ECONOMIC DEVELOPMENT (Week 2) a country’s residents without making a deductions for

depreciation (the wearing out of equipment and other forms of

Prelim Lecture Notes 04 capital that is written off to the value of capital stock) of the
domestic capital stock ( total amount of physical goods existing
Comparative Economic Development – In Global Context
at a particular time that have been produced for use in the
It is more appropriate to discuss economic development with production of other goods and services). The GNI comprises
comparison between different economies in such a way that we will Gross Domestic Product, which is the measure of the total value
find whether the policies made have solve the lingering problems of for final use of output produced by an economy both by residents
development. Both developed and developing countries have made and non-residents, plus the difference between the income
substantial progress when it comes to economic residents receive from abroad for factor services (labor and
development. However, output per worker, life expectancy, literacy, capital) less payments made to nonresidents who contribute to
income, and other indicators of economic development differ much the domestic economy.
between developed and developing countries that inequality seems a
Prelim Lecture Notes 05
feature striking enough to acknowledge the presence of contrast in
our global economy. We will begin understanding economic The GNI per capita comparisons between developed and less
development with the developing countries. developed countries use the official foreign-exchange rates to convert
national currency figures into U.S. dollars which does not reflect the
Developing World – classifications of countries
relative domestic purchasing power of different currencies. The use
The Organization for Economic Cooperation and of Purchasing Power Parity instead is helpful to make a relative
Development (OECD) and the United Nations classified countries comparison of GNIs and GDPs as conversion factors. Purchasing
according to their economic status. The World Bank ( International Power Parity (PPP) means as the number of units of a foreign
Bank for Reconstruction and development) has provided a country’s currency required to purchase identical quantity of goods
classification that ranked economies with population not less than and services in the local developing country market as $1 would buy
30,000 according to their levels of Gross National Income (GNI) per in the United States as such two currencies are at purchasing power
capita: On year 2011 level, A. Low-income countries (LICs) GNI per parity when a unit of domestic currency can buy the same basket of
capita of $1,025 or less; B. Lower-middle-income countries (LMCs) goods at home or abroad. In using PPP, nontraded services is lower in
GNI per capita of $1,026 to $4,035; C. upper-middle-income developing countries since wages are much lower, and PPP measures
countries (UMCs) GNI per capita $4,036 to $12,475; D. high-income of GNI per capita estimates is higher than using foreign-exchange rate
OECD countries GNI per capita $12,475 or more. as a conversion factor. Adjustments for differing relative prices across
countries are made so as to measure living standards.
High income countries with one or two highly developed export but
with significant parts of population remain uneducated, in poor 2. Health as measured by life expectancy, undernourishment, and
health and social development are viewed as low for country’s child mortality- Life expectancy is the average number of years
income as such classified as developing. Some high-income countries newborn children live subject to mortality risks prevailing for
having lingering economic problems are also classified as developing their group at the time of their birth. Undernourishment means
countries. Also, a special distinction is made among upper-middle- consuming little food to maintain normal levels of activity. Birth
income or newly high-income economies as newly industrializing rate is also an indicator since high fertility can be both a cause
countries (NICs) which are countries at a relatively advance level of and a consequence of underdevelopment.
economic development with a substantial and dynamic industrial 3. Educational Attainment as measured by literacy and schooling –
sector and with close links to the international trade, finance, and Literacy means a fraction of adult males and females reported or
investment system. Another classification is made according to the estimated to have basic abilities to read and write.
degree of indebtedness like the World Bank’s classification of severely
Diversity and Commonality of Developing Countries
indebted, moderately indebted, and less indebted. The United Nations
Development Program (UNDP) classifies countries based on their Though developing countries have in common in their
level of human development that includes educational attainment historical and economic attributes which led them to experience
and health as low, medium, high, and very high. Another known development problems that is being studied within same analytical
classification is the United Nations designation, as of 2012, of the framework in development economics it is proper to take note of the
least developed countries for inclusion a country should meet three diversity even within those areas of commonality because different
criteria: low income, low human capital, and high economic development problems require different policies and strategies for
vulnerability. The classification of countries as developed and development.
developing is a useful guide for analytical purposes.
Ten (10) areas of commonality with diversity in the developing
Basic Indicators of Economic Development countries:
1. Real income per capita adjusted for purchasing power- The 1. Lower levels of Living and Productivity- The wide disparity in
Gross National Income (GNI) per capita is the common measure income shows large gaps in output per worker between
of the overall level of economic activity and being used as a developed and developing countries. Low level of income leads
summary index of the relative economic well-being of people in to low level of investment in education and health, in plant and
different countries. Gross National Income (GNI) per capita is the equipment, and infrastructure that lead to low productivity and
total domestic and foreign value added (portion of a product’s economic stagnation. Income growth rates varied in different
final value that is added at each stage of production) claimed by developing countries with rapid growth in East Asia, slow or even
 no growth in sub-Saharan Africa, and intermediate growth rates diversity is cited as source of innovation and creativity. In a
levels in other regions. The common misperception that low- sense, the composition of social divisions, ethnic, or religious, or
income result from a country’s too small to be self-sufficient or linguistics of a developing country. Either or not it will lead to
too large to overcome economic inertia does not hold semblance conflict or cooperation are important determinants of the
of reality since there is no correlation between country size in success or failure of development initiatives.
