Chapter 2

Comparative Economic
Development

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1. Defining the Developing World.
2. Basic Indicators of Development: Real
Income, Health, and Education(1-
Purchasing Power Parity(PPP)-2-
Indicators of Health and Education)
3. Holistic Measures of Living Levels and
Capabilities(The Traditional Human
Development Index-The New Human
Development Index).
4. Characteristics of the Developing
World.
5. How Low-Income Countries Today
Differ from Developed Countries in
Their Earlier Stages.

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2.1 Defining the Developing World
The most common way to define the developing world is by per
capita income.
World Bank Scheme- ranks countries on GNI per capita:
These economies are then classified as:
1-low- income countries(LICs):Countries with a gross
national income per capita of less than $976 in 2008.
2- the middle-income countries: Countries with a gross
national income per capita between $976 and $11,906 in
2008.lower middle-income countries(LMCs),upper-middle-
income countries(UMCs),high-income OECD countries, and
other high-income countries(often, LMCs and UMCs are
informally grouped as the middle-income countries).
3-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.
4-Least developed countries :A United Nations designation of
countries with low income, low human capital, and high
economic vulnerability
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 2.2 Basic Indicators of Development: Real
Income, Health, and Education
In this section, we examine basic indicators of three facets of
development: real income per capita adjusted for purchasing
power; health as measured by life expectancy,
undernourishment, and child mortality; and educational
attainments as measured by literacy and schooling.
1-Purchasing Power Parity(PPP)
In accordance with the World Bank's income-based country
classification scheme:
-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. It is calculated as the total domestic
and foreign value added claimed by a country's residents
without making deductions for depreciation (or wearing out) of
the domestic capital stock.

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-Gross domestic product (GDP) measures the total value for
final use of output produced by an economy, by both residents
and nonresidents. Thus GNI comprises GDP plus the difference
between the income residents receive from abroad for factor
services (labor and capital) less payments made to
nonresidents who contribute to the domestic economy Where
there is a large nonresident population playing a major role in
the domestic economy (such as foreign corporations), these
differences can be significant.
Per capita GNI comparisons between developed and less
developed countries , 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.
In an attempt to rectify this problem, researchers have tried to
compare relative GNIs and GDPs by using purchasing power
parity (PPP) instead of exchange rates as conversion factors.

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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.
In a simple version, purchasing power parity is defined as the
number of units of 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.
In practice, adjustments are made for differing relative prices across
countries so that living standards may be measured more
accurately.
Summary:
PPP measures show the number of units of developing country
currency required to purchase a basket of goods and services
in the developing country market that costs one dollar in the
U.S. Prices for most services tend to be much cheaper in
developing countries than in the U.S

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 2-Indicators of Health and Education
Besides average incomes, it is necessary to evaluate a
nation's average health and educational attainments,
which reflect core capabilities. some basic indicators of
income, health:
-life expectancy(is the average number of years newborn
children would live if subjected to the mortality risks
prevailing for their cohort at the time of their birth).
- the rate of undernourishment(means consuming too
little food to maintain normal levels of activity; it is what is
often called the problem of hunger)
- the under-5 mortality rate.
-the crude birth rate.
-education (male and female adult literacy). Literacy is the
fraction of adult males and females reported or estimated
to have basic abilities to read and write; functional literacy
is generally lower than the reported numbers.
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2.3 Holistic Measures of Living Levels and
Capabilities
The Traditional Human Development Index
The most widely used measure of the comparative status of
socioeconomic development is presented by the United Nations
Development Program (UNDP) in its annual series of Human
Development Reports. The centerpiece of these reports, which were
initiated in 1990, is the construction and refinement of its informative
Human Development Index (HDI).
-Human Development Index (HDI): An index measuring national
socioeconomic development, based on combining measures of
education, health, and adjusted real income per capita.
- HDI based on three goals or end products of development:
1-longevity as measured by life expectancy at birth.
2- knowledge as measured by a weighted average of adult literacy and
gross school enrollment ratio.
3- standard of living as measured by real per capita gross domestic
product adjusted for the differing purchasing power parity of each
country's currency to reflect cost of living and for the assumption of
diminishing marginal utility of income.
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the HDI ranks countries into four groups:
1-low human development (0.0 to 0.499).
2- medium human development (0.50 to 0.799).
3- high human development (0.80 to 0.90).
4- very high human development (0.90 to 1.0).
-three main indicators that make up the Human Development
Index:
Life expectancy, educational attainment, GDP per capita measured in PPP
terms.
In the final index, each of the three components receives equal, or one-
third, weight. Thus:

major advantage of the HDI:

