Chapter 2

Comparative Economic Development

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 – rapid migration to cities
 Lower levels of industrialization
 Adverse geography
 Underdeveloped financial and other markets
 Colonial legacies
Human Capital - refers to the skills, education and health of individuals

Absolute Poverty - is the lack of one or more needs over a long period of time that it endangers your life
or cause it harm.

3 Main types of Economic Inequality:

1. Income Inequality - income is distributed unevenly in a group of people.
2. Pay Inequality - a person pay is different to their income.
3. Wealth Inequality - refers to the unequal distribution of assets in a group of people.

Defining the Developing World

1. World Bank -an international financial institution which lends loans to different countries.

 GNP per capita –total value of goods and services produced by a country in a year
including income from foreign investors.
2. LIC, LMC, UMC, and OECD

 Lower-Income Countries (LIC) - per capita GNI = $1, 025. Example: Cambodia,
Tajikistan, and Afghanistan.
 Lower-Middle income Countries- per capita GNI = between $1, 026 and $4, 035.
Example: Philippines, Vietnam, and Indonesia.
 Upper-Middle income Countries- per capita GNI = between $4, 035 to $12, 475.
Example: Angola, American Samoa, and Argentina.
  Higher Income OECD Income- per capita GNI = more than $12, 475. Example:
Australia, Austria, and Spain.

Measuring Development for Quantitative Comparison across Countries

1. Gross National Income- is the total domestic and foreign output claimed by a resident
of a country.
2. Gross Domestic Product- total value of goods and services produced within the country
1. PPP Method (Purchasing Power Parity) - number of units 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.
2. Gross National Income (GNI) - Like GDP, Gross National Income is a measure of a
countries income. GNI is theoretically equivalent to Gross National Product but GNI is
calculated based on output rather than in income.
Some Basic Indicators of Development
 Health
 Life Expectancy
 Education
HDI as a holistic measure of living levels
 HDI also varies for groups within countries
 HDI also varies by region in a country
 HDI also reflects rural-urban differences
Human Development Index (HDI) - an index measuring national socio-economic development
based on combining measures of different factors.
Three Dimensions of HDI
 A Long and Healthy Life: Life expectancy at birth
 Education Index: Mean years of schooling and expected years of schooling.
 A decent standard of living: GNI per capita.
LOW INCOME COUNTRIES DIFFER FROM DEVELOPED COUNTRIES EIGHT DIFFERENCES:
1. PHYSICAL AND HUMAN RESOURCE ENDOWMENTS - some developing countries are blessed
with abundant supplies of petroleum, minerals and raw materials and etc… for which world
demand is growing. But most less developed countries however especially in Asia, where more
than half of the world's population resides are poorly endowed with physical and natural
resources.
2. LEVELS OF PER CAPITA INCOMES AND GDP - the people living in low income countries have
an average a lower level of real per capita income. Today developed nations were economically
in advance of the rest of the world, they could therefore take advantage of their relatively
strong financial position to widen the income gaps between themselves.
3. CLIMATIC DIFFERENCES - Almost all developing countries are situated in the tropical or
subtropical climatic zone. It has been observed that the economically most successful countries
are located in the temperature zone. But also in extremes of heat and humidity in the poor
countries contribute to deteriorating soil quality and the rapid depreciation of many natural
goods, as well as weak generation of forest and poor animal health.
4. POPULATION SIZE, DISTRIBUTION AND GROWTH - Developed countries populations grew
slowly in their time of development, while developing countries today have significant
population growth because of lack of family planning and lack of sex education.
5. HISTORICAL ROLE OF INTERNATIONAL MIGRATION - Even though many people migrate and
find work in other parts of the world, the migration of those people is not enough to relieve the
governments of developing nations from the pressure of taking care of everyone. Also there is a
often huge drain going on where the educated people that developing countries need the most
are leaving for better opportunities worldwide.
6. INTERNATIONAL TRADE BENEFITS Now developed nations were able to benefit from largely
free trade earlier in the century, but developing countries now do not have such advantage.
After WW1, developed nations had a first player advantage in the world markets and
developing nations simply couldn't compete.
7. BASIC SCIENTIFIC AND TECHNOLOGICAL RESEARCH Countries at different stages want
different things. Rich countries want high tech, high capital products, while low developed
countries want the exact opposite, because they don't have the financial resources to
undertake necessary for the high capital commodities.
8. EFFICIENCY OF DOMESTIC INSTITUTIONS Developed countries typically enjoyed relatively
stronger political stability and more flexible social institutions with broader access to mobility.
Today such extraction may be carried out by powerful local interest as well as foreign ones. But
it is very difficult to change institutions rapidly.
CONVERGENCE - opposite of divergence, when it is just income per capita that is increasing and
everything is staying the same (saving rates, labor force growth, production technology) the
term conditional converge is used.
Leapfrogging on technology is helping developing nations converge because they can use
already research and developed technology from other countries.
Absolute country converge can occur when a developing country's income is growing
extremely fast, but in absolute terms it is not catching up to the more slowly growing income of
a rich country.
2 IMPORTANTS REASONS to expect that developing countries would be catching up by growing
faster on average than developed countries:
1. First, is due to TECHNOLOGY TRANSFER- replicate or reinvent technology than to undertake
original. As a result, they should be able to grow much faster than today's developed countries
are growing now or were able to grow in the past, when they had to invent the technology as
they went along and proceed step by step through the historical stages of innovation.
2. second, if conditions are similar is based on CAPITAL ACCUMULATION, today developed
countries have high levels of physical and human capital. The impact of additional capital
output would be expected to be smaller in a developed country that already had a lot of capital
in relation to the size of its workforce than in a developing country where capital is scares. As a
result, we would expect higher investment rates in developing countries, either through
domestic sources or through attracting foreign investments.
Role of Institutions

 Economic Institution- Provide the underpinning of a market economy by establishing the rules
of property rights and contract enforcement; improving coordination; restricting coercive,
fraudulent and anticompetitive behaviour.
 Daron Acemoglu, Simon Johnson and James Robinson- When potential settlers faced higher
mortality rates (or perhaps other high costs) they more often ruled at arm's length and avoided
large, long-term settlement.
 British Raj, Abhijit Banerjee and Lakshmi Lyer- Substantial evidence on the importance of
institutions is provided in a study of the impact of land revenue institution.