid capital accumulation in LDCs due to law of diminishing returns: marginal product of capital (therefore profitability of investment) is higher in developing countries where capital is scarce.

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Absolute Convergence:

• Long run income convergence between rich and poor nations as

the faster-growing LDCs catch up with slower-growing MDCs.

• Empirical evidence for absolute convergence is not present in the

data.

– Income divergence in the world sample.

Convergence in Living Standards

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Figure 2.8: Convergence among OECD countries but divergence in the World as a whole.

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Convergence of Living Standards

Conditional Convergence:

• Long run income convergence between countries of similar

economic structure (i.e. 20 high income OECD countries).

• Explanation for conditional convergence: similar savings rates,

population growth rates, capital depreciation rates, production

technologies, etc.

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Figure 2.9: Per capita GDP growth in 125 developing countries (1995-2005)

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Figure 2.10: Growth convergence and absolute income convergence

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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.

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Table 2.6: The 12 most and least populated countries and their per capita income (2005)

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Figure 2.7: People living in poverty (1981-2002)

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Figure 2.11: Schematic representation of leading theories of comparative development

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Concepts for Review

• Absolute poverty.• Brain drain.• Crude birthrate.• Convergence.• Death rate.• Dependency burden.• Developed world.• Economic Institutions.• Foreign exchange.• Gross Domestic Product.

• Gross national product (GNP).

• Human Development Index (HDI)

• Imperfect markets.

• Income gap.

• Income inequality.

• Incomplete information.

Value added (%of GDP) 1980 2006Brazil Agriculture 11.0 5.2Brazil Industry 43.8 30.1Brazil Services 45.2 64.7

World Agriculture 6.6 3.0World Industry 37.2 28.1World Services 56.2 68.9

United States Agriculture 2.9 1.1United States Industry 33.5 22.4United States Services 63.6 76.5

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