-One major advantage of the HDI is that it does reveal that a country can
do much better than might be expected at a low level of income and
that substantial income gains can still accomplish relatively little in
human development.

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-the HDI reminds us that by development we clearly mean broad human
development, not just higher income. Many countries, such as some
of the higher-income oil producers, have been said to have
experienced "growth without development." Health and education are
inputs into the national production function in their role as
components of human capital, meaning productive investments
embodied in persons , such as skills, values, and health resulting
from expenditures on education, on-the-job training programs, and
medical care. Improvements in health and education are also
important development goals in their own right .
There are other criticisms and possible drawbacks of the HDI:
-One is that gross enrollment in many cases 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.
- Equal (one-third) weight is given to each of the three components,
which clearly has some value judgment behind it, but it is difficult to
determine what this is.

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 The New Human Development Index
November 2010, the UNDP introduced its New Human Development
Index (NHDI), intended to address some of the criticisms of the
HDI.
What is new in the New HDI?
1. Calculating with a geometric mean:
• Probably most consequential: The index is now computed with a
geometric mean, instead of an arithmetic mean((adding up the
component indexes and dividing by three) in the HDI, the effect is
to assume perfect substitutability across income, health, and
education)
• A geometric mean is also used to build up the overall education
index from its two components
• Traditional HDI added the three components and divided by 3
• New HDI takes the cube root of the product of the three
component indexes
• The traditional HDI calculation assumed one component traded off
against another as perfect substitutes, a strong assumption
• The reformulation now allows for imperfect substitutability.

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So in the NHDI, instead of adding up the health, education, and
income indexes and dividing by 3, the NHDI is calculated with the
geometric mean:
NHDI = H1/3E1/3I1/3
where H stands for the health index, E stands for the education index,
and I stands for the income index.
2. Other key changes:
• Gross national income per capita replaces gross domestic product
per capita
• Revised education components: now using the average actual
educational attainment of the whole population, and the expected
attainment of today’s children
• The maximum values in each dimension have been increased to
the observed maximum rather than given a predefined cutoff
• The lower goalpost for income has been reduced due to new
evidence on lower possible income levels

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 2.4 Characteristics of the Developing World:
This section examines the ten major areas of "diversity within
commonality" in the developing world.
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 -World Poverty
4. Higher Population Growth Rates
– Crude Birth rates.
5. Greater Social Fractionalization
6. Larger Rural Populations but Rapid Rural-to-Urban Migration
7. Lower Levels of Industrialization and Manufactured Exports
8. Adverse Geography
– Resource endowments
9. Underdeveloped Financial and Other markets
– Imperfect markets -Incomplete information
10. Colonial Legacy and External Dependence
– Institutions -Private property
– Personal taxation -Taxes in cash rather than in kind
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1. Lower levels of living and productivity
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.
However, it is important to stress that there are ways to escape from
low income.
Indeed, some star performers among now high-income economies such
as South Korea and Taiwan were once among the poorest in the
world.
One common misperception is that low incomes result from a country's
being too small to be self-sufficient or too large to overcome
economic inertia. However, there is no necessary correlation
between country size in population or area and economic
development .

