Comparative Economic Development

Dr. Ismaeel Tharwat

Triple Crown Accredited

Outline
•Recap
•Indicators (HDI)
•Human Capital Attainments
•Case Study
Measurement Issues
1. Underreporting of income
 Inefficient tax collection, greater incentive to underreport
earnings for tax reasons, national accounts may not be
comprehensive as well (?)
2. Prices not appropriately reflected
 Price of traded goods are high (reflected in exchange rate)
 Non-traded goods are related to the level of development
 lower real incomes do not suffice to pull these prices up to
international levels
3. Subtle issues of measurement
 Market price & structure imperfections, externalities…
Purchasing Power Parity
 Purchasing Power Parity ratio’s sole function is to
capture differences in the cost of living
 The exchange rate implies that the cost of living is
equal across countries.
Comparing Countries by Health and
Education, and the Human
Development Index
 To measure the average level of economic development
 necessary to go beyond average incomes
 to evaluate a nation’s average health and educational attainments
 Basic indicators of Health & Education:
 life expectancy at birth
 under-5 mortality rate
 prevalence of undernourishment
 Basic indicators of Education:
 gross enrolment ratio for secondary school
 Percentage of the population with at least some secondary
education
Comparing
Health &
Education Levels
What do you see?
The Human Development Index
(HDI)
 The New Human Development Index
 Introduced by UNDP in November 2010
 HDI: An index measuring national socioeconomic
development, based on combining measures of
education, health, and adjusted real income per
capita.
 Scale: 0 (lowest) to 1 (highest)
The Human Development Index
(HDI)
Based on 3 goals of development:
1. Long and healthy life: measured by life expectancy at birth
2. Knowledge: measured by a combination of average schooling
attained by adults and expected years of schooling for school-age
children
3. Decent standard of living: measured by real per capita gross
domestic income 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

HDI as a holistic measure of living levels:

HDI Calculation Example
 Define the relevant
minimum and maximum
values (or lower and
upper “goalposts”)
 Each dimension index is
calculated as a ratio that
basically is given by the
percent of the distance
above the minimum to the
maximum levels that a
country has attained
HDI Calculation Example
 Costa Rica
 Life Expectancy: 79.3
 Mean Schooling: 8.37
 Expected Schooling: 13.5
 GNI/capita: 13,011.7

Mean Years of Schooling Index:

Expected Years of Schooling Index:

Education Index:

Income Index:
What is new in the New HDI?
 Traditional HDI added the three • Probably most consequential:
components and divided by 3 The index is now computed
with a geometric mean, instead
of an arithmetic mean
• New HDI takes the cubic root
of the product of the three
component indexes
 The traditional HDI calculation • The reformulation now allows
assumed one component traded for imperfect substitutability
off against another as perfect which development specialists
substitutes, a strong widely consider a more
assumption plausible way to frame the
tradeoffs.
 HDI
in 2018 the HDI classified countries
in four groups:
 low human development (0.0 to
0.549)
 medium human development
(0.550 to 0.699)
 high human development (0.700
to 0.799)
 very high human development
(0.80 to 1.0)

 Does it differ from income

rankings previously seen?
HDI: How Does it Differ from
Income Rankings?
 Income predicts rather weakly how countries will
perform on education and health
 See Botswana, China, Egypt, Chad, Turkey,
Guatemala, South Africa, Gabon, Côte d’Ivoire,
Equatorial Guinea, Pakistan, and the United Arab
Emirates
 What about Chile, Bangladesh, Cuba, Sri Lanka,
Kenya, and Madagascar?
 Pakistan & Bangladesh
HDI by Income

Does income accurately predict

human development status?
HDI Trend

Source: https://hdr.undp.org/data-center/human-development-index#/indicies/HDI
HDI Trends

What do we learn here?