area or population and economic development. The 12 most
populous countries belong either in low-income, lower-middle- 6. Larger Rural Population but Rapid Rural-to-Urban Migration-
income, upper-middle-income, and high-income countries. Economic Development is also characterize by a shift from
While the least populous countries primarily belong to lower- agriculture to manufacturing to services. In developing
middle-income and upper-middle income countries. countries, there is a higher share of population living in rural
areas and correspondingly less in urban areas. Rural areas in
Prelim Lecture Notes 06 comparison to urban areas are poorer and with none or few
markets, limited information, and social stratification. An influx
2. Lower levels of Human Capital – Compared with developed of hundreds of millions of people from rural to urban areas
countries, much of the developing countries have lagged in its fueled rapid urbanization coupled with its own urban problems.
average levels of nutrition, health (measured by Prelim Lecture Notes 07
undernourishment and life expectancy), and education
(measured by literacy). There are complementarities between
progress in health and education example in World Bank, World
Development Indicators Data of 1990-2012 Under-5 Mortality 7. Lower levels of Industrialization and Manufactured Exports-
Rates, under-5 mortality rates improve as mother’s education High productivity and incomes associated with industrialization
levels rise. lead to modernization and economic development as such
industrialization become high national priority of developing
3. Higher levels of Inequality and Absolute Poverty- In global scale, countries. The share of employment in agriculture in developing
the poorest 20% of people receive about 1.5 % of world income countries is higher than the developed countries however there
which corresponds to about 1.2 billion people living in extreme is low productivity in agriculture in developing countries
poverty on less than $1.25 per day at purchasing power parity. compared to other sectors in their own economies. Developing
The large gap in per capita incomes between rich and poor countries, along with lower industrialization, have a high
countries shows enormous global economic disparities. dependence on primary exports such as agriculture and mineral
However, it is also necessary to research on the gap between rich exports. In some degree, most developing countries ventured
and poor within each developing country. Inequality varies into manufacturing of goods for exports though with less
among developing countries with much lower inequality in Asia. advanced skills and technology.
Somehow, we must research on at how income is distributed and
who benefits from economic development and why. 8. Adverse Geography- Primarily, developing countries are in
tropical and subtropical region as such susceptible more to
4. Higher Population Growth Rate- Global population increases tropical pests and parasites, endemic diseases, water resource
from just under 1 billion in 1800 to 1.65 in 1900 to over 6 billion constraints, and extreme heat. Before colonization, some
in 2000 to 7 billion in 2012. Rapid population growth started in tropical and sub-tropical regions had a higher income per capita
Europe and other developed countries but in recent account, than Europe. The presence of common and adverse geographic
most population growth has been confined in the developing features of developing countries compared to temperate zones
world. In comparison with developed countries which have birth countries suggest that it is advantageous to study tropical and
rates near or even below replacement levels (zero population sub-tropical developing countries.
growth), the low-income developing countries have a very high
birth rate. More than 5/6 of all the people of the world live in 9. Underdeveloped Markets-The legal and institutional
developing countries and around 97% of net population growth foundations for markets in developing countries are extremely
(births less deaths) in 2012 happened in developing countries. weak as such imperfect markets and incomplete information are
There is a wide range of Crude Birth Rates (the number of prevalent that makes domestic and financial markets work
children born alive each year per 1,000 population). inefficiently. Some of the aspects of the market developing
countries lack: 1. A legal systems that enforces contracts and
5. Greater Social Fractionalization- Low-income countries usually validates property rights, 2. S stable and trustworthy currency, 3.
have social divisions such as ethnic and linguistic groupings An infrastructure of roads and facilities that facilitates economic
known as Fractionalization. The bigger the ethnic, linguistic, and activity and markets, 4. A well-developed and efficiently
religious diversity in a certain country the more chances that regulated banking and insurance systems, 5. Substantial market
internal strife and political instability will occur. Conflict affects information for consumers and producers regarding prices,
the realization of an otherwise been positive development quantities, and qualities of products and resources along with
progress. However, ethnic or religious diversity do not creditworthiness of potential borrowers, 6. Social norms that
necessarily lead to inequality, turmoil, or instability, and the facilitates successful long-term business relationships.
impact of which could not be made. There are instances of
successful economic and social integration of minority ethnic 10. Lingering Colonial Impacts and Unequal International
population like in Malaysia and Mauritius. In the United States, Relations- Most developing countries are once colonies of
Europe or other foreign powers. Colonial era institutions are
often favored or are focused on extraction of wealth instead of
creation of wealth. Colonial history matters not only because of
stolen resources but because colonial powers determine
whether the legal and other institutions would encourage either
investment by the broad population or facilitate exploitation of
human and other resources for the benefit of the colonizing elite
and create or reinforce inequality. Development-facilitating or
development-inhibiting institutions tend to have a long-life span.
Relatedly, developing countries are less well organized and
influential in international relations, with sometimes adverse
effects for development.