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2. Lower levels of human capital (health,
education, skills)
Human capital—health, education, and skills is vital to economic growth
and human development. We have already noted the great
disparities in human capital around the world while discussing the
Human Development Index. Compared with developed countries,
much of the developing world has lagged in its average levels of
nutrition, health (as measured, for example, by life expectancy or
undernourishment), and education (measured by literacy).
Moreover, there are strong synergies (complementarities) between
progress in health and education, For example, under-5 mortality
rates improve as mothers' education levels rise.
The well-performing developing countries are much closer to the
developed world in health and education standards than they are
to the lowest-income countries. Although health conditions in
East Asia are relatively good, sub-Saharan Africa continues to be
plagued by problems of malnourishment, malaria, tuberculosis,
AIDS, and parasitic infections.

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3. Higher Levels of Inequality and Absolute
Poverty
Globally, the poorest 20% of people receive just 1.5% of world income.
The lowest 20% now roughly corresponds to the approximately
1.4 billion people living in extreme poverty on less than $1.25 per
day at purchasing power parity. Bringing the incomes of those
living on less than $1.25 per day up to this minimal poverty line
would require less than 2% of the incomes of the world's
wealthiest 10%. Thus the scale of global inequality is immense.
But the enormous gap in per capita incomes between rich and poor
nations is not the only manifestation of the huge global economic
disparities. but, it is also necessary to look at the gap between
rich and poor within individual developing countries. Very high
levels of inequality—extremes in the relative incomes of higher-
and lower-income citizens—are found in many middle-income
countries.
Extreme poverty is due in part to low humane capital but also to social
and political exclusion and other deprivations.
Extreme poverty represents great humane misery.

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4. Higher Population Growth Rates
In recent decades, most population growth has been centered in the
developing world. compared with the developed countries,
which often have birth rates near or even below
replacement(zero population growth)levels, the low-income
developing countries have very high birth rates.
the proportion of people over the age of 65 is much greater in the
developed nations. Both older people and children are often
referred to as an economic 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) in the sense that they must be
supported financially by the country's labor force (usually
defined as citizens between the ages of 15 and 64).
We may conclude, therefore, that not only are developing countries
characterized by higher rates of population growth, but they
must also contend with greater dependency burdens than rich
nations.
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5. Greater Social Fractionalization
Low-income countries often have ethnic, linguistic, and other forms of
social divisions, sometimes known as fractionalization. This is
sometimes associated with civil strife and even violent conflict,
which can lead developing societies to divert considerable
energies to working for political accommodations if not national
consolidation. It is one of a variety of governance challenges
many developing nations face.

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6. Larger Rural Populations but Rapid Rural-to-
Urban Migration:
One of the hallmarks of economic development is a shift from agriculture
to manufacturing and services. In developing countries, a much
higher share of the population lives in rural areas. Although
modernizing in many regions, rural areas are poorer and tend to
suffer from missing markets, limited information, and social
stratification. A massive population shift is also under way as
hundreds of millions of people are moving from rural to urban
areas, fueling rapid urbanization, with its own attendant problems.
7. Lower Levels of Industrialization and Manufactured
Exports:
Along with lower industrialization, developing nations have tended to
have a higher dependence on primary exports. Most developing
countries have diversified away from agricultural and mineral
exports to some degree. The middle-income countries are rapidly
catching up with the developed world in the share of manufactured
goods in their exports, even if these goods are typically less
advanced in their skill and technology content. However, the low-
income countries, particularly those in Africa, remain highly
dependent on a relatively small number of agricultural and mineral
exports. Africa will need to continue its efforts to diversify its
exports

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8. Adverse Geography

Many analysts argue that geography must play some role in problems of
agriculture, public health, and comparative underdevelopment
more generally. Landlocked economies, common in Africa, often
have lower incomes than coastal economies. As can be observed
on the map on the inside cover, developing countries are primarily
tropical or subtropical, and this has meant that they suffer more
from tropical pests and parasites, endemic diseases such as
malaria, water resource constraints, and extremes of heat.