Critiques of HDI
 Omitted indicators
 by adding some and others not: attention shifting from areas
such as legal rights to education and health, or income
 Difficulty of Forecasting
 expected educational attainment is difficult to predict in
low- and lower-middle-income countries
 could lead to an overly optimistic view
 resulting in too little attention to education quality
improvements

Conclusion: HDI with other indicators still very useful

Human Capital Attainments
Human Capital Attainments
Population Growth
Birth Rates
 Does industrialization affect development?
are of the Population Employed in the Agricultural, Industrial, and Service Sectors in Selected Countries, 1990–92 and 2008–2011 (%)

Source: World Bank, World Development Indicators, 2013 (Washington, D.c.: World Bank, 2013), tab. 2.3
Growth Convergence versus
Absolute Income Convergence

Data Source: Penn World Table

Key Similarities and Differences Among
Developing Countries
 These 10 characteristics are common among
developing countries – on average and with great
diversity - in comparison with developed countries:
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
Key Similarities and Differences Among
Developing Countries
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
Key Similarities and Differences Among
Developing Countries
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
 In-Class
Presentation
Announcement
Class Memo

1. Describe the HDI. And state why it is useful.

2. List 2-3 critiques of HDI.

Thank you!
Social Fractionalisation
 Fractionalisation: Significant ethnic, linguistic, and
other social divisions within a country.
Are Living Standards Converging across
Countries?
 A Great Divergence followed the Industrial Revolution
 Two reasons to think (re-)convergence likely
1) Diminishing returns to capital (though as economies develop they often
find ways to compensate)
2) Diffusion of ideas across countries, so can skip trial and error and grow
fast while catching up
 Latter elated to “advantages of backwardness” (Gerschenkron), or “the
latecomer’s advantage”
 But - at least until this century - evidence of unconditional national average
income convergence has been unconvincing
 Continued evidence of divergence between middle and low income
countries
 There is also evidence of “per capita income convergence,” weighting
changes in per capita income by population size
 (We consider “conditional” convergence - observed after accounting for
Relative Country Convergence: World,
Developing Countries, and OECD

Data Source: Penn World Table

Nature and Role of Economic Institutions

 Institutions provide “rules of the game” of economic life

 Follows general framework of Nobel Laureate Douglass North
 Salient institutions include the nature and extent of:
 Property rights
 Contract enforcement
 Restriction of coercive, fraudulent and anti-competitive
behavior
 Provision of access to opportunities for the broad population
 Constraining the power of elites
 Conflict management
 Other institutions provide improved coordination; social
insurance; and predictable macroeconomic stability
The Nature and Role of Economic
Institutions: Some Caveats and Nuances
 Most importantly: Good institutions may both cause development, and improve as
a result of development
 In addition:
‒ The institutions on the previous slide are correlated
‒ It is not clear which of these institutions matter most
‒ Unclear how specific in form institutions must be to fulfill their main function
‒ Progress may be made when only some institutions are of high quality; but
further progress may require improving quality of additional institutions
‒ The specifics of their relative importance, and the sequence of improving them,
may well vary by country
‒ China provides an important case of transitional institutions, examined in case
study for Chapter 4
‒ Note : A “free market economy” is not the only example of a market economy
Schematic Representation of Leading
Theories of Comparative Development
Explaining Long-Run Causes of Comparative
Development: Fig. 2.10 Summary
 Arrow 1: Geography: Important in pre-modern era; limited effect in
modern era
 Arrow 2: However, exogenous geography affected how colonists
viewed opportunities they could exploit in colonies; and so in part…
 Arrow 3: Geography was a determinant of whether colonists created
extractive or inclusive institutions; this fact facilitates analysis of role
of institutions
 Arrow 4: Geography presumably affected indigenous institutions…
 Arrow 5: A Note: Difficult to quantify; but colonial institutions may
have been influenced by indigenous institutions
 Arrow 6: Geography affected comparative advantages: resources and
people
Explaining Long-Run Causes of Comparative
Development: Fig. 2.10 Summary (Continued)
 Arrow 7: Geography helps explain “motivation” for institutions:
extractive when comparative advantage (CA) was in activities with (a
range of) increasing returns (e.g. sugar cane, mining); inclusive
when CA was in constant returns activities (e.g. wheat)
 Arrow 8-9: Reflects that state of development of the colonizer also
had an effect
 Arrow 10: Key: Institutions were persistent from colonial to post-
colonial periods
 Arrow 11: Bad institutions created high inequality which also had
bad effects on growth and development outcomes
 Arrow 12: Especially difficult to reform institutions with high
inequality
 Results (arrows 14-22): “Bad” institutions and high inequality led to
slower growth and slow improvement of human capital and other