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9. Underdeveloped Financial and Other markets
markets and incomplete information are far more prevalent in developing
countries, with the result that domestic markets, notably but not
only financial markets, have worked less efficiently.
Some aspects of market underdevelopment are that they often
lack:
(1) a legal system that enforces contracts and validates property rights.
(2) a stable and trustworthy currency.
(3) an infrastructure of roads and utilities that results in low transport
and communication costs so as to facilitate interregional trade.
(4) 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.
(5) substantial market information for consumers and producers about
prices, quantities, and qualities of products and resources as well
as the creditworthiness of potential borrowers.
(6) social norms that facilitate successful long-term business
relationships.

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10. Colonial Legacy and External Dependence
Colonial Legacy Most developing countries were once colonies of Europe
or otherwise dominated by European or other foreign powers, and
institutions created during the colonial period often had pernicious
effects on development that in many cases have persisted to the
present day.
External Dependence Relatedly, developing countries have also been
less well organized and influential in international relations, with
sometimes adverse consequences for development. For example,
agreements within the World Trade Organization (WTO) and its
predecessors concerning matters such as agricultural subsidies in
rich countries that harm developing-country farmers and one-sided
regulation of intellectual property rights have often been relatively
unfavorable to the developing world.

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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
– Efficiency of domestic institutions

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 1-Physical and human resource endowments:
Contemporary developing countries are often less well
endowed with natural resources than the currently
developed nations were at the time when the latter nations
began their modern growth. Some developing nations are
blessed with abundant supplies of petroleum, minerals, and
raw materials for which world demand is growing; most
less developed countries.
The difference in skilled human resource endowments is even
more pronounced. The populations of today's low-income
developing nations are often less educated, less informed,
less experienced, and less skilled than their counterparts
were in the early days of economic growth in the West.
2-Per capita incomes and levels of GDP in relation to
the rest of the world:
The people living in low-income countries have, on average,
a lower level of real per capita income than their
developed-country counterparts had in the nineteenth
century. First of all, nearly 40% of the population of
developing countries is attempting to subsist at bare
minimum levels.
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 3-Climate differences:
Almost all developing countries are situated in tropical or
subtropical climatic zones. It has been observed that the
economically most successful countries are located in the
temperate zone. Although social inequality and institutional
factors are widely believed to be of greater importance, the
dichotomy is more than coincidence.
4-Population size, distribution, and growth:
At this point, it is sufficient to note that population size,
density, and growth constitute another important
difference between less developed and developed
countries. Before and during their early growth years,
Western nations experienced a very slow rise in population
growth.
5-Historic role of international migration:
In the nineteenth and early twentieth centuries, a major
outlet for excess rural populations was international
migration, which was both widespread and large-scale.

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 The irony of international migration today depend on Brain
drain(The emigration of highly educated and skilled
professionals and technicians from the developing countries
to the developed world).
6-The Growth Stimulus of International Trade:
International free trade(in which goods can be imported and
exported without any barriers in the forms of tariffs, quotas,
or other restrictions) has been called the "engine of growth"
that propelled the development of today's economically
advanced nations during the nineteenth and early twentieth
centuries.
Where developing countries are successful at becoming lower-
cost producers of competitive products with the developed
countries (e.g., textiles, clothing, shoes, some light
manufactures), the latter have often resorted to various
forms of tariff and nontariff barriers to trade, including
"voluntary" import quotas, excessive sanitary requirements,
intellectual property claims, antidumping "investigations,"
and special licensing arrangements. But in recent years an
increasing number of developing countries, particularly
China and others in East and Southeast Asia, have
benefitted from expanded manufactures exports to
developed countries.
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 7-Basic scientific/technological research and
development capabilities:
Basic scientific research and technological development have
played a crucial role in the modern economic growth
experience of contemporary developed countries.
And even today, the process of scientific and technological
advance in all its stages, from basic research to product
development, is heavily concentrated in the rich nations,
despite the emergence of China and India as destinations
for research and development (R&D) activities of
multinational corporations.
8-Efficiency of domestic institutions:
Another difference between most developing countries and
most developed countries at the time of their early stages of
economic development lies in the efficiency of domestic
economic, political, and social institutions.
The developed countries also typically enjoyed relatively
stronger political stability and more flexible social
institutions with broader access to mobility.

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2.7 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